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 78 STAT. ]

PUBLIC LAW 88-272-FEB. 26, 1964

"SEC. 217. MOVING EXPENSES. " (a) I)P:DUCTIOX ALLOWED.—There shall be allowed as a deduction moving expenses paid or incurred during the taxable year in connection with the commencement of work by the taxpayer as an employee at a new principal place of work. " (b)

DEFINITION or MOVIXG EXPENSES.—

"(1) I x GENERAL.—For purposes of this section, the term 'moving expenses' means only the reasonable expenses— " (A) of moving household goods and personal, effects from the former residence to the new residence, and " (B) of traveling (including meals and lodging) from the former residence to the new place of residence. "(2) iNDivmuALS OTHER THAN TAXPAYER.—In the case of any individual other than the taxpayer, expenses referred to in paragraph (1) shall be taken into account only if such individual has both the former residence and the new residence as his principal place of abode and is a member of the taxpayer's household, ''(c) CONDITIONS FOR ALLOWANCE.—Xo deduction shall be allowed under this section unless— "(1) the taxpayers new principal place of work— " (A) is at least 20 miles farther from his former residence than was his former principal place of work, or " (B) if he had no former principal place of work, is at least 20 miles from his former residence, and "(2) during the 12-month period innnediately following his arrival in the general location of his new principal place of work, the taxpayer is a full-time employee, in such general location, during at least 39 weeks. "(d)

RULES FOR APPLICATION OF SI'BSECTION

(C)(2).—

" (1) Subsection (c)(2) shall not apply to any item to the extent that the taxpayer receives reimbursement or other expense allowance from his employer for such item. "(2) If a taxpayer has not satisfied the condition of subsection (c)(2) before the time prescribed by law (including extensions thereof) for filing the return for the taxable year during which he paid oi- incurred moving expenses ^yhich would otherwise be deductible under this section, but may still satisfy such condition, then such expenses may (at the election of the taxpayer) be deducted for such taxable year notwithstanding sid^section (c)(2). "(3) If— " (A) for any taxable year moving expenses have been deducted in accordance with the rule provided in paragraph (2), and " (B) the condition of subsection (c)(2) is not satisfied by the close of the subsequent taxable year, then an amount equal to the expenses which were so deducted shall be in('lude<l in gross income for such subsequent taxable year. "(e) DISALLOWANCE OF DEDUCTION "WITH RESPECT TO REIMBURSEMENTS XOT IN(^LI DED IN GROSS INCOME.—No deduction shall be al-

lowed under this section for any item to the extent that the taxpayer receive*?, reimbursement or other expense allowance for such item which is not included in his gross income. "(f) REGULAITONS.—The Secretary or his delegate shall prescribe such regulations as may be necessary to carry out the purposes of this section."'

51

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 this Cambric progenitor; the carapace, preabdomen, postabdomen and telson exhibiting the same general characters and number of component parts. Notwithstanding this conformity in structure Strabops presents a number of distinctly primitive characters which indicate its closeness to the archetype of the eurypterids. We see the most important of these in the lack of differentiation in width and length between the preabdominal and postabdominal segments, the contraction of the postabdomen taking place so uniformly that the conventional division between body and tail, so evident in all later eurypterids, is here still entirely undeveloped. The postabdomen, always a slender part of the body with much lengthened posterior segments in later forms, is here short and broad, the segments not at all increasing in length backward. Altogether, all abdominal segments retain a highly primitive and simple aspect in their appearance as uniformly narrow straight bands that hardly bend forward at the lateral extremities. The first tergite, however, has progressed in development beyond the others, and, as in the Siluric genera, is more closely connected with the carapace than with the abdomen, and is distinctly bent forward at the extremities.

The carapace is distinguished from that of the Siluric descendants by its remarkable shortness, or relatively very small size which may also constitute a primitive feature. On the other hand the doublure or rim of the underside is very broad, suggesting the genus Stylonurus. The eyes are especially notable for their small size and circular outline.

The telson spine is short and plump, and thus in correspondence to the short compact body.

Of the limbs but a single fragment is shown, and this is too small to indicate their character. Doubtless they correspond in lack of differentiation with the dorsal test and were probably all of simple and similar form, slightly increasing in length posteriorly. Strabops has served in our effort to reconstruct the archetype of the Eurypterida.

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PUBLIC LAW88-272-FEB. 26, 1964

[78 STAT.

(2) The table of sections for part VII of subchapter B of chapter 1 is amended by striking out— "See. 217. Cross references."

and inserting in lieu thereof the following: "Sec. 217. Moving expenses. "Sec. 218. Cross references."

76^stlf *828^^' 26 USC 62. Ante. p. 51.

^^^ ADJUSTED GROSS INCOME.—Section 62 (defining adjusted gross income) is amended by inserting after paragraph (7) the following new paragraph: " (8) MOVING EXPENSE DEDUCTION.—The deduction allowed by SeCtloU 2 1 7. "

Ante, p. 36.

(^^.^ WITHHOLDING.—Section 3401(a) (relating to definition of "wages") is amended by adding after paragraph (14) (added by section 204(b) of this Act) the following new paragraph: " (15) to or on behalf of an employee if (and to the extent that) at the time of the payment of such remmieration it is reasonable to believe that a corresponding deduction is allowable under section 217." (d) EFFECTIVE DAT^S.—The amendments made by subsections (a) and (b) shall apply to expenses incurred after December 31, 1963, in taxable years ending after such date. The amendment made by subsection (c) shall apjjly with respect to remuneration paid after the seventh day following the date of the enactment of this Act. SEC. 214. 100 PERCENT DIVIDENDS RECEIVED DEDUCTION FOR MEMBERS OF ELECTING AFFILIATED GROUPS.

26 USC 243.

^.^^ 200 PERCENT DIVIDENDS RECEIVED DEDUCTION.—Section 243

Is use 6^?' note.

(relating to dividends received by corporations) is amended to read as follows: "SEC. 243. DIVIDENDS RECEIVED BY CORPORATIONS. " (a) (TENERAL RULE. — I n the case of a corporation, there shall be allowed as a deduction an amount equal to the following percentages of the amoiuit re<'eived as dividends from a domestic corporation which is subject to taxation under this chapter: "(1) 85 percent, in the case of dividends other than dividends described in paragraph (2) or (3); "(2) 100 percent, in the case of dividends I'eceived by a small business investment company operating under the Small Business Investment Act of 1958; and " (3) 100 percent, in the case of qualifying dividends (as defined in subsection (b)(1)). "(b)

Post. p. 117.

Ql'ALTFYlNG DIVIDENDS.

"(1) DEFINITION.—For purposes of subsection (a)(3), the term 'qualifying dividends' means dividends received by a corporation which, at the close of the day the dividends are received. IS a meml)er of the same aifiliate<I,group of corporations (as defined in paragraph (5)) as the corporation distributing the dividends, if— " (A) such affiliated group has made an election under paragraph (2) which is effective for the taxable years of its members which include such day, and " (B) such dividends are distributed out of earnings and profits of a taxable year of the distributing corporation ending after December 31, 1963— "(i) on each day of which the distributing corporation and the corporation receiving the dividends were members of such affiliated group, and "(ii) for which an election under section 1502 (relating to election of nniltiple sin-ta.v exemptions) is not effective.

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PUBLIC LAW 88-272-FEB. 26, 1964

53

"(2) ELECTION.—An election under this paragraph shall be made for an affiliated group by the common parent corporation, and shall be made for any taxable year of the common parent corl)oration at such time and in such manner as the Secretary or his delegate by regulations prescribes. Such election may not be made for an affiliated group for any taxable year of the common parent corporation for which an election under section 1562 is ^°®^' P- ^ineffective. Each corporation which is a member of such group at any time during its taxable year which includes the last day of such taxable year of the common parent corporation must consent to such election at such time and in such manner as the Secretary or his delegate by regulations prescribes. An election under this paragraph shall be effective— " (A) for the taxable year of each member of such affiliated group which includes the last day of the taxable year of the common parent corporation with respect to which the election is made (except that in the case of a taxable year of a member beginning in 1963 and ending in 1964, if the election is effective for the taxable year of the common parent corporation which includes the last day of such taxable year of such member, such election shall be effective for such taxable year of such member, if such member consents to such election with respect to such taxable year), and " (B) for the taxable year of each member of such affiliated group which ends after the last day of such taxable year of the common parent corporation but which does not include such date, unless the election is terminated under paragraph (4). " (3) EFFECT OF ELECTION.—If an election by an affiliated group is effective with respect to a taxable year of the common parent corporation, then under regulations prescribed by the Secretary or his delegate— " (A) no member of such affiliated group may consent to an election under section 1562 for such taxable year, " (B) the members of such affiliated group shall be treated as one taxpayer for purposes of making the elections under section 901(a) (relatuig to allowance of foreign tax credit) se^scT^go^i^^" and section 904(b)(1) (relating to election of overall limita- 74 Stat. 1010. tion),and 26 USC 904. " (C) the members of such affiliated group shall be limited to /-i / i \ / - .. ^ \

1

^

^ ' ' ' ' 2 6

and 809(d) (10),and _ " (v) $100,000 exemption for purposes of estimated tax filing requirements under section 6016 and the addition to tax under section 6655 for failure to pay estimated tax. "(4) TERMINATION.—An election by an affiliated group under paragraph (2) shall terminate with respect to the taxable year of the common parent corporation and with respect to the taxable years of the members of such affiliated group which Include the last day of such taxable year of the conmion parent corporation if—

use

804.

26 USC 809. ^6 USC 6016. ^^ "^*-^ ^^^^•

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 54

9fi'^i^r^*i=;n4^'

26 USC 80^^.' Ante, p. 29.' Post. p. 120.

PUBLIC LAW 88-272-FEB. 26, 1964

[78 STAT.

" (A) (\)XSKXT OF MEMHKKs,—Such iittiliiited orU}) files M terminjition of such election (at such time and in such, manner as the Secretary or his deleg'ate by regulations prescribes) with respect to such taxable year of the coiinnon parent corporation, and each corporation which is a member of such affiliated grouj) at any time during its taxable year which includes the last day of such taxable year of the common parent corporation consents to such termination, or " (B) REFLSAL BY NEW MEMBER TO CONSENT.—During such taxable year of the common parent corporation such affiliated group includes a member which— " (i) was not a member of such group during such common parent corporation's immediately pi-eceding taxable year, and "(ii) such member files a statement that it does not consent to the election at such time and in such manner as the Secretary or his delegate by regulations prescribes. "(5) DEFINITION OP AFFILIATED GROUP.—For purposes of this subsection, the term 'affiliated group' has the meaning assigned ^^ it by section 1504(a), except that for such purposes sections 1504(b)(2) and 1504(c) shall not apply. "(6) SPECIAL RULES FOR INSURANCE COMPANIES.—If an election under this subsection is effective for the taxable year of an insu ranee company subject to taxation under section 802 or 821— "(-A-) part II of Subchapter B of chapter 6 (relating to certain controlled corporations) shall be applied without regard to section 1563(a)(4) (relating to certain insurance companies) and section 1563(b)(2)(D) (relating to certain excluded members) with respect to such company and the other corporations which are members of the controlled group of corporations (as determined under section 1563 without regard to subsections (a)(4) and (b)(2)(D)) of which such company is a member, and "(13) for purposes of paragraph (1), a distribution by such company out of earnings and profits of a taxable year for which an election under this subsection was not effective, and for which such company was not a component member of a controlled group of corporations within the meaning of section 1563 solely by reason of section 1563(b)(2)(D), shall not be a qualifying dividend. "(c)

SPECIAL RULES FOR CERTAIN DISTRIBUTIONS.—For purposes

of subsection (a) — 26 USC 591. "(1) Any amount allowed as a deduction under section 501 (relating to deduction for dividends paid by mutual savings banks, etc.) shall not he treated as a dividend. "(2) A dividend received from a regulated investment com"t"/^' ^99^^' P^^^^y shall be subject to the limitations prescribed in section 854. 26 USC 8*54. "(3) Any dividend received from a real estate investment trust which, for the taxable year of the trust in which the dividend is paid, (Qualifies under part II of subchapter M (section 856 and 26 us^c 85^858 following) shall uof be treated as a dividend. Post, p. 55. ' "(4) Any dividend received which is described in section 244 26 USC 244. (relating to dividends received on preferred stock of a public utility) shall not be treated as a dividend. •'(d)

26 USC 245^*

CERTAIN

DIVII>ENDS

FROM

FOREIGN

CORPORATIONS.—For

purposes of Rubsecti<m (a) and for purposes of section 245, any dividend from a foreign corporation from earnings and profits accumulate<l by a domestic cor^xiration during a period with respect to which such domestic corporation was subject to taxation under this chapter

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 78 STAT. ]

PUBLIC LAW 88-272-FEB. 26, 1964

55

(or corresponding provisions of prior law) shall be treated as a dividend from a domestic corporation Aviiioh is subject to taxation under this chapter." (b) TECHNICAL AMENDMENTS.—

(1) Section 244 (relating to dividends received on certain preferred stock) is amended by inserting " (a) GENERAL RULE. — " before "'In case of a corporation," and by adding at the end thereof the following new subsection: "(b) EXCEPTION.—If the dividends described in subsection (a)(1) are qualifying dividends (as defined in section 248(b)(1), but determined without regard to section 243(c)(4)) — "(1) subsection (a) shall be applied separately to such qualifying dividends, and "(2) for purposes of subsection (a)(3), the percentage applicable to such qualifying dividends shall be 100 percent in lieu of 85 percent." (2) Section 246(b) (relating to limitation on aggregate amount of deductions for dividends received) is amended by striking out "243(a), 244," each place it appears therein and inserting in lieu thereof "243 (a)(1), 244(a),". (3) Section 804(a)(5) (relating to the application of section 246(b) to taxable investment income of life insurance companies) is amended by striking out "243(a), 244," and inserting m lieu thereof "243(a)(1), 244(a),". (4) Section 8 0 9 (d)(8)(B) (relating to the application of section 246(b) to the life insurance company's share of certain dividends) is amended by striking out "243(a), 244," each place it appears therein and inserting in lieu thereof "243(a)(1), 244(a),". (c) EFFECTIVE DATE.—The amendments made by subsections (a) and (b) shall apply with respect to dividends received in taxable years ending after December 31, 1963. SEC. 215. INTEREST ON LOANS INCURRED TO PURCHASE CERTAIN INSURANCE AND ANNUITY CONTRACTS. (a) DISALLOWANCE OF INTEREST DEDUCTION.—Section 264(a) (relating to certain amounts paid in connection with insurance contracts) is amended— (1) by inserting after paragraph (2) the following new paragraph: "(3) Except as provided in subsection (c), any amount paid or accrued on indebtedness incurred or continued to purchase or carry a life insurance, endowment, or annuity contract (other than a single premium contract or a contract treated as a single premium (contract) pursuant to a plan of purchase which contemplates the systematic direct or indirect borrowing of part or all of the increases in the cash value of such contract (either from the insurer or otherwise)." (2) by adding at the end thereof the following new sentence: "Paragraph (3) shall apply only in respect of contracts purchased after August 6, 1963." (b) ExcEi-rioNs.—Section 264 is amended by adding at the end thereof the following new subsection: "(c) ExcEiTioNS,—Subsection (a)(3) shall not apply to any amount paid or accrued by a person durhig a taxable year on indebtedness incurred or continued as part of a plan referred to in subaction (a)(3) — "(1) if no part of 4 of the annual premiums due during the 7-year period (beginning with the date the first premium on the 31-667 0-65—7

68A Stat. 7 3. 26 USC 244.

Ante,

p. 52.

26 USC 246.

26 u^sc sol'

26 USC sog.

26 USC 264.

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 56

68A Stat. 78 26 USC 265.

54 Stat. 789.

15 USC 80a-2.

26us^c 2V4"

PUBLIC LAW 88-272-FEB. 26, 1964

contract to which such plan relates was paid) is paid under such plan by means of indebtedness, " (2) if the total of the amounts paid or accrued by such person during such taxable year for which (without regard to this paragraph) no deduction would be allowable by reason of subsection (a)(3) does not exceed $100, "(3) if such amount was paid or accrued on indebtedness incurred because of an unforeseen substantial loss of income or unforeseen substantial increase in his financial obligations, or "(4) if such indebtedness was incurred in connection with his trade or business. For purposes of applying paragraph (1), if there is a substantial increase m the premmms on a contract, a new 7-year period described in such paragraph with respect to such contract shall commence on f he date the first such increased premium is paid." (c) Eri-TiCTiMi: DAnc.—The amendments made by this section shall apply with respect to amounts paid or accrued in taxable years beginning after December 31, 1963. SEC. 216. INTEREST ON INDEBTEDNESS INCURRED OR CONTINUED TO PURCHASE OR CARRY TAX-EXEMPT BONDS. (a) Ari'LicATiox W I T K RESPECT TO CERTAIN FrNANciAi. INSTITUTIONS.—Section 265 (relating to expenses and interest relating to taxexempt income) is amended by adding at the end of paragraph (2) the following new sentence: "In applying the preceding sentence to a financial institution (other than a bank) which is a face-amount certificate company registered under the Investment Company Act of 1040 (15 F.S.C. SOa-1 and following) and which is subject to the bankhig laws of the State in which such institution is incorporated, interest on face-amount certificates (as defined in section 2(a) (15) of such Act) issued by such institution, and interest on amounts received for the purchase of such certificates to be issued by such institution, shall not be considered as interest on indebtedness incurred or continued to puivhase or carry obligations the interest on which is wholly exempt from the taxes imposed by this subtitle, to the extent that the average amount of such obligations held by such institution during the taxable year (as detennined under regulations prescribed by the Secretary or his delegate) does not exceed 15 percent of the average of the total assets held by such institution duruig the taxable year (as so determined).*' (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply with respect to taxable years ending after the date of the enactment of this Act. SEC. 217. LIMITATION OF TRAVEL ALLOCATION REQUIREMENT TO FOREIGN TRAVEL. ^'^^ LIMITATION OF APPLICATION OF SECTION 274(C).—Section 274 ((•) (relating to traveling) is amended to read as follows: "(C)

26 USC 212. 26 USC 162.

[78 STAT.

CERTAIN FOREIGN TRAVEL.—

"(1) I N (iENEiLVL.—In the case of any individual who travels outside the United States away from home hi pursuit of a trade or business or in pursuit of an activity described in section 212, no deduction shall be allowed under section 102 or section 212 for that portion of the expenses of such travel otherwise allowable under such section which, under regulations prescribed by the Secretary or his delegate, is not allocable to such trade or Imsiness or to such activity-

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PUBLIC LAW 88-272-FEB. 26, 1964

57

"(•2) ExcEFriox.—Paragraph (1) shall not apply to the expenses of any travel outside the United States awav from home if— " (A) such travel does not exceed one week, or " (B) the portion of the time of travel outside the United States away from home which is not attributable to the pursuit of the taxpayer's trade or business of an activity described in section 212 is less than 25 percent of the total time on such travel. " (3) DOMESTIC TRAVEL EXCLUDED.—For purposes of this subsection, travel outside the United States does not include any travel from one point in the United States to another point in the United States." (b) EFFECTIVE DATE.—The amendment made by subsection (a) shall apply with respect to taxable years endhig after December 31, 1962, but only in respect of periods after such date. SEC. 218. ACQUISITION OF STOCK IN EXCHANGE FOR STOCK OF CORPORATION WHICH IS IN CONTROL OF ACQUIRING CORPORATION. (a) DEFINITION OF REORGANIZATION.—Section 368(a)(1)

(relat-

2rusc'2i2!*

26 USC 368.

m^ to definition of reorganization) is amended by inserting after "voting stock" in subparagraph (B) " ( o r in exchange solely for all or a part of the voting stock of a corporation which is in control of the acquiring corporation)". (b)

TECHNICAL AMENDMENTS.—

(1) Section 3 6 8 (a)(2)(C) amended to read as follows:

(relating to special rules)

is

" (C) TRANSFERS OF ASSETS OR STOCK TO SUBSIDIARIES IN CERTAIN PARAGRAPH (1)(A), (1)(B), AND (1)(C) CASES.—A

transaction otherwise qualifying under paragraph (1)(A), (1)(B), or (1)(C) shall not be disqualified by reason of the fact that part or all of the assets or stock which were acquired in the transaction are transferred to a corporation controlled by the corporation acquiring such assets or stock." (2) Section 368(b) (relating to definition of party to a reorganization) is amended by striking out the last two sentences and inserting in lieu thereof the following: " I n the case of a reorganization qualifying under paragraph (1)(B) or (1)(C) of subsection (a), if the stock exchanged for the stock or properties is stock of a corporation which is in control of the acquiring corporation, the terai 'a party to a reorganization' includes the corporation so controlling the acquiring corporation. I n the case of a reorganization qualifying under paragraph (1)(A), (1)(B), or (1)(C) of subsection (a) by reason of paragraph (2)(C) of subsection (a), the term 'a party to a reorganization' includes the corporation controlling the corporation to which the acquired assets or stock are transferred." (c) EFFECTIVE DATP:.—The amendments made by this section shall apply with respect to transactions after December 31, 1963, in taxable years ending after such date. SEC. 219. RETROACTIVE QUALIFICATION OF CERTAIN. UNION-NEGOTIATED MULTIEMPLOYER PENSION PLANS. (a) BwuNxiNG OF PERIOD AS QUALIFIED TRUST.—Section 401 (relating to qualified pension, profit-sharing, and stock bonus plans) is amended by redesignating subsection (i) as subsection (j), and by inserting after subsection (h) the following new subsection: "(i)

CERTAIN

[ ^NION-NEGOTIATED

MULTIEMPLOYER

PENSION

PLANS.—In the case of a trust forming part of a pension plan which

76 Stat. 809. 26 USC 401.

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 58

26^scr*so\^^"

PUBLIC LAW 88-272-FEB. 26, 1964

[78 STAT.

has been deteriuined by the Secretary or his delegate to constitute a (lualified trust under subsection (a) and to be exempt from taxation under section 501(a) for a period beginning after contributions were first made to or for such trust, if it is shown to the satisfaction of the Secretary or his delegate that— "(1) such trust was created pursuant to a collective bargaining agreement between employee representatives and two or more employers who are not related (determined under regulations prescribed by the Secretary or his delegate), "(2) any disbursements of contributions, made to or for such trust before the time as of which the Secretary or his delegate determined that the trust constitut-ed a qualified trust, substantially complied with the terms of the trust, and the plan of which the trust is a part, as subsequently qualified, and "(3) before the time as of which the Secretary or his delegate determined that the trust constitutes a qualified trust, the contributions to or for such trust were not used in a maimer which would jeopardize the interests of its beneficiaries, then such trust shall be considered as having constituted a qualified trust under subsection (a) and as having been exempt from taxation under section 501(a) for the period beginning on the date on which contributions were first made to or for such trust and ending on the date such trust first constituted (without regard to this subsection) a ([ualified trust under subsection (a). " (b) EFFECTIVE DATE.—The amendments made by subsection (a) shall apply with respect to taxable years beginning after December 81, 1953, and ending after August 16, 1954, but onlj' with respect to contributions made after December 31, 1954. SEC. 220. QUALIFIED PENSION. ETC., PLAN COVERAGE FOR EMPLOYEES OF CERTAIN SUBSIDIARY EMPLOYERS. (a)

EMPLOYEES OF FOREIGN SUBSIDIARIES COVERED BY SOCIAL SECU-

26 USC 401-405. j^j^jry AGREEMENTS.—Part I of Subchapter D of chapter 1 (relating to pension, profit-sharing, stock bonus plans, etc.) is amended by adding at the end thereof the following new section: "SEC. 406. CERTAIN EMPLOYEES OF FOREIGN SUBSIDIARIES. "(a)

26 USC 40 f 26 USC 403! 26 u*sc 40^5' ?6 USC 3121!

TREATMENT

AS EMPLOYEES

OF DOMESTIC

CORPORATION.—

For purposes of applying this part with respect to a pension, profitsharing, or stock bonus plan described in section 401(a), an annuity plan described in section 403(a), or a bond purchase plan described in section 405(a), of a domestic corporation, an individual who is a citizen of the United States and who is an employee of ^ foreign subsidiary (as defined in section 3121(1)(8)) of such domestic corporation shall be treated as an employee of such domestic corporation, if— "(1) such domestic corporation has entered into an agreement under section 3121(1) which applies to the foreign subsidiary of which such individual is an employee; "(2) the plan of such domestic corporation expressly providea for contributions or benefits for individuals who are citizens of the Ignited States and who are employees of its foreign subsidiaries to which an agreement entered into by such domestic corporation under section 3121(1) applies; and "(3) contributions under a funded plan of deferred compensation (whether or not a plan described in section 401(a), 4 0 3 (a), or 405(a)) are not provided by any other person with respect to the remuneration paid to such individual by the loreigii subsidiary.

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 78

STAT.

]

PUBLIC LAW 88-272-FEB. 26, 1964

59

••(i>) Si'KCiAL Kri.Ks Ki{ APPLKATKJN (»K SKCTIOX 401(a).— "(1)

XONDI.SCKIMINATIOX

KKQl IKKMKXTS.

For

pillpOSeS

of

applying? paragraphs (8) (J^) and (4) of section 401(a) with lespec't to an individual who is treated as an employee of a domestic corporation under subsection (a) — " (A) if such individual is an officer, shareholder, or person whose principal duties consist in supervising the work of other employees of a foreign sul)sidiary of such domestic corporation, he shall be treated as having such capacity with respect to such domestic corporation; and " (B) the determination of whether such individual is a highly compensated employee shall be made by treating such individual's total compensation (determined with the application of paragraph (2) of this subsection) as compensation paid by such domestic corporation and by determining such individual's status with regard to such domestic corporation. "(2)

DETERMINATION OF COMPENSATIOX.—For

purposes

68A Stat. 134. 26 USC 401.

of

applying paragraph (5) of section 401(a) with respect to an individual who is treated as an employee of a domestic corporation under subsection (a) — " (A) the total compensation of such individual shall be the remuneration paid to such individual by the foreign subsidiary which would constitute his total compensation if his services had been performed for such domestic corporation, and the basic or regular rate of compensation of such individual shall be determined under regulations x^rescribed by the Secretary or his delegate; and " (B) such individual shall be treated as having paid the amount paid by such domestic corporation which is equivalent to the tax imposed by section 8101. "(<") IKKMIXATIOX OF S T A T I S AS DKEMED Ibri'LOYEE NOT To Bi: THEATED AS SEPAUATIOX FROM SEHVICE KOI; I^IHI'OSES OF CAIMTAL G A I N

75 Stat. 141. 26 USC 3101.

l*Ko\isixs.—For purposes of applying section 402(a)(2) and section 26 USC 402. 40H(a)(2) with respect to an individual who is treated as an employee 26 USC 403. of a domestic corporation under subsection (a), such individual shall not be considered as separated from the service of such domestic corporation solely by reason of the fact that— "(1) the agreement entered into by such domestic corporation under section 8121(1) which covers the employment of such 26U^C3i2U individual is terminated under the |n-ovisions of such section, "(2) such individual becomes an employee of a foreign subsidiary with respect to which such agreement does not apply, "(8) such individual ceases to be an employee of the foreign subsidiary by reason of which he is treated as an employee of such domestic corporation, if he becomes an employee of another corporation controlled by such domestic cor])ration, or "(4) the provision of the plan described in subsection (a)(2) is terminated. " (d) DEDrcTiBiLiTY OF CoxTiMiuTioxs.—For puiposes of applying sections 404 and 40.5(c) with respect to contributions made to or gjg^ ^*^*' ^^^' under a pension, protit-sharing, stock bonus, annuity, or bond pur- 26 USC 404, chase plan by a domestic corporation, or by another corporation '*°^* which is entitled to deduct its contributions under section 404(a) (5)(B), on behalf of an individual who is treated as an emploj-ee of such domestic corporation under subsection (a) — "(1) except as provided in paragraph (2), no deducticm shall be allowed to such domestic corporation or to any other cori^oration which is entitled to deduct its contributions under such sections.

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 60

ye^st^t^'s'ig^g^ae 26 USC 404,

PUBLIC LAW 88-272-FEB. 26, 1964

[78 STAT.

"(2) there shall be allowed as a deduction to the foreign subsidiary of which such individual is an employee an amount equal to the amount which (but for paragraph (1)) would be deductible under section 404 (or section 405(c)) hj the domestic corporation if he were an employee of the domestic corporation,

-•OS.

and

"(3) any reference to compensation shall be considered to be a reference to the total compensation of such individual (determined with the application of subsection (b)(2)). Any amount deductible by a foreign subsidiary under this subsection shall be deductible for its taxable year %vith or within which the taxable year of such domestic corporation ends. "(e)

2^ ^^^'^2. 26 USC 101. 26 USC 2039. 72 Stat. 1659.

TREATMENT AS EMPLOYEE UNDER EELATED PROVISIONS.—An

individual who is treated as an employee of a domestic corporation under subsection (a) shall also be treated as an employee of such domestic corporation, with respect to the plan described in subsection (a)(2), for purposes of applying the following provisions of this title: «^2) Section 72(d) (relating to employees* annuities). "(2) Section 72(f) (relating to special rules for computing employees' contributions). u(3) Section 101(b) (relating to employees' death benefits). «(4) Section 2039 (relating to annuities). «(5) Section 2517 (relating to certain annuities under (lualitied 1 ^ <-,.

26 USC 2517.

'-

^

plans). (b)

26 USC 401-405. Ante, p. 58.

EMPLOYEES OF DOMESTIC SUBSIDIARIES EN(iA(iED IN Bi SINESS QuTSiDE THE UNITED STATES.—Part I of subchapter I) of chapter 1

(relating to pension, profit-sharing, stock bonus plans, etc.) is amended by adding after section 406 (as added by subsection (a)) the following new section: "SEC. 407, CERTAIN EMPLOYEES OF DOMESTIC SUBSIDIARIES ENGAGED IN BUSINESS OUTSIDE THE UNITED STATES. ''(a) TREATMENT AS EMPLOYEES OF DOMESTIC PARENT CORPORATION.—

"'(1) I N (JENERAL.—For purposes of applying this part with respect to a pension, profit-sharing, or stock bonus plan described in section 401(a), an annuity plan described in section 403(a), or a bond purchase plan described in section 405(a), of a domestic parent corporation, an individual who is a citizen of the United States and who is an employee of a domestic subsidiary (within the meaning of paragraph (2)) of such domestic parent corporation shall be treated as an employee of such domestic parent corporation, if— " (A) the plan of such domestic parent corporation expressly provides for contributions or benefits for individuals who are citizens of the United States and who are employees of its domestic subsidiaries; and " (B) contributions under a funded plan of deferred compensation (whether or not a plan described in section 401(a), 403(a), or 405(a)) are not provided by any other person with respect to the remuneration paid to such individual by the domestic subsidiary. '• (2) DEFINITIONS.—For purposes of this section— treated as a domestic subsidiary for any taxable year onlv if— "(i) such corporation is a domestic corporation 80 percent or more of the outstanding voting stock of which is owned by another domestic corporation;
 * '(A) DOMESTIC SUBSIDLVRY.—A corporation shall be

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"(ii) 95 percent or more of its gross income for the three-year period immediately preceding the close of its taxable year which ends on or before the close of the taxable year of such other domestic corporation (or for such part of such period during which the corporation was in existence) was derived from sources without the United States; and "(iii) 90 percent or more of its gross income for such period (or such part) was derived from the active conduct of a trade or business. If for the period (or part thereof) referred to in clauses (ii) and (iii) such corporation has no gross income, the provisions of clauses (ii) and (iii) shall be treated as satisfied if it is reasonable to anticipate that, with respect to the first taxable year thereafter for which such corporation has gross income, the provisions of such clauses will be satisfied. " (B) DOMESTIC PARENT CORPORATION.—The domestic parent corporation of any domestic subsidiary is the domestic corporation which owns 80 percent or more of the outstanding voting stock of such domestic subsidiary. " (b) SPECIAL RULES FOR APPLICATION OF SECTION 401(a).— " (1) NONDISCRIMINATION REQUIREMENTS.—For purposes

of

supplying paragraphs (3)(B) and (4) of section 401(a) with respect to an individual who is treated as an employee of a domestic parent corporation under subsection (a) — " (A) if such individual is an officer, shareholder, or person whose principal duties consist in supervising the work of other employees of a domestic subsidiary, he shall be treated as having such capacity with respect to such domestic parent corporation; and " (B) the determination of whether such individual is a highly compensated employee shall be made by treating such individual's total compensation (determined with the application of paragraph (2) of this subsection) as compensation paid by such domestic parent corporation and by determining such individual's status with regard to such domestic parent corporation. " (2) DETERMINATION OF COMPENSATION.—For

purposes

!

68A Stat. 134. 26 USC 4 0 1.

of

applying paragraph (5) of section 401(a) with respect to an individual who is treated as an employee of a domestic parent corporation under subsection (a), the total compensation of such individual shall be the remuneration paid to such individual by the domestic subsidiary which would constitute his total compensation if his services had been performed for such domestic parent corporation, and the basic or regular rate of compensation of such individual shall be determined under regulations prescribed by the Secretary or his delegate., " (c) TERMINATION OF STATUS AS DEEMED EMPLOYEE N'OT TO B E TREATED AS SEPARATION FROM SERVICE FOR PURPOSES OF CAPITAL

(TATN PROVISIONS.—For purposes of applying section 402(a)(2) and section 403(a)(2) with respect to an individual who is treated as an eniployee of a domestic parent corporation under subsection (a), fnicli individual shall not be considered as separated from the service of such domestic parent corporation solely by reason of the fact that— "(1) the corporation of which such individual is an employee ceases, for any taxable year, to be a domestic subsidiary within the meaning of subsection (a)(2)(A),

26use 402,403.

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[78 STAT.

"(2) such individual ceases to be an employee of a domestic subsidiary of such domestic parent corporation, if he becomes an employee of another corporation controlled by such domestic parent corporation, or "(3) the provision of the pLan described in subsection (a)(1) (A) is terminated. " (d) DEDUCTIBILITY OF COXTKIBUTIONS.—For purposes of apply76^stlt!M*9 ^2^6 ^"S sections 404 and 405(c) with respect to contributions made to or 26 USC 404,40*5. under a pension, profit-sharing, stock bonus, annuity, or bond purdiase plan by a domestic parent corporation, or by another corporation which is entitled to deduct its contributions under section 404 (a)(3)(B), on belialf of an individual who is treated as an employee of such domestic corporation under subsection (a)— "(1) except as provided in paragraph (2), no deduction shall be allowed to such domestic parent corporation or to any other corporation which is entitled to deduct its contributions under such sections, "(2) there shall be allowed as a deduction to the domestic subsidiary of which such individual is an employee an amount equal to the amount which (but for paragraph (1)) would be deductible under section 404 (or section 405(c)) by the domestic parent corporation if he were an employee of the domestic parent corporation, and "(3) any reference to compensation shall be considered to be a I'eference to the total compensation of such individual (determined with the application of subsection (b)(2)). Ally amount deductible by a domestic subsidiary under this subsection shall be deductible for its taxable year with or within which the taxable year of such domestic parent corporation ends. "(e)

26 USC 72. 26 USC 101. 26 USC 2039. 72 Stat. 1659.

TREATMENT AS P^MPLOYEE LTNUEK RELATED PROVISIONS,—An

individual who is treated as an employee of a domestic parent corporation under subsection (a) shall also be treated as an employee of such domestic parent corporation, with respect to the plan described in subsection (a)(1)(A), for purposes of applying the following I)r<)visions of this title: '^(1) Section 72(d) (relating to employees' annuities). "(2) Section T2(f) (relating to special rules for computing employees' contributions). "(4) Section 2039 (relatingto annuities). «(5) Section 2517 (relating to certain annuities under quali-
 * ^^3) Section 101(b) (relathig to employees' death benefits).

26 u SC2517*

i » i

1

\*s

ned plans), (c)

26 USC 3121.

26 USC 403.

TECHNICAL AMENDMENTS.—

(1) The table of sections for part I of subchapter D of chapter 1 is amended by adding at the end thereof the following: "Sec. 4(Hi. Certain employees of foreign subsidiaries. "Sec. 407. Certain employees of domestic subsidiaries engaged in business outside the United States." ^2) Section 3121(a)(5) (relating to definition of wages) is amended by striking out "or" at the end of subparagraph (A) and by striking out subparagraph (B) and inserting in lieu thereof the following new subparagraphs: " (B) under or to an annuity plan which, at the time of such payment, is a plan described in section 403(a), or " (C) under or to a bond purchase plan which, at the time of such payment, is a qualified bond purchase plan described in.section 405(a);".

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63

64 492. (3) Section 209(e) of the Social Security Act (relating to the 42 Stat. 4 0 9. use definition of wages) is amended to read as follows: "(e) Any payment made to, or on behalf of, an employee or his beneficiary (1) from or to a trust exempt from tax under section 165(a) of the Internal Revenue Code of 1939 at the time of such pay- 53 Stat. 6 7. ment or, in the case of a payment after 1954, under sections 401 and 68A 501(a) of the Internal Revenue Code of 1954, unless such payment is 163. Stat. 134, made to an employee of the trust as remuneration for services "26use 401,501 rendered as such employee and not as a beneficiary of the trust, or (2) under or to an annuity plan which, at the time of such payment, meets the requirements of section 165(a)(3), (4), (5), and (6) of the Internal Revenue Code of 1939 or, in the case of a payment after 1954 and prior to 1963, the requirements of section 401(a)(3), (4), (5), and (6) of the Internal Revenue Code of 1954, or (3) under or to an annuity plan which, at the time of any such payment after 1962, is a plan described in section 403(a) of the Internal Revenue Code of 1954, or (4) under or to a bond purchase plan which, at the time of 26 USC 4 0 3. any such payment after 1962, is a qualified bond purchase plan described in section 405(a) of the Internal Revenue Code of 1954;". 76 Stat. 826. 26 USC 405. (d) EFFECTIVE DATE.—The amendments made by subsections (a), (b), and (c)(1) shall apply to taxable years ending after December 31, 1963. The amendments made by subsections (c)(2) and (3) shall apply to remuneration paid after December 31, 1962.

SEC. 221. EMPLOYEE STOCK OPTIONS AND PURCHASE PLANS. (a) IN GENERAL.—Pait II of subchapter D of chapter 1 is amended to read as follows: "PART II—CERTAIN STOCK OPTIONS "Sec*. 421. "Sec. 422. "Sec. 423. "Sec. 424. "Sec. 42.5.

General rules. Qualified, stock options. Employee stock purchase plans. Restricted stock options. Definitions and special rules.

"SEC. 421. GENERAL RULES. " (a) EFFEcrr OF QUALIFYING TRANSFER.—If a share of stock is transferred to an individual in a transfer in respect of which the requirements of section 422(a), 423(a), or 424(a) are met— e/'"**' ^^* ^^' ^^' "(1) except as provided in section 422(c)(1), no income shall result at the time of the transfer of such ^hare to the individual upon his exercise of the option with respect to such share; "(2) no deduction under section 162 (relating to trade or ^^ ^^^ ^^^* business expenses) shall be allowable at any time to the employer corporation, a parent or subsidiary corporation of such corporation, or a corporation issuing or assuming a stock option in a transartion to which section 425(a) applies, with res^ject to the ^°* * ^^* share so transferred; and "(3) no amount other than the price paid under the option shall be considered as received by any of such corporations for the share so transferred. "(b) EFFE("r OF DisQUALiFViN(} DiSFOsiTioN.—If the transfer of a share of stock to an individual pursuant to his exercise of an option would otherwise meet the requirements of section 422(a), 423(a), or 424(a) except that there is a failure to meet any of the holding period requirements of section 422(a)(1), 423(a)(1), or 424(a)(1), then any increase in the income of such individual or deduction from the income of his employer corporation for the taxable year in which such exercise, occurred attributable to such disposition, shall be treated as an increase in income or a deduction from income in the taxable year of such individual or of such employer cori:)oration in which suchdisposition occurred.

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[78 STAT.

" (c) P^xEKcisK B ESTATE.— V

''(1) I x GENERAL.—If till option to which this part applies is exercised after the death of the employee by the estate of the decedent, or by a person who acquired the right to exercise such option by bequest or inheritance or by reason of the death of the decedent, the provisions of subsection (a) shall apply to the same extent as if the option had been exercised by the decedent, except that— " (A) the holding period and employment requirements of sections 422(a), 423(a), and 424(a) shall not apply, and " (B) any transfer by the estate of stock acquired shall be considered a disposition of such stock for purposes of secPost. pp. 67,69. tions423(c) and424(c)(1). "(2) DEDUCTION FOR ESTATE TAX.—If an amount is required to be included under section 422(c)(1), 423(c), or 424(c)(1) in gross income of the estate of the deceased employee or of a person (lescribed in paragraph (1), there shall be allowed to the estate or such person a deduction with respect to the estate tax attributable to the inclusion in the taxable estate of the deceased employee of the net value for estate tax purposes of the option. For this purpose, the deduction shall be determined under section 26^sc°*69^i^^ ^^^ ^^^ ^® ^^^® option acquired from the deceased employee were an item of ^ross income in respect of the decedent under section 691 and as if the amount includible in gross income under section 422(c)(1), 423(c), or 424(c)(1) were an amount included in gross income under section 691 in respect of such item of gross income. '* (3) BASIS OF SHARES ACQUIRED.—In the case of a share of stock acquired by the exercise of an option to which paragraph (1) applies— " (A) the basis of such share shall include so much of the basis of the option as is attributable to such share; except that the basis of such share shall be reduced by the excess (if any) of (i) the amount which would have been includible in gross income under section 422(c)(1), 423(c), or 424(c)(1) if the employee had exercised the option on the date of his death and had held the share acquired pursuant to such exercise at the time of his death, over (ii) the amount which is includible in gross income under such section; and " (B) the last sentence of sections 422(c)(1), 423(c), and 424(c)(1) shall apply only to the extent that the amount includible in gross income under such sections exceeds so much of the basis of the option as is attributable to such share. "vSEC. 422. QUALIFIED STOCK OPTIONS. " (a) IN GENERAL.—Subject to the provisions of subsection (c)(1), Ante. p. 63. sectjou 421(a) shall apply with respect to the transfer of a share of «t«x;k to an individual pursuant to his exercise of a qualified stock option if— "(1) no disposition of such share is made by such individual within the 3-year period beginning on the day after the day of the transfer of such share, and "(2) at all times during the period l>eginning with the date of the granting of the option and ending on the day 3 months before the date of such exercise, such individual was an employee of either the corporation granting such option, a parent or subsidiary corporation of such corporation, or a corporation or a parent or subsidiary corporation of such corporation issuing or

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PUBLIC LAW 88-272-FEB. 26, 1964

assuming a stock option in a transaction to which section 425(a) Post, applies. " (b) QUALIFIED STOCK O I T I O N. — For purposes of this part, the term 'qualified stock option' means an option granted to an individual after December 31, 1963 (other than a restricted stock option granted pursuant to a contract described in section 424(c)(3)(A)), for any Post, reason connected with his employment by a corporation, if granted by the employer corporation or its parent or subsidiary corporation, to purchase stock of any of such corporations, but only if— "(1) the option is granted pursuant to a plan which includes the aggregate number of shares which may oe issued under options, and the employees (or class of employees) eligible to receive options, and which is approved by the stockholders of the granting corporation within 12 months before or after the date such plan is adopted; " (2) such option is granted within 10 years from the date such plan is adopted, or the date such plan is approved by the stockholders, whichever is earlier; "(3) such option by its terms is not exercisable after the expiration of 5 years from the date such option is granted; "(4) except as provided in subsection (c)(1), the option price is not less than the fair market value of the stock at the time such option is granted; "(5) such option by its terms is not exercisable while there is outstanding (within the meaning of subsection (c)(2)) any qualified stock option (or restricted stock option) which was granted, before the granting of such option, to such individual to purchase stock in his employer corporation or in a corporation which (at the time of the granting of such option) is a parent or subsidiary corporation of the employer corporation, or in a predecessor corporation of any of such corporations; "(6) such option by its terms is not transferable by such individual otherwise than by will or the laws of descent and distribution, and is exercisable, during his lifetime, only by him; and " (7) such individual, immediately after such option is granted, does not own stock possessing more tluin 5 percent of the total combined voting power or value of all classes of stock of the employer corporation or of its parent or subsidiary corporation; except that if the equity capital of such corporation or corporations (determined at the time the opti(m is granted) is less than $2,000,000, then, for purposes of applying the limitation of this paragraph, there shall be added to such 5 percent the percentage (not higher than 5 percent) which bears the same ratio to 5 percent as the difference between such equity capital and $2,000,000 bears to $1,000,000. " (c) SPFAIAL RULES.— " (1) ExER(^isE OP o r r i o x WIIEX PRICE IS LESS TJFAX VALUE OF

STO(^K.—If a share of stock is transferred pursuant to the exercise by an individual of an option which fails to qualify as a (|ualified stock ption under subsection (b) because there was a failure in an attempt, made in good faith, to meet the requirement of subsection (b)(4), the requirement of subsection (b)(4) shall be considered to have been met, but there shall be included as compensation (and not as gain upon the sale or exchange of a capital asset) in his gross income for the taxable year in which such option is exercised, an amount equal to the lesser of— " (A) 1.50 percent of the difference between the option price and the fair market value of the share at the time the option was granted, or

65 p. 71.

p. 69.

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Post,

PUBLIC LAW 88-272-FEB. 26, 1964

p. 71.

[78 STAT.

' ' (B) the (lifieience between the option pri(*e and the fair market value of the share at the time of such exercise. The basis of the share aajuired shall be increased by an amount e<|ual to the amount included in his ^ross income umler this paragraph in the taxable year in which the exercise occurred. "(2) CERTAIN onioNs TKKATED AS orrsiAXDixcs.—For purposes of subsection (b)(5)— " (A) any restricted stock option which is not terminated before January 1, 1965, and " (B) any qualified stock opt ion granted after December 31, 1063, shall be treated as outstanding until such optin is exer<Msed in full or expires by reason of the lapse of time. For purposes of the preceding sentence, a restricted stock option granted before January 1, 1964, shall not be treated as outstanding for any period before the first day on which (under the terms of such option) it may be exercised. ' ' (A) the term 'equity capital" means— " (i) in the case of one corporation, the sum of its money and other property (in an amount eipial to the adjusted basis of such property for determining gain), less the amount of its indebtedness (other than indebtedness to shareholders), and "(ii) in the case of a group of corporations consisting of a parent and its subsidiary corporations, the sum of the equity capital of each of such corporations adjusted, under regulations presci-ibed by the Secretary or his delegate, to eliminate the effect of intercorporate ownership and transactions among such corporations: " (B) the rules of section -l'25(d) shall apply in determining the stock ownersliip of the individual; and ''(C) stock which the individual may purchase under outstanding options shall be treated as stock owned by such individual. If an individual is granted an option which permits him to purChase stock in excess of the limitation of subsection (b)(7) (determined by applying the rules of this paragraph)5 such option shall be treated as meeting the reciuirement of subsection (b)(7) to the extent that such individual could, if the option were fully exercised at the time of grant, purchase stock under such option without exceeding such limitation. The portion of such option which is treated as meeting the requirement of subsection (b)(7) shall be deemed to be that portion of the option which is first exercised. '•(!:) CERTAIN DISQIALIFVIXG nisposrnoxs WHERE AMOUXT RKAKIZEO IS L E S S T II A X V A I A E AT KXERCISE.
 * '(3) OiTioNS oRAXTKU TO cKKTAix siiAj{Knoi.i>K'Ks,—For purposes of subsection (b)(7) —

Tf

" (A) an individual who has acquired a shaie of stock by the exercise of a ([ualified stock option makes a disposition of such share within the o-year period described in subsection (a)(1), and " (B) such clistX)sition is a sale or exchange with respect to which a loss (if sustained) would be recognized to such individual, then the anicmut which is includible in the gross income of such individual, and the amount which is deductible from the income of his employer corporation, as compensation attributable to the exercise of such option shall not exceed the excess (if any) of the

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amount realized on such sale or exchange over the adjusted basis of such share. "(5)

CERTAIN TRANSFERS BY INSOLVENT INDIVIDUATE.—If an in-

solvent individual holds a share of stock acquired pursuant to his exercise of a qualified stock option, and if such share is transferred to a trustee, receiver, or other similar fiduciary, in any proceeding under the Bankruptcy Act or any other similar insol- gj^gtatr^s/o!^' vency proceeding, neither such transfer, nor any other transfer 11 USC i note. of such share for the benefit of his creditors in such proceeding, shall constitute a 'disposition of such share' for purposes of subsection (a)(1). " (6) APPLICATION OF SUBSECTION (b)(5) WHERE OPTIONS ARE FOR STOCK OF SAME CLASS IN SAME CORPORATION.—The requirement of subsection (b)(5) shall be considered to have been met in the case of any option (referred to in this paragraph as 'new option') granted to an individual if— " (A) the new option and all outstanding options referred to in subsection (b)(5) are to purchase stock of the same class in the same corporation, and " (B) the new option by its tenns is not exercisable while there is outstanding (within the meaning of paragraph (2)) any qualified stock option (or restricted stock option) which was granted, before the granting of the new option, to such individual to purchase stock in such corporation at a price (determined as of the date of grant of the new option) higher than the option price of the new option.

"SEC. 4 3 EMPLOYEE STOCK PURCHASE PLANS. 2. " (a) GENFJIAL RULE.—Section 421(a) shall apply with respect to the transfer of a share of stock to an individual pursuant to his exercise of an option granted after December 81, 1963 (other than a restricted stock option granted pursuant to a plan described in section 4 2 4 (c)(3)(B)), under an employee stock purchase plan (as defined in subsection (b)) if— "(1) no disposition of such share is made by him within 2 years after the date of the granting of the option nor within 6 months after the transfer of such share to him; and "(2) at all times during the period beginning with the date of the granting of the option and ending on the day 8 months before the date of such exercise, he is an employee of the corporation granting such option, a parent or subsidiary corporation of such corporation, or a corporation or a parent or subsidiary corporation of such corporation issuing or assuming a stock option in a transaction to which section 425(a) applies. " (b) EMPLOYEE STOCK PURCHASE P L A N. — For purposes of this part, the term 'employee stock purchase plan' means a plan which meets the following requirements: "(1) the plan provides that options are to be granted only to employees of the employer corporation or of its parent or subsidiary corporation to purchase stock in any such corporation; "(2) such plan is approved by the stockholders of the granting corporation within 12 months before or after the date such plan is adopted; " (3) under the terms of the plan, no employee can be granted an option if such employee, immediately after the option is granted, owns stock possessing 5 percent or more of the total combined voting power or value of all classes of stock of the employer corporation or of its parent or subsidiary corporation. For purposes of this paragraph, the rules of section 425(d) shall apply in determining the stock ownership of an individual, and

^"*e, p. 63.

Post, p. 69.

Post, p. 71.

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[78 STAT.

stock which the employee may purchase under outstanding options shall be treated as stock owned by the employee; "(4) under the terms of the plan, options are to be granted to all employees of any corporation whose employees are granted any of such options by reason of their employment by such corporation, except that there may be excluded— " (A) employees who have been employed less than 2 years, " (B) employees whose customary employment is 20 hours or less per week, " (C) employees whose customary employment is for not more than 5 months in any calendar year, and " (D) officers, persons whose principal duties consist of supervising the work of other employees, or highly compensated employees; "(5) under the terms of the plan, all employees granted such options shall have the same rights and privileges, except that the amount of stock which may be purchased by any employee under such option may bear a uniform rehitionship to the total compensation, or the basic or regular rate of compensation, of employees, and the plan may provide that no employee may purchase more than a maximum amount of stock fixed under the plan; "(6) under the terms of the plan, the option price is not less than the lesser of— " (A) an amount equal to 85 percent of the fair market value of the stock at the time such option is granted, or " (B) an amount which under the terms of the option may not be less than 85 percent of the fair market value of the stock at the time such option is exercised; "(7) under the terms of the plan, such option cannot be exercised after the expiration of— " (A) 5 years from the date such option is granted if, under the terms of such plan, the option price is to be not less than 85 percent of the fair market value of such stock at the time of the exercise of the option, or " (B) 27 months from the date such option is granted, if the option price is not determinable in the manner described in subparagraph (A); "(8) under the terms of the plan, no eniployee may be granted ail option which permits his rights to purchase stock under all such plans of his ejnployer corporation and its parent and subsidiary corporations to accrue at a rate which exceeds $25,00 of fair market value of such stock (determined at the time such option is granted) for each calendar year in which such option is outstanding at any time. For purposes of this paragraph— " (A) the right to purchase stock under an option accrues when the option (or any portion thereof) first l)ecomes exercisable during the calendar year; " (B) the right to purchase stock under an option accrues at the rate provided in the option, but in no case may such rate exceed $25,000 of fair market value of such stock (determined at the time such option is granted) for any one calendar year; and " (C) a right to purchase stock which has accrued under one option granted pursuant to the plan may not be carried over to any other option; and "(9) under the terms of the plan, such option is not transferable by such individual otherwise than by will or the laws of descent and distribution, and is exercisable, during his lifetime, only by him.

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For purposes of paragraphs (3) to (9), inclusive," where additional terms are contained in an offering made under a plan, such additional terms shall, with respect to options exercised under such offering, be treated as a part of the terms of such plan. "(c)

SPECIAL RULE W H E R E OPTION PRICE Is BETWJ:EX 85 PERCENT AND 100 PERCENT OF VALUE or STOCK.—If the option price of a share

of stock acquired by an individual pursuant to a transfer to which subsection (a) applies was less than 100 percent of the fair market value of such share at the time such option was granted, then, in the event of any disposition of such share by him which meets the holdingperiod requirements of subsection (a), or in the event of his death (whenever occurring) while owning such share, there shall be included as compensation (and not as gain upon the sale or exchange of a capital asset) in his gross income, for the taxable year in which falls the date of such disposition or for the taxable year closing with his death, whichever applies, an amount equal to the lesser of— " (1) the excess of the fair market value of the share at the time of such disposition or death over the amount paid for the share under the option, or "(2) the excess of the fair market value of the share at the time the option was granted over the option price. If the option price is not fixed or determinable at the time the option is granted, then for purposes of this subsection, the option price shall be determined as if the option were exercised at such time. I n the case of the disposition of such share by the individual, the basis of the share in his hands at the time of such disposition shall be increased by an amount equal to the amount so includible in his gross income. "SEC. 424. RESTRICTED STOCK OPTIONS.

" (a) IN GENERAL.—Section 421(a) shall apply with respect to the transfer of a share of stock to an individual pursuant to his exercise after 1949 of a restricted stock option, if— " (1) no disposition of such share is made by him within 2 years from the date of the granting of the option nor within 6 months after the transfer of such share to him, and •' (2) at the time he exercises such option— " (A) he is an employee of either the corporation granting such option, a parent or subsidiary corporation of such corporation, or a corporation or a parent or subsidiary corporation of such corporation issuing or assuming a stock option in a transaction to which section 425(a) applies, or " (B) he ceased to be an employee of such corporations within the 3-month period preceding the time of exercise. "(b) RESTRICTED STOCK O I T I O N. — For purposes of this part, the term 'restricted stock option' means an option granted after Febniary 26, 1945, and before January 1, 1964 (or, if it meets the requirements of subsection (c)(3), an option granted after December 31, 1963), to an individual, for any reason connected with his employment by a (X)rporation, if granted by the employer corporation or its parent or sul)sidiary corporation, to purchase stock of any of such corporations, but only if— •'( 1) at the time such option is granted— " (A) the option price is at least 85 percent of the fair market value at such time of the stock subject to the option, or " (H) in tpe case of a variable price option, the option price (computed as if the option had been exercised when granted) is at least 85 percent of the fair market value of the stock at the time such option is granted; "(2) such option by its terms is not transferable by such individual otherwise than by will or the laws of descent and distribution, and is exercisable, during his lifetime, only by him;

^"^^' ^' " •

Post,

p. 71.

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Post,

PUBLIC LAW 88-272-FEB. 26, 1964

p. 71.

[78 STAT.

" (3) such individual, at the time the option is granted, does not own stock possessing more than 10 percent of the total combined voting power of all classes of stock of the employer corporation or of its parent or subsidiary corporation. This paragraph shall not apply if at the time such option is granted the option price is at least 110 percent of the fair market value of the stock subject to the option, and such option either by its terms is not exercisable after the expiration of 5 years from the date such option is granted or is exercised within one year after August 16, 1954. For purposes of this paragraph, the provisions of section 425(d) shall apply in determining the stock ownership of an individual; and " (4) such option by its terms is not exercisable after the expiration of 10 years from the date such option is granted, if such option has been granted on or after June 22, 1954. "(c)

SPECIAL RULES. — "(1) OPTIONS UNDER WHICH OPTION PRICE IS BETWEEN 85 PERCENT AND 95 PERCENT OF VALUE OF STOCK.—If uo disposition of

a share of stock acquired by an individual on his exercise after 1949 of a restricted stock option is made by him within 2 years from the date of the granting of the option nor within 6 months after the transfer of such share to him, but, at the time the restricted stock option was granted, the option jH-ice (computed under subsection (b)(1)) was less than 95 percent of the fair market value at such time of such share, then, in the event of any disposition of such share by him, or in the event of his death (whenever occurring) while owning such share, there shall be included as compensation (and not as ^ain upon the sale or exchange of a capital asset) in his gross income, for the taxable year in which falls the date of such disposition or for the taxable year closing with his death, whichever applies— " (A) in the case of a share of stock acquired under an option qualifying under subsection (b)(1)(A), an amount equal to the amount (if any) by which the option price is exceeded by the lesser of— " (i) the fair market value of the share at the time of such disposition or death, or "(ii) the fair market value of the share at the time the option was granted; or " (B) in the case of stock acquired under an option qualifying under subsection (b)(1)(B), an amount equal to the lesser of— " (i) the excess of the fair market value of the share at the time of such disposition or death over the price paid under the option, or "(ii) the excess of the fair market value of the share at the time the option was granted over the option price (computed as if, the option had been exercised at such time). I n the case of a disposition of such share by the individual, the basis of the share in his hands at the time of such disposition shall be increased by an amount equal to the amount so includible in his gross income. "(2) VARIABLE PRICE OPINION.—For purposes of subsection (b) (1), the term 'variable price option' means an option under which the purchase price of the stock is fixed or determinable under a formula in which the only variable is the fair market value of the stock at any time during a period of 6 months which includes the time the option is exercised; except that in the case of options granted after September 80, 1958, such tenn does not

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include any such option in which such formula provides for determining such price by reference to the fair market value of the stock at any time before the option is exercised if such value may be greater than the average fair market value of the stock during the calendar month in which the option is exercised. "(3)

CERTAIN OPTIONS GRANTED AFTER DECEMBER 31, 1963. —

For purposes of subsection (b), an option granted after December 31, 1963, meets the requirements of this paragraph if granted pursuant to— " (A) a binding written contract entered into before January 1, 1964, or " (B) a written plan adopted and approved before January 1, 1964, which (as of January 1, 1964, and as of the date of the granting of the option)— " (i) met the requirements of paragraphs (4) and (5) of section 423(b), or ^"'"' ''• '^• "(ii) was being administered in a way which did not discriminate in favor of officers, persons whose principal duties consist of supervising the work of other employees, or highly compensated employees. "SEC. 425. DEFINITIONS AND SPECIAL RULES. " (a) CORPORATE REORGANIZATIONS. LIQUIDATIONS. ETC.—For purposes of this part, the term 'issuing or assuming a stock option in a transaction to which section 425(a) applies' means a substitution of a new option for the old option, or an assumption of the old option, by an employer corporation, or a parent or subsidiary of such corporation, by reason of a corporate merger, consolidation, acquisition of property or stock, separation, reorganization, or liquidation, if— " (1) the excess of the aggregate fair market value of the shares subject to the option immediately after the substitution or assumption over the aggregate option price of such shares is not more than the excess of the aggregate fair market value of all shares subject to the option immediately before such substitution or assumption over the aggregate option price of such shares, and "(2) the new option or the assumption of the old option does not give the employee additional benefits which he did not have under the old option. Kor purposes of this subsection, the parent-subsidiary relationship shall be determined at the time of any such transaction under this subsection. " (b) AcQursrnoN or NEW STOCK.—For purposes of this part, if stock is received by an individual in a distribution to which section 305, 354, 355, 356, or 1036 (or so much of section 1031 as relates to jeljIc'soT/ section 1036) applies, and such distribution was made with respect to 354, 355, sse! stock transferi-ed to him upon his exercise of the option, such stock ^°36, 1031. shall be considered as having been transferred to him on his exercise of such option. A similar rule shall be applied in the case of a series of such distributions. "(c)

DISPOSITION.—

"(1) IN GENERAL.—Except as provided in paragraph (2), for I)iirposes of this part, the t«rm 'disposition' includes a sale, exchange, gift, or a transfer of legal title, but does not include— " (A) a transfer from a decedent to an estate or a transfer by bequesl or inheritance; ' " (B) an exchange to which section 354, 355, 356, or 1036 (or so much of section 1031 as reilates to section 1036) applies; or " (C) a mere pi edge or hypothecation. 31-667 0-65—8

71

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i<inte, p. 71.

PUBLIC LAW 88-272-FEB. 26, 1964

[78 STAT.

"(2) JoiXT TENAXCY.—The acquisition of a share of stock in the name of the employee and another jointly with the right of survivorship or a subsequent transfer of a share of stock into such joint ownership shall not be deemed a disposition, but a termination of such joint tenancy (except to the extent such employee acquires ownership of such stock) shall be treated as a disposition by him occurring at the time such joint tenancy is terminated. " (d) ATTRIBUTION OF STOCK OWNERSHIP.—For purposes of this part, in applying the percentage limitations of sections 4 2 2 (b)(7), 423(b)(3), and424(b)(3)— "(1) the individual with respect to whom such limitation is being determined shall be considered as owning the stock owned, directly or indirectly, by or for his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and "(2) stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust, shall be considered as beingowned proportionately by or for its shareholders, partners, or beneficiaries. "(e) PARENT CORPORATION,—For purposes of this part, the term 'parent corporation' means any corporation (other than the employer corporation) in an unbroken chain of corporations ending with the employer corporation if, at the time of the granting of the option, each of the corporations other than the employer corporation owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. " (f) SUBSIDIARY CORPORATION.—For purposes of this part, the term 'subsidiary corporation' means any corporation (other than the employer corporation) in an unbroken chain of corporations beginning with the employer corporation if, at the time of the granting of the option, each of the corporations other than the last corporation in the unbroken chain owns stock possessing 50 percent or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. " (g) SPECIAL RULE FOR APPLYING SUBSECTIONS (e) AND (f).—In applying subsections (e) and (f) for purposes of section 422(a)(2), 423(a)(2), and 424(a)(2), there shall be substituted for the term 'employer corporation' wherever it appears in subsections (e) and (f) the term 'grantor corporation', or the term 'corporation issuing or assuming a stock option in a transaction to which section 425(a) applies', as the case may be. "(h)

MODIFICATION, EXTENSION, OR RENEWAL OF OPITON.—

"(1) IN GENERAL.—For purposes of this part, if the terms of any option to purcliase stock are modified, extended, or renewed, such modification, extension, or renewal shall be considered as the granting of a new option. "(2)

SPECIAL RULES FOR SECTIONS 4 2.{ AND 4 24 O P I TO N s. —

" (A) I n the case of the transfer of stock pursuant to the exercise of an option to which section 423 or 424 applies and which has been so modified, extended, or renewed, then, except as provided in subparagraph (B), the fair market value of such stock at the time of the granting of such option shall be considered as whichever of the following is the highest: " (i) the fair market value of such stock on the date of the original granting of the option, " (ii) the fair market value of such stock on the date of the making of such modification, extension, or renewal, or

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"(iii) the fair market value of such stock at the time of the making of any intervening modification, extension, or renewal. " (B) Subparagraph (A) shall not apply with respect to a modification, extension, or renewal of a restricted stock option before January 1, 1964 (or after December 31, 1963, if made pursuant to a binding written contract entered into before January 1, 1964), if the aggregate of the monthly average fair market values of the stock subject to the option for the 12 consecutive calendar months before the date of the modification, extension, or renewal, divided by 12, is an amount less than 80 percent of the fair market value of such stock on the date of the original granting of the option or the date of the making of any intervening modification, extension, or renewal, whichever is the highest. "(3) DEFINITION OF MODIFICATION.—The term 'modification' means any change in the terms of the option which gives the employee additional benefits under the option, but such term shall not include a change in the terms of the option— " (A) attributable to the issuance or assumption of an option under subsection (a); " (B) to permit the option to qualify under sections 422(b) (6),423(b)(9),and424(b)(2);or " (C) in the case of an option not immediately exercisable in full, to accelerate the time at which the option may be exercised. If a restricted stock option is exercisable after the expiration of 10 years from the date such option is granted, subparagraph (B) shall not apply unless the terms of the option are also changed to make it not exercisable after the expiration of such period. "(i) STOCKHOLDER APPROVAL.—For purposes of this part, if the grant of an option is subject to approval by stockholders, the date of grant of the option shall be determined as if the option had not been subject to such approval.

73

Ante, p p. 64, 67, 69.

" (j) CROSS REFERENCES.— "For provisions requiring the reporting of certain acts with respect to a qualified stock option, options granted under employer stock purchase plans, or a restricted stock option, see section 6039." (b) ADMINISTRATIVE PROVISIONS.— (1) REPORTING REQUIREMENT FOR CERTAIN OPTIONS,—Subpart

A of part III of subchapter A of chapter 61 (relating to information returns) is amended by renumbering section 6039 as 6040, and by inserting after section 6038 the following new section: "SEC. 6039. INFORMATION REQUIRED IN CONNECTION WITH CERTAIN OPTIONS. " (a) REQUIREMENT OF REPORTING.—Every corporation—

"(1) which in any calendar year transfers a share of stock to any person pursuant to such person's exercise of a qualified stock option or a restricted stock option, or "(2) which in any calendar year records (or has by its agent recorded) a transfer of the legal title of a share of stock— " (A) acquired by the transferor pursuant to his exercise of an option described in section 423(c) (relating to special rule where option price is between 85 percent and 100 percent of value of stock), or

26 USC 60316039.

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PUBLIC LAW 88-272-FEB. 26, 1964

[78 STAT.

" (B) acquired by the transferor pursuant to his exercise ^f ^ restricted stock option described in section 124(c)(1) (relating to options under which option price is between 85 percent and 95 percent of value of stock), shall, for such calendar year, make a return at such time and in such manner, and setting forth such information, as the Secretary or his delegate may by regulations prescribe. For purposes of the preceding sentence, any option which a corporation treats as a qualified stock option, a restricted stock option, or an option granted under an employee stock purchase plan, shall be deemed to be such an option. A return is required by reason of a transfer described in paragraph (2) of a share only with respect to the first transfer of such share by the person who exercised the option. "(b)

STATEMENTS TO B E FURNISHED TO PERSONS W I T H EESPEGT TO

W H O M INFORMATION I S FURNISHED.—F>ery corporation making a

return under subsection (a) shall furnish to each person whose name is set forth in such return a written statement setting forth such information as the Secretary or his delegate may by regulations prescribe. The written statement required under the preceding sentence shall be furnished to the person on or before January 31 of the year following the calendar year for which the return under subsection (a) was made. "(c) iDENTiFif'ATiON OF STOCK.—Any Corporation M'hich transfers any share of stock pursuant to the exercise of an option described in subsection (a)(2) shall identify such stock in a manner adequate to carry out the purposes of this section. "(d)

CROSS KEFERENCES.—

"For definition of— "(1) The term 'qualified stock option', see section 422(b). "(2) The term 'employee stock purchase plan', see section 423(b). "C3) The term 'restricted stock option', see section 424(b)." (2) 76 Stat. 1057. 26 USC 6652.

PENAL'TIES FOR FAILURE TO F I L E INFORMATION RETURNS.—•

Section 6652(a) (relating to failure to file certain information returns) is amended to read as follows: " (a) RETURNS RELATING TO PAYMENTS OF DIVIDENDS, E T C., AND CERTAIN TRANSFERS OF STOCK,—In the case of each failure—

26 USC 6042. 26 USC 6044. 26 USC 6049.

Ante, p. 73.

Ante, p. 37.

"(1) to file a statement of the aggregate amount of payments to another person required by section 6042(a)(1) (relating to payments of dividends aggregating $10 or more), section 6044 (a)(1) (relating to payments of patronage dividends aggregating $10 or more), or section 6049(a)(1) (relating to payments of interest aggregating $10 or more), u^2) to make a return required by section 6039(a) (relating to reporting information in connection with certain options) with resj^ect to a transfer of stock or a transfer of legal title to stock, or u^g^ |-Q n^^ke a retum required by section 6052(a) (relating to reporting payment of wages in the form of group-term life insurance) with respect to group-term life insurance on the life of an employee, on the date prescribed therefor (determined with regard to any extension of time for filing), unless it is shown that such failure is due to reasonable cause and not to willful neglect, there shall be paid (upon notice and demand by the Secretary or his delegate and in the same manner as tax), by the person failing to file a statement referred to in paragraph (1) or failing to make a return referred to in paragraph (2) or (3), $10 for each such failure, but the total amount imposed on the delinquent person for all such failures during any calendar year shall not exceed $25,000."

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(3) PENALTIES FOR FAILURE TO FURNISH STAIT-IMENTS TO PERSONS WITH R E S P E C T TO WHOM RETURNS ARE FILED. S c c t i o U 6 6 7 8 ( r e l a t i n g

to failure to furnish certain statements) is amended— (A) by striking out "section 6042(c)," and inserting in lieu thereof "section 6039(b), 6042(c),"; and (B) by striking out "section 6042(a)(1)," and inserting in lieu thereof "section 6039(a), 6042(a)(l), ' '. (c)

TECHNICAL AMENDMENTS.—

(1) Section 4 0 2 (a)(3)(B) (relating to taxability of beneficiary of employees' trust) is amended by striking out "section 421(d)(2) and (3) " and inserting in lieu thereof "subsections (e) and (f) of section 425". (2) The last sentence of subparagraph (li) of section 691(c) (2) (relating to allowance of deduction for estate tax in case of items constituting income in respect of a decedent) is amended to read as follows: "Such net value shall be determined with respect to the provisions of section 421(c)(2), relating to the deduction for estate tax with respect to stock options to which p a i t II of subchapter D applies." (d)

AntefT'^'37^^^''

26'use 6678. ^e use 6042. Ante, p. 73.

68A Stat. 135. 26 USC 402.

Ante,

p. 71.

26 USC 691.

Ante,

p. 63.

CLERICAL AMENDMENTS.—

(1) The table of parts for subchapter I) of chapter 1 is amended by striking out "Part II. Miscellaneous provisions."

and inserting in lieu thereof the following: "Part II. Certain stock options."

(2) The table of sections for subpart A of part III of subchapter A of chapter 61 is amended by striking out "Sec. 6039. Cross references."

and inserting in lieu thereof: "Sec. 6039. Information required in connection with certain options. "Sec. 6040. Cross references." (e)

EFFECTIVE DATES AND TRANSITION RUT.ES.—

(1) Except as provided in paragraphs (2) and (3), the amendments made by this section shall apply to taxable years ending after December 31, 1963. (2) The amendments made by paragraphs (1) and (3) of subsection (b), and paragraph (2) of section 6652(a) of the Internal Revenue Code of 1954 (as amended by paragraph (2) of subsection (b)), shall apply to stock transferred pursuant to options exercised on or after January 1, 1964. (3) I n the case of an option granted after December 31, 1963, and before January 1, 1965— (A) paragraphs (1) and (2) of section 422(b) of the Internal Revenue Code of 1954 (as added by subsection (a)) shall not apply, and (B) paragraph (1) of section 425(h) of such Code (as added by subsection (a)) shall not apply to any change in the terms of such option made before January 1, 1965, to permit such option to qualify under paragraphs (3), (4), and (5) of such section 422(b). SEC. 222. SALES AT RETAIL UNDER REVOLVING CREDIT PLANS. (a)

TREATMENT

I'NDER

INSTALLMENT

METHOD.—Section

453

(relatijjg to installment method of accounting) is amended by adding
 * it the end thereof the following new subsection:

"(e) REVOLVING (CREDIT T Y P E PLANS.—For purposes of subsection (a), the teiTO 'histallment plan' includes a revolving credit type plan which provides that the purchaser of personal property at retail may

^5 USC'665*2

^"'^' ^' ^^*

26 USC 453.

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[78 STAT.

pay for sudi property in a series of periodic paynieiiis of;\n a«^ree(l portion of the amounts due the seller under the plau, ex('ept that such term does not include any such plan with respect to a purchaser who uses his account primarily as an ordinary charge account." (b) EFFB:GTIVK DATE.—The amendment made by subsection (a) shall apply in respect of sales made during taxable years beginningafter December 31, 1963. SEC. 223. TIMING OF DEDUCTIONS IN CERTAIN CASES WHERE ASSERTED LIABILITIES ARE CONTESTED. (a)

7/stlf*io2o-^^' 76 Stat! 1199! 26 USC 461.

^^^ Section 461 (relating to general rule for taxable year of deduction) is amended by adding at the end thereof the following new subsection: "(f)

" Stat. 24.

TAXABLE YEAR OP' DEDUCTION.—

C o N T E S r a n LlABlLI'lTES.

If

" (1) the taxpayer contests an asserted 1 iability, " (2) the taxpayer transfers money or other property to provide for the satisfaction of the asserted liability, "(3) the contest with respect to the asserted liability exists after the time of the transfer, and "(4) but for the fact that the asserted liability is coutested, a deduction would be allowed for the taxable year of the transfer (or for an earlier taxable year), then the deduction shall be allowed for the taxable year of the transfer. This subsection shall not apply in respect of the deduction for income, war profits, and excess profits taxes iin{)osed by the authority of any foreign country or possession of the United States." (2) Section 43 of the Internal Revenue Code of n)3<) (relating to period for which deductions and credits taken) is amended by adding at the end thereof the following new sentences: "'If— ''(1) the taxpayer contests an asserted liability, "(2) the taxpayer transfers money or otliei- property to provide for the satisfaction of the asserted liability, "(3) the contest with respect to the asserted liability exists after the time of the transfer, and "(4) but for the fact that the asserted liability is contested, a deduction would be allowed for the taxable yeai- of the transfer (or for an earlier taxable year), then the deduction shall be allowed for the taxable year of the transfer. The preceding sentence shall not Jipply in respect of the deduction for income, war profits, and excess profits taxes imposed by the authority of any foreign country or possession of the United States.'' (b) KFFKCTIVK DATES.—Except as provided in subsections (c) and (<!)(1) (lie amendment made by subsection (a)(1) shall apply to taxable years beginning after December 31, 1953, and ending after August 16, 1954, and (2) the amendment made by subsection (a)(2) shall apply to taxable years to which the Internal Keveiiiie Code of 1939 applies. (c)

P^LKCTIOX

AS TO TRANSFERS

IN

TAXAHJ.K

YEARS

BEGINNING

1, 1964.— (1) The amendments made by subsection (a) shall not apply to any transfer of money or other property described in subsection (a) made in a taxable year beginning befoie January 1, 1964, if the taxpayer elects, in the manner provided by regulations prescribed by the Secretary of the Treasury or his delegate, to have this paragraph apply. Such an election— (A) must l>e made within one year after the date of the enactment of this Act,

IVKFORK JANUARY

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(B) may not be revoked after the expiration of such oneyear period, and (C) shall apply to all transfers described in the first sentence of this paragraph (other than transfers deserilied in paragraph (2)). I n the case of any transfer to which this paragraph applies, the deduction shall be allowed only for the taxable year in which the contest with respect to such transfer is settled. (2) Paragraph (1) shall not apply to any transfer if the assessment of any deficiency which would result from the application of the election in respect of such transfer is, on the date of the election under paragraph (1), prevented by the operation of any law or rule of law. (3) If the taxpayer makes an election under paragraph (1), and if, on the date of such election, the assessment of any deficiency which results from the application of the election in respect of any transfer is not prevented by the operation of any law or rule of law, the period within which assessment of such deficiency may be made shall not expire earlier than 2 years after the date of the enactment of this Act. (d) CERTAIN OTHER TRANSFERS I N TAXABLE YEARS BEGINNING BEFORE JANUARY 1, 1964.—The amendments made by subsection (a)

shall not apply to any transfer of money or other property described in subsection (a) made in a taxable year beginning before Januarv 1, 1964, if— (1) no deduction has been allowed in respect of such transfer for any taxable year before the taxable year in which the contest with respect to such transfer is settled, and (2) refund or credit of any overpayment which would result from the application of such amendments to such transfer is prevented by the operation of any law or rule of law. In the case of any transfer to which this subsection applies, the deduction shall be allowed for the taxable year in which the contest with respect to such transfer is settled. SEC. 224. INTEREST ON CERTAIN DEFERRED PAYMENTS.

(a) IN GENERAL.—Part III of subchapter E of chapter 1 (relating lo accounting periods and methods of accounting) is amended by adding at the end thereof the following new section: "SEC. 483. INTEREST ON CERTAIN DEFERRED PAYMENTS. " (a) AMOUNT CONSTITUTING INTEREST.—For purposes of this title,

in the case of any contract for the sale or exchange of property there shall be treated as interest that part of a payment to M'hich this section applies which bears the same ratio to the amount of such payment as the total unstated interest under such contract bears to the total of the payments to which this section applies which are due under such contract. " (b) TOTAL UNSTATED INTEREST.—For purposes of this section, the term 'total unstated interest' means, with respect to a contract for the sale or exchange of property, an amount equal to the excess of— "(1) tile sum of the payments to which this section applies which are due under the contract, over "(2) the sum of the present values of such payments and the present values of any interest payments due under the contract. For purposes of paragraph (2), the present value of a payment shall be determined, as of the date of the sale or exchange, by discounting such payment at the rate, and in the manner, provided in regulations prescril>ed by the Secretary or his delegate. Such regulations shall provide for discounting on the basis of 6-mnth brackets and shall provide that the present value of any interest payment due not more

68A Stat. 160. 26 USC 481, 482.

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[78 STAT.

tlisiii months after the date of the sale or exchange is an amount eqiial to 100 percent of such payment. '' (c) PAYMENTS rt) Wiiicii SECTIOX APPLIES.— "(1) IN GENERAL.—Except as provided in subsection (f), this section shall apply to any payment on account of the sale or exchange of property which constitutes part or all of the sales price and which is due more than 6 months after the date of such sale or exchange under a contract— " (A) under which some or all of the payments are due more than one year after the date of such sale or exchange, and " (B) under which, using a rate provided by regulations prescribed by the Secretary or his delegate for purposes of this subparagraph, there is total unstated interest. Any rate prescribed for determining whether there is total unstated interest for purposes of subparagraph (B) shall be at least one percentage point lower than the rate prescribed for purposes of subsection (b)(2). "(2) TREATMENT OF EVIDENCE OF INDEBTEDNESS.—For purposes of this section, an evidence of indebtedness of the purchaser given in consideration for the sale or exchange of property shall not be considered a payment, and any payment due under such evidence of indebtedness shall be treated as due under the contract for the sale or exchange. " (d) PAYMENTS T H A T ARE INDEFINII-E AS TO T I M E, LIABILITY, OR

AMOUNT.—In the case of a contract for the sale or exchange of property under which the liability for, or the amount or due date of, any portion of a payment cannot be determined at the time of the sale or exchange, this section shall be separately applied to such portion as if it (and any amount of interest attributable to such portion) were the only payments due under the contract; and such determinations of liability, amount, and due date shall be made at the time 2:>ayment of such portion is made. " (e) CHANGE I N TERMS OF CONTRACT.—If the liability for, or the

amount or due date of, any payment (including interest) under a contract for the sale or exchange of property is changed, the 'total inistated interest' under the contract shall be recomputed and allocated (with adjustment for prior interest (including unstated interest) payments) under regulations prescribed by the Secretary or his delegate. "(f)

68A Stat. 46. 26 USC 163.

26 USC 1231.

26 USC 1235.

EXCEPTIONS AND LIMITATIONS.— "(1) SALES PRICE OF $.S,OOO OR LESS.—This

section shall not apply to any payment on account of the sale or exchange of property if it can be determined at the time of such sale or exchange that the sales price cannot exceed $3,000. "(2) CARRYING CHARGES.—In the case of the purchaser, the tax treatment of amounts paid on account of the sale or exchange of property shall be made without regard to this section if any such amounts are treated under section 163(b) as if they included interest. "(3) TREATMENT OF SELLER.—In the case of the seller, the tax treatment of any amounts received on account of the sale or exchange of property shall be made without regard to this section if no part of any gain on such sale or exchange would be considered as gain from the sale or exchange of a capital asset or property described in section 1231. "(4) SALES OR EXCHANGES OF PATENTS.—This section shall not apply to any payments made pursuant to a transfer described in section 1235(a) (relating to sale or exchange of patents).

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