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TITLE 26-INTERNAL REVENUE CODE Act Aug. 16, 1954, ch. 736, 68A Stat. 3 The foliowing tables have been prepared as aids in comparing provisions of the Internal Revenue Code of 1954 with provisions of the In- ternal Revenue Code of 1939. No inferences, im- plications, or presumptions of legislative con- struction or intent are to be drawn or made by reason of such tables. Citations to "R. A." refer to the sections of earlier Revenue Acts. TABLE I 1939 Code section number 1954 Code section number 1 ..... oo.........,....,...,.,...,, 2 ......................................... 7806(a). 3 .... ....... ............ ................ 4.o,.......... .. ,... ,.............., 11. ...................... ....... ...... 1. 12(a) .... ......... ...................... 12(b)(1) .. ............. (2) ..................... 12(b) .......................................... 1. 12(c) ............................................ 1. 12(d) ............................................. 2. 12(e) ............................................... 12(g)......." . .................. 12(g) ............................................... 13(a) ............................................... 13(b) .. ................ .................... 11. 13(c)- ) ................. ........................ 14(a). . ..................................... 11. 15(c) ............................................... 1551. 21 .................................................... 63. 22(a) ............................................. 61. 22(b)(1) .......................................... 101. 22(b)(2)(A ) .................................... 72. 22(b)(2)(B) ................. 72. 403. 22(b)(2)(C) .................................... 72. 22(b)(3) .......................................... 102. 22(b)(4) .......................................... 103. 22(b)(5) .......................................... 104. 22(b)(6) .......................................... 107. 22(b)(7) .......................................... 894. 22(b)(8) .......................................... 115, 526, 892, 893, 911. 912, 933, 943. 22(b)(9) .......................................... 108. 22(b)(10) ........................................ 108. 22(b)(11) ........................................ 109. 22(b)(12) ........................................ 111. 22(b)(13) ........................................ 112. 22(b)(14) ........................................ 113. 22(b)(15) ........................................ 621. 22(b)(16) ........................................ 114. 22(b)(17) ........................................ 121. 22(C) ............................................... 471. 22(d)(1)-(5) ................................... 472. 22(d)(6) .......................................... 1321, 6156(a). 22(e) ............................................... 301(a). 22(t) ............................................... 1001. 22(g) ............................................... 861, 862, 863. 864. 22(h) .............................................. Chapter 1, Subchapter 0, Part II. 220) ................................................ 22(J) ................................................ 76. 22(k) ............................................... 71. 22(t) ................................................ 691. 22(m ) .............................................. 73, 6201(c). 22(n) ........................ 62. 22(o) ........................ 75. 23 .................................................... 161,211. 23(a)(1)(A) .................................... 162. Page 1 1939 Code section number 1954 Code section number 23(a)(1)(B ) .................................... 162. 23(a)(1)(C ) .................................... 263. 23(a)(2) .......................................... 212. 23(b) ............................................... 163, 265. 23(e)(1) .......................................... 164. 23(c)(2) .......................................... 23(c)(3) .......................................... 164. 23(d) ............................................... 164. 23(e) ............................................... 165. 23( ) ............................................ 185. 23(g) ............................................... 165. 23(h) .............................................. 165. 23(I) ................................................ 165. 23(j) ................................................ 1091. 23(k)(1) .......................................... 166, 593. 23(k)(2) ..................................... 165(g)(1), 166(e), 582. 23()(3) ......... ................ 165(g)(2). 23(k(4) .................... 166. 23(k)(5) .......................... 166. 23(k)(6) .......................................... 271, 166. 23(1) ............................................. 167. 23(m) ..................... 611. 23(n) ............................................... 167. 23(o) ............................................... 170. 23(p) ............................................... 404. 23(q) ............................................... 170. 23(r) ............................................... 591. 23(s) ............................................... 172. 23(t) ............................................... 168. 169. 23(u) ............................................... 215. 23(V) ............................................... 171. 23(w ) ............................................ 691. 23(x) ............................................... 213. 23(y) ............................................... 23(z) ............................................... 216. 23(aa)(1) ........................................ 141. 23(aa)(2) ........................................ 36. 23(aa)(3) ........................................ 144. 23(aa)(4) ........................................ 4, 142. 23(aa)(5) ........................................ 142. 23(aa)(6) ........................................ 143. 23(aa)(7) ........................................ 144. 23(bb) ............................................. 173. 23(cc) ............................................. 616. 23(dd) ............................................. 592. 23(ee) ............................................. 1202. 23(11) .............................................. 615. 24(a) ............................................... 261. 24(a)(1) .......................................... 262. 24(a)(2), (3) ................................... 263. 24(a)(4) .......................................... 264. 24(a)(5) .......................................... 265. 24(a)(6) .......................................... 264. 24(a)(7) .......................................... 266. 24(b) ............................................... 267. 24(c).............................................. 267. 24(d) ............................................... 273. 24(e) ............................................. 1451. 24(f) ............................................... 268. 25(a) ............................................... 35. 25(b)(1) .......................................... 151. 25(b)(2) .......................................... 153. 25(b)(3) .......................................... 152. 26 .................................................... 241. 26(a) ............................................... 242. 26(b) ............................................... 246. 26(b)(1) .......................................... 243. 20(b)(2) .......................................... 244. 26(b)(3) .......................................... 245. 26(c) ............................................... 545, 5 6. 26(d) ............................................... 535, 545, 801. 26(e) ............................................... 26(f) ............................................... 561, 562, 564. 26(g) ............................................... 565.
TITLE 26-INTERNAL REVENUE CODE 1954 Code section number 1939 Code section number 26(h) ............................................ 247. 26(f) ................................................ 922. 27(a) ............................................. 561. 27(b) ............................................... 535, 562. 27(c)-() ......................................... 562, 584. 28 .................................................... 565. 31 ........................... 33. 32 .......................... 32. 33 .................................................... 6401. 34 ....................... ....................... 35 .................................................... 31. 41 ........................... 441.446. 42(a) ........................ 451. 42(b)-(d) ..................... 454. 43 ........................... 461. 44 ........................ 453, 7101. 45 ........................... 482. 46 .......................... 442. 47 ........................ 443. 6011(a). 48 .......................... 441,7701. 51 ........................ 6001, 6011(a). 51(a) ............................................... 6001, 6012(a), 6065(b). 51(b) ............................................... 6013(a), 6012(b)(1), 6014(b). 51(c) ............................................... 6012(b). 51(d) ............................................... 51(e) ...................... 6065(a). 51(t )...................... 6014(a) and (b), 6151(a), 6155(a). 51(g) ............................................... 6012(b), 6013(b), 6653(a), 6659. 52 .................................................... 6012(a), (b), 6062. 53 .................................................... 6072,6081,6001. 54(a)-(b) ........................................ 6001. 54(c)-(e) ......................................... 54(f) ............................................... 6033(a), 6065(b). 55 .................................................... 6103. 7213(a). 58(a) .............................................. 6151(a). 56(b) ............................................... 6152, 6601(cd 2). 56(c) ............................................... 6161(a), 6162(a). 6165, 7101. 56(d)-(f) ......................................... 56(g) ............................................... 6313. 56(h) .......... .......... 56() ................................................ 6151(b). 58(j) ............................................ 57 .................... ........................ 58 .................................................... 6012(b), 6015, 6064, 6065, 6073 (a). (c), 6081(a), 6091(b), 6103, 6161(a). 59(a)-(c) ........................................ 6153. 59(d) ............................................... 6201(b), 6315. 6601(g). 60 ................................................... 6015(g), 6073(b). (d), (e); 6091(b), 6153(b). (d), (e). 61 ............................................. 62 .................................................... 7805. 83 .................................................... 6108. 64 .................................................... 7701. 101(1)-(11), (13)419) ................... 501. 101(12) ........................................... 521. 522. 101 .................................................. 502. 102(a) ............................................. 531,532. 102(b), (c) ...................................... 533. 102(d) ............................................. 535. 102(e) ............................................. 541. 102(f) .......................................... 536. 103 .................................................. 891. 104(a) ............................................. 581. 104(b) ............................................. 11. 105 .......................... 632. 106 .................. .. ................... 1347. 107(a) ............................................. 1301. 107(b) ............................................. 1302. 107(c) ............................................. 1304(a). 107(d) ............................................. 1303. 107(e) ............................................. 1304(b). 108 .................................................. 21. 109 .................................................. 921. 110 .................................................. 594. 111 ................................................. 1001. 112(a) ..................... 1002. 112(b)(1) ........................................ 1031. 112(b)(2) ........................................ 1036. 112(b)(3) ....................................... 354. 355. 112(b)(4) ...................................... 361. 112(b)(5) ........................................ 351, 112(b)(6) ........................................ 332. 112(b)(6)(D ) .................................. 7101. 112(b)(7) ....................................... 333. 112(b)(8) ........................................ 1081. 112(b)(9) ....................................... 373. 112(b)(10) .................... 371. 112(bX I ) ...................................... 355. 112(c) ............................................. 351, 356, 371, 1031. 112(d) ............................................. 361,371. 112(e) ............................................. 351, 356, 361, 371, 1031. 112(f) ............................................. 1033. 112(g) ....................................... 368. 112(h) ............................................ 368. 112() .......................................... 367. 112(J) .............................................. 112(k) ............................................. 357, 371. 112(t) .............................................. 371. 112(m ) ............................................ 1071. 112(n) ............................................. 1034. 113(a) ............................................. 1012. 113(a)(1) ...................................... 1013. 113(a)(2) ........................................ 1015. 113(a)(3) ........................................ 1015. 113(a)(4) ........................................ 1015. 113(a)(5) ........................................ 1014. 113(a)(6) ........................................ 358, 1031. 113(a)(7) ...................................... 362. 113(a)(8) ...................................... 362. 113(a)(9) ........................................ 1033. 113(a)(10) ...................................... 1091. 113(a)(11) ...................................... 1051. 113(a)(12) ...................................... 1052. 113(a)(13) ...................................... 723, 732. 113(a)(14) ...................................... 1053. 113(a)(15) ...................................... 334. 113(a)(16) ...................................... 1052. 113(a)(17) ...................................... 1082. 113(a)(18) ...................................... 334. 113(a)(19) ...................................... 307. 113(a)(20) ...................................... 373. 113(a)(21) ...................................... 373. 113(a)(22) ...................................... 372. 113(a)(23) ...................................... 358. 113(b) ............................................. 1011. 113(b)(1) ........................................ 1016. 113(b)(2) ........................................ 1016. 113(b)(3) ........................................ 1017. 113(b)(4) ........................................ 1018. 113(c) ............................................. 1019. 113(d) ............................................. 1020. 113(e) ............................................. 1022. 114(a) .......................................... 167(f). 114(b)(1) ........................................ 612. 114(b)(2) .................................... 114(b)(3) .................................... 613(b)(3). 114(b)(4) ........................................ 613(b)(4). 115(a) ............................................. 301,316. 115(b) ............................................. 301,316. 115(c) ........................ 302,312,331,342. 115(d) ....................... 301. 115(e) ............................................. 301. 115(f) ........................ 305. 115(g)(1) ..................... 302. 115(g)(2) ........................................ 304. 115(g)(3) ........................................ 303. 115(h) ............................................ 312. 115(l) .............................................. 302, 346. 115(j) .............................................. 301. 115(k) ............................................. 115(t) .............................................. 312. 115(m ) ............................................ 312. 116(a) .......................................... 911. 118(b) ......................................... 116(c) ......................................... 892. 116(d) ............................................. 115. 116(e) ............................................. 115. 116(f) ........................ 943. 116(g) ........................ 526. 116(h) ............................................ 893. 116() .............................................. 121(a)(17). 116(j) .............................................. 912. 116(k) ............................................. 912. 116(t) .............................................. 933. 117(a) ............................................. 1221,1222. 117(b) ............................................. 1202. 117(c) ............................................. 1201. 117(d) ............................................. 1211. 117(e)(1) ........................................ 1212, 117(e)(2) ................................... 117(f) ........................................ 1232, 117(g)(1) ........................................ 1233. 117(g)(2) ........................................ 1234. 117(g)(3) ........................................ 1238. 117(h) ............................................ 1223. 117(l) .............................................. 582. 117(J) .............................................. 1231. 117(k) ............................................. 631. 1939 Code section number Page 2 1954 Code section number (b),
Page 3 1939 Code section number TITLE 20-INTERNAL REVENUE CODE 1954 Code section number 1939 Code section number 117(/) .............................................. 1233. 117(m ) ............................................ 341. 117(n) ............................................. 1236. 117(o) ............................................. 1239. 117(p) ............................................. 1240. 118 ........ ....... ........................ 1091. 119(a), (b) .................... 861. 119(c),(d) .............................. 862. 119(e) ............................................. 88 1, 862, 863. 119(f) ............................................. 864. 120 .................................................. 170. 121 .................................................. 583. 122 .................................................. 172. 123 .................................................. 77. 124 .................................................. 124A ............................................... 168. 124B ............................................... 169. 125 .................................................. 171. 128 .................................................. 691. 127(a), (b) ...................................... 127(c)(1) ........................................ 1331. 127(c)(2) .. .................................... 1332. 127(c)(3) ........................................ 1333. 127(c)(4) ........................................ 1334. 127(c)(5) ................... 1335. 127(d) ............................................. 1336. 127(e) ............................................. 1337. 127(1) ............................................. 1337. 128 .................................................. 1346. 129 ................................................. 269. 130 .................................................. 270. 130A ............................................... 421. 131(a) ............................................. 901. 131(b) ............................................. 904. 131(c) ............................................. 905, 6155(a), 7101. 131(d) ............................................. 905. 131(e) ............................................. 905. 131(f) ............................................. 902. 131(g) ............................................. 901(c). 131(h) ............................................ 903. 131(I) .............................................. 905. 141 .................................................. 1501, 1502, 6071, 6081(a), 6091(b)(2), 6503(a)(2). 142 .................................................. 6012(a), (b), 6085(a). 143(a) ............................................. 1451. 143(b) ............................................. 1441. 143(c) ............................................. 1461, 6011(a), 6072(a), 6091(b), 6151(a). 143(d) ............................................. 1462. 143(e) ............................................. 1463. 143(t) ............................................. 1464, 6414. 143(g) ............................................. 1461. 143(h) ............................................ 1443, 6151. 144 .................................................. 1442, 6151(a). 145 .................................................. 7201,7202,7203,7043. 146 .................................................. 443. 6155(a), 6601(a), 6658, 8851, 7101. 147 .................................................. 6041(b), (c); 6071, 6081(a), 6091(a). 148 .................................................. 6042, 6043. 6044, 6085(a), 6071, 6081(a), 6091(a). 149 .................................................. 6045. 6065(a). 6071, 6081(a), 6091(a). 150 .................................................. 6071, 6081(a), 6091(a), 7001(a), 7231. 151 ........... ...................... 163(a) ............................................. 6033(b), 6071, 6081(a), 6091(a). 153(b) ............................................. 6034. 6071, 6081(b). 6091(a). 153(c) ............................................. 6104. 153(d) ............................................. 7201,7203. 154 .................................................. 692. 161 .................................................. 641. 162(a) ............................................. 642(e). 162(b) ............................................. 651,652, 661,662. 162(c) ............................................. 661. 162(d) ............................................. 643,663. 162(e) ............................................. 642. 162( ) ............................................. 642. 162(0 ............................................. 681. 163(a)(1) ........................................ 642. 163(a)(2) ........................................ 642. 163(b) ............................................. 642. 163(c) ............................................. 642(a). (1). 164 .................................................. 652, 662. 165(a) ............................................. 401, 501(a). 165(b) ............................................. 402. 165(c) ............................................. 402. 165(d) ............................................. 402. 166 .................................................. 676. 167 .................................................. 677. 168 .................................................. 642. 169(a)-(c) ...................................... 584, 6065. 169(d)(1)-(3) ................................. 584. 169(d)(4) ........................................ 584. 169(e) ............................................. 584. 169(f) ............................................. 6032. 6065(a). 169(g) ............................................. 584. 170 .................................................. 642, 584. 171 .................................................. 682. 172 .................................................. 642. 181 .................................................. 701. 182 .................................................. 702. 183(a), (b) ...................................... 702. 703. 183(c) ............................................. 702. 183(d) ............................................. 703(a). 184 .................................................. 702. 186 .................................................. 702. 187 .................................................. 6031, 6063, 6085(a). 188 .................................................. 706. 189 .................................................. 702. 703. 190 .................................................. 191 .................................................. 704. 201(a)(1) ........................................ 802. 201(a)(2). (3) ................................. 807. 201(b) ............................................. 801. 201(c)(1) ........................................ 803(a). 201(c)(2) ........................................ 803(b). 201(c)(3) ........................................ 803(c). 201(c)(4) ........................................ 803(d). 201(c)(5) ........................................ 803(e). 201(c)(6) ........................................ 803(f). 201(c)(7) ........................................ 803(g). 201(d) ............................................ 803(h). 201(e) ............................................ 803(l). 201(f) ............................................. 803(J). 201(g) ............................................. 202(a) ............................................. 202(b) ............................................. 804(a). 202(c) ............................................. 806. 203 .................................................. 203A ............................................... 805. 204(a)(1) ........................................ 831(a). 204(a)(2) ........................................ 831(b), 832. 204(a)(3) ........................................ 831(b). 204(b)(1) ........................................ 832(b)(1). 204(b)(2) ........................................ 832(a). 204(b)(3) ........................................ 832(b)(2). 204(b)(4) ........................................ 832(b)(3). 204(b)(5) ........................................ 832(b)(4). 204(b)(6) ................... 832(b)(5). 204(b)(7) ........................................ 832(b)(6). 204(c) ............................................. 832(c). 204(d) ............................................. 832(d). 204(e) ............................................. 832(e). 204(f) ............................................. 832(c)(12). 205 .................................................. 841. 208 .................................................. 842. 207(a)(1), (2) ................................ 821(a). 207(a)(3) ........................................ 821(b). 207(a)(4) ........................................ 821(c). 207(a)(5) ........................................ 822(e). 207(a)(6) ........................................ 821(d). 207(b)(1) ........................................ 822(a), (b). 207(b)(2) ........................................ 823(1). 207(b)(3) ........................................ 823(2). 207(b)(4) ........................................ 822(a). 207(b)(4)(A )-(F ) ........................... 822(c). 207(c) ............................................. 822(d)(1). 207(d) ............................................. 822(d)(2). 207(e) ............................................. 822(e). 207(f) ............................................. 822(d)(3). 207(g) ............................................. 208 .................................................. 211 .................................................. 871. 212 .................................................. 872. 213(a)-(c) ...................................... 873. 213(d) ............................................. 142(b)(1). 214 .................................................. 873. 215 .................................................. 874. 6011(a), 6005(b). 216 .................................................. 874. 217 .................................................. 6011(a), 6012(a), 6072(c). 218(a) ............................................. 6151(a). 219 .................................................. 875. 220 ..................... ................... 876. 221 .................................................. 877. 231(a) ............................................. 881. 231(b) ............................................. 882(a). 231(c) ............................................. 882(b). 231(d) ............................................. 883. 232(a) ............................................. 882. 1954 Code section number
TITLE 26-INTERNAL REVENUE CODE 1939 Code 1954 Code section number section number 232(b) ............................................ 882, 233 ................................................. 882, 6065(a). 234 .................................................. 882. 235(a) ............................................. 882. 6011(a), 6012(a), 6072(c). 235(b) ............................................. 6012(a). 236(a) ............................................. 6151(a). 236(b) ............................................. 884(1). 237 .................................................. 884(3). 238 .................................................. 884(4). 251 .......................9 31, 6011(a). 252 .................................................. 932. 261 .................................................. 11. 262 .................................................. 941. 263 .................................................. 942. 265 .................................................. 943. 271 .................................................. 6211, 6653(c)(1). 272(a) ............................................. 6212(a), (b)(2); 6213(a). 272(b) ............................................. 6155(a), 6215(a). 272(c) ............................................. 6155(a), 6213(c). 272(d) ............................................. 6213(d). 272(e) ............................................. 6214(a). 272(f) ............................................. 6212(c), 6213(b)(1). 272(9) ..................... 6214(b). 272(h) ............................................ 6214(c). 272(l) .............................................. 6152(c), 6601(c)(2). 272(J) .............................................. 6161(b), 6165, 7101. 272(k) ............................................. 6212(b). 273(a)-(I), W ................................ 6155, 6861, 6863(a), (b), 7101. 273(J) .............................................. 6404(b). 274 .................................................. 6086. 6155(a), 6161(c), 6503(b), 6871, 6872, 6873. 275 .................................................. 6501. 276 .................................................. 6501(c), 6502(a). 277 ....................... 6503(a). 291 ....................... 6651(a), 6659. 292 .................................................. 6155(a), 6601, 293 .................................................. 6653(a), 6659, 294 .................................................. 6601, 6651(c), 6654(a). 295 .................................................. 6601. 296 .................................................. 6601. 297 .................................................. 6601. 298 .................................................. 6601. 299 .................................................. 6658. 311 .................................................. 6901. 312 .................................................. 6903. 313 ............................................. 321 .................................................. 6403. 322(a)(1)-(3) ................................. 6401. 6402. 322(a)(4) ........................................ 31. 322(b)(1) ........................................ 6511. 322(b)(2) ........................................ 6511. 322(b)(3) ........................................ 6511. 322(b)(4) ........................................ 6151(c), 6513(a), 6611(d). 322(b)(5) ........................................ 6511(d). 322(b)(6) ........................................ 6511(d). 322(c) ............................................. 6512(a). 322(d) ............................................. 6512(b). 322(e) ............................................. 6151(c), 6513(b), 6611(d). 322(f) ............................................. 322(g) ............................................. 6511(d). 331 .................................................. 552. 332 .................................................. 553. 333 .................................................. 554. 334 .................................................. 555. 335 .................................................. 556. 336(a), (b), (c) ............................... 556. 336(d) ............................................. 557. 337 .................................................. 551. 338 ....................... 8035(a). 339 ....................... ... ................... 6035(b). 340 .................................................. 7201, 7203. 361 .................................................. 851. 362 .................................................. 852, 855. 371 .................................................. 1081. 372 .................................................. 1082. 373 .................................................. 1083. 391............................. 392.................. ,...................... 393 ........................... 394(a)-(c) ...................................... 394(d) ............................................. 312. 394(e), (f) ...................................... 395............................. 396............................. 400 .............................................. 3. 401 ............................................. 4. 402 ............................................... 4. 403 .................................................. 36. 404 ............................................... 4. 421(a), (b) ...................................... 501.511. 421(c), (d) ...................................... 512. 1939 Code section number sec 422(a) ............................................. 612. 422(b) ............................................. 513. 423 .................................................. 514. 424 .................................................. 615. 480 .................................................. 1401. 481 .................................................. 1402. 482 .................................................. 1403,6017. 500 ........................ 5.. 41. 501 .................................................. 542, 502 .................................................. 543. 503 .................................................. 544. 504(a), (b) ...................................... 545. 504(c) ............................................. 562, 563. 504(d) ............................................. 504(e) ............................................. 545. 505(a)-(c) ...................................... 545. 505(d) ............................................. 505(e) ............................................. 546. 506(a)-(h) ...................................... 547. 506(1) .............................................. 506(J) .............................................. 507(a) ............................................. 507(b) ............................................. 543. 508 ...................... 509 ......................................... 531. 510 .................................................. Chapter 1, Il. 1954 Code otion number Subchapter 0, Part 511 .................................................. 6103, 7213(a). 650 .................................................. 1471. 651 .................................................. 1471. 722(g) ............................................. 6105. 800 .................................................. 2001. 2101. 801 .......... ............ ,,. 802 ............. ........... ........... 810 .................................................. 2001(a), 2011(a), 2011(b). 811 .................................................. 2031(a). 811(a) ............................................. 2033. 811(b) ............................................. 2034. 811(c) ............................................. 2035, 2036, 2037. 811(d)(1) ........................................ 2038(a)(1). 811(d)(2) ........................................ 2038(a)(2). 811(d)(3) ........................................ 2038(b). 811(d)(4) ........................................ 811(e) ............................................. 2040. 811(f) ............................................. 2041. 811(g) ............................................. 2042. 811(h) ..................... 2044. 811(1) ...................... 2043(a). 811( ) .............................................. 2032. 811(k) ............................................. 2031(b). 811(t) .............................................. 2035. 811(m ) ............................................ 812 .................................................. 2051. 812(a) ............................................. 812(b) ........... ................................ 2043(b), 2053, 2054. 812(c) ............................................. 812(d) ............................................. 2055. 812(e) ............................................. 2056. 813(a)(1) ........................................ 813(a)(2) ................... 2012. 813(b) ................................... 2011. 813(c) ............................................. 2014. 820 .................................................. 6036, 6091(a). 821(a) ............................................. 6018, 6065(a). 821(b) ............................................. 6071, 6075(a), 6081(a). 821(c) ............................................. 6091(b). 821(d) ............................................. 6001. 821(e) ............................................. 822(a)(1) ........................................ 6151(a). 822(a)(2) ....................................... 6161(a)(2), 6165, 6503(d). 7101. 822(b) ............................................. 2002. 823 .................................................. 6314(b). 824 .... .................................... 825 .................................................. 2204. 826(a) ............................................. 7404. 826(b) ............................................. 2205. 826(c) ............................................. 2206. 826(d) ........................ 2207. 827(a) .................................... 6324(a)(1), 6325(a)(1). 827(b) ............................................. 6324(a)(2). 827(c) ............................................. 6324(a)(3). 828............... ....................... 840 .......... o..... ..................... 841 ...................... 850 ........................................... 2202. 851 .,... ......... .......... 860 .. .................... .................... 2101. 861 .................................................. 2102,2103,2106. 862 .................................................. 2104. 863 .................................................. 2105. Page 4
Page 5 1939 Code section number TITLE 26-INTERNAL REVENUE CODE 1954 Code section number 1939 Code section number 864(a) ............................................. 6018, 6065(a). 864(b) ............................................. 6071, 6075(a), 6081(a). 864(c) ............................................. 6091(b). 865 ......... ............... ....... .. . .... 870 .................................................. 6211(a), 6653(c)(1). 871(a) ...... ..................................... 6212(a), 6213(a). 871(b) ............................................. 6155(a), 6215(a). 871(c) ............................................. 6155(a), 6213(c). 871(d) ............................................. 6213(d). 871(e) ............................................. 6214(a). 871(f) ............................................. 6212(c), 6213(b). 871(g) ............................................. 6214(c). 871(h) ............................................ 6161(b)(2), 6165. 6503(d), 7101. 871(I) .............................................. 6653(b), 6659(a). 872(a) ............................................. 6155(a), 6861(a). 872(b) ............................................. 6861(b). 872(c) ............................................. 6861(c). 872(d) ............................................. 6861(d). 872(e) ............................................. 6861(e). 872() ............................................. 6863(a), (b)(2); 7101. 872(g) ............................................. 6155(a), 6863(b)(1). 872(h) ............................................ 6863(a), (b)(2). 872() .............................................. 6155(a), 6861(f). 872(J) .............................................. 6861(g). 873 .................................................. 6404(b). 874(a) ............................................. 6501(a). 874(b)(1) ........................................ 6501(c)(1). 6501(c)(3). 874(b)(2) ........................................ 6502(a). 874(b)(3) ........................................ 2016, 6071, 6081, 6091, 6155. 875 .................................................. 6503(a)(1). 876 .................................................. 890 .................................................. 6601(a), 6601(b), 6601(f)(1). 891 .................................................. 6155(a), 6601(a), 6601(d), 6601(f)(1). 892 .................................................. 6601(a), 6601(c)(3). 893 .................................................. 6601(a), (c), (f). 894(a) ............................................. 6651(a), 6653(a). 894(b) ............................................. 7201, 7202, 7203, 7207, 7269, 7343. 900(a) ............................................. 6901(a), (b). 900(b) ............................................. 6901(c). 900(c) ............................................. 6901(f). 900(d) ............................................. 6904, 7421(b). 900(e) ............................................. 6901(h). 901(a) ............................................. 6903(a). 901(b) ............................................. 6903(a). 901(c) ............................................. 6903(b). 901(d) ............................................. 6212(b). 910 .................................................. 6511. 911 .................................................. 6512(a). 912 .................................................. 6512(b). 913 .................................................. 920 .................................................. 921 .................................................. 925 .................................................. 6601(a), (b), 6163(a). 926 .................................................. 6163(a), 7101. 927 .................................................. 2015. 930(a) ............................................. 2203. 930(b) ............................................. 930(c) ............................................. 930(d) ............................................. 931 .................................................. 935 .................................................. 2001. 2101, 2052. 936(a) ............................................. 936(b) ............................................. 2012. 936(c) ............................................. 2014. 937 .................................................. 6018(a), 7203. 938 .................................................. 6103. 939 .................................................. 2201. 1000(a) ........................................... 2501. 1000(b) ........................................... 2511(a). 1000(c) ........................................... 2514. 1000(d) ........................................... 1000(e) ........................................... 1000(f) ........................................... 2513. 1000(g) ........................................... 1001(a) ........................................... 2502(a). 1001(b) ........................................... 2502(c). 1001(c) ........................................... 1002 ................................................ 2512(b). 1003 ................................................ 2503. 1004(a)(1) ...................................... 2521. 1004(a)(2) ...................................... 2522, 1004(a)(3) ...................................... 2523. 1004(b) ........................................... 2522. 1004(c) ........................................... 2524. 1005 ................................................ 2512(a). 1006(a) .................... 6019(a), 6065(a). 1006(b) ........................................... 6075(b), 6091(b)(l). 1007 ................................................ 6001. 1008(a) ........................................... 2502(d), 6151(a). 1008(b) ........................................... 6161(a)(1). 1008(c) ........................................... 1008(d) ........................................... 6313. 1008(c) ........................................... 6314(a). 1009 ................................................ 6324(b), 6325(a)(1). 1010 ................................................ 1011 ................................................ 6211(a), 6653(c)(1). 1012(a) ........................................... 6212(a), 6213(a). 1012(b) ........................................... 6155(a), 6215(a). 1012(c) ........................................... 6155(a), 6213(c). 1012(d) ........................................... 6213(d). 1012(e) ........................................... 6214(a). 1012(f) ........................................... 6212(c), 6213(b). 1012(g) ........................................... 6214(b). 1012(h) .......................................... 6214(c). 1012(f) ............................................ 6161(b)(I) 6165, 7101. 1012( ) ............................................ 6212(b). 1013(a) ........................................... 6155(a), 6861(a). 1013(b) ........................................... 6861(b). 1013(c) ........................................... 6861(c). 1013(d) ........................................... 6861(d). 1013(e) ........................................... 6861(c). 1013(f) ........................................... 6863(a), 6863(b)(2), 7101. 1013(g) ........................................... 6155(a), 6863(b)(1). 1013(h) .......................................... 6863(a), (b)(2). 1013(I) ............................................ 6155(a). 6861(f). 1013(J) ............................................ 6861(g). 1014 ................................................ 6404(b). 1015(a) ........................................... 6871. 1015(b) ........................................... 6155(a), 6161(c), 6503(b), 6873(a). 1016 ................................................ 6501. 6502(a), 1017 ................................................ 6503(a)(1). 1018 ................................................ 1019 ................................................ 6653, 6659(b). 1020 ................................................ 6601(a), (f)(1). 1021 ................................................ 6155(a), 6601(a), (d), (f)(1). 1022 ................................................ 0601(a), (c)(3). 1023 ................................................ 6601(a), 6601(c)(1), 6601(f)(1). 1024(a) ........................................... 7201,7203. 1024(b) ........................................... 7201. 1025(a) ........................................... 6901(a), (b). 1025(b) ........................................... 6901(c), 1025(c) ........................................... 6901(e). 1025(d) ........................................... 6901(f). 1025(e) ........................................... 6904, 7421(b). 1025(f) ........................................... 6901(h). 1025(g) ........................................... 6901(g). 1026(a) ........................................... 6903(a). 1026(b) ........................................... 6903. 1026(c) ........................................... 6903(b), 1027(a) ........................................... 6402(a). 1027(b) ........................................... 6511(a), (b). 1027(c) ........................................... 6512(a). 1027(d) ........................................... 6512(b) 1028 ................................................ 1029 ................................................ 7805(a). 1030(a) .................... 25C2(b). 1030(b) ........................................... 2511(b). 1031 ................................................ 6103. 1100 ................................................ 7441. 1101 ................................................ 7442. 1102(a)-(g) .................................... 7443(a)-(g). 1103(a)-(d) .................................... 7444(a)-(d). 1104 ................................................ 7445. 1105 ................................................ 7446. 1106 ................................................ 7447. 1110 ................................................ 7451. 1111 ................................................ 7453. 1112 ................................................ 7454(a). 1113 ................................................ 7455. 1114 ................................................ 7456(a). 1114(b) ........................................... 7456(c). 1115(a) ........................................... 7457(a). 1115(b) ........................................... 7457(b). 1116 ................................................ 7458. 1117(a)-(f) ................. ................ 7459(a)-(f). 1117(g) .................... 6155(a), 6659, 6673. 1117(h) .......................................... 1118 ................................................ 7460, 1119 ................................................ 6902. 1120 ................................................ 7461. 1121 ................................................ 7462. 1130 ................................................ 7471. 1131 ................................................ 7472. 1132 ................................................ 7473. 1133 ................................................ 7474. 1140 ............................................... 7481. 1141 ................................................ 7482. 71-999 0 - 78 - 3 (Vol. 7) 1954 Code section number
TITLE 26-INTERNAL REVENUE CODE 1939 Code 1954 Code section number section number 1142 ................................................ 7483. 1143 ................................................ 7484. 1144 ................................................ 1145 ................................................ 7101, 7485(a). 1148 ................................................ 7486. 1250 ................................................ 149 1. 1251 ................................................ 1492. 1252 ................................................ 1493. 1253 ................................................ 1494, 6071, 6081(a), 6091(a), 6151(a). 1400 ................................................ 3101. 1401(a),(M .................................... 3102(a), (b). 1401(c) ........................................... 6205(a), 6413(a)(1). 1401(d)(1) ...................................... 1401(d)(2) ...................................... 1401(d)(3) ...................................... 6413(c)(1). 1401(d)(4) ...................................... 6413(c)(2). 1402 ................................................ 3502. 1403 ................................................ 6051(a). 1410 ................................................ 3111. 1411 ................................................ 6205(a), 6413(a). 1412 ................................................ 3112. 1420(a) ........................................... 3501. 1420(b) ........................................... 6601(a), (t)(1). 1420(c) ........................................... 6011(a), 6071, 6081(a), 6091(a), 6302(b). 1420(d) ........................................... 6313. 1420(e) ........................................... 3122. 1421 ................................................ 6205(b), 6413(b). 1422 ................................................ 3503. 1423(a) ........................................... 6802(1 ). 1423(b) ........................................... 6803(a)(1). 1423(c) ........................................... 6803(a)(2). 1424 ................................................ 7509. 1425(a) ........................................... 7209. 1425(b) ........................................... 7208(1). 1426(a)-(e) .................................... 3121(a)-(e). 1426( ) ........................................... 7701(a)(1). 1426(g)-(I) ..................................... 3121()-k) 1427 ................................................ 3123. 1428 ................................................ 3124. 1429 ................................................ 7805(a), (c). 1430 ................................................ 1431 ................................................ 1432 ................................................ 3125. 1500 ................................................ 3201. 1501(a). (b) .................................... 3202(a), (b). 1501(c) ........................................... 6205(a)(1), 6413(a)(1). 1502 ................................................ 6205(b), 6413(b). 1503 ................................................ 3502(a). 1510 ...................................... 3211. 1511 ................................................ 3212. 1512 ................................................ 3502. 1520 ................................................ 3221. 1521 ................................................ 6205(a)(1), 6413(a)(1). 1522 ................................................ 6205(b), 6413(b). 1530(a) ........................................... 3501. 1530(b) ........................................... 6011(a), 6071, 6081(a), 6091(a), 6151(a). 1530(c) ........................................... 6601(a), (1)(1). 1530(d) ........................................... 6313. 1531 ................................................ 3503. 1532(a)-(e) .................................... 3231(a)-(e). 1532(f) ........................................... 7701(a)(9). 1532(g), (h) ................. 3231(f), (g). 1532(f) ............................................ 7701(a)(1). 1534 ................................................ 3232. 1535 ................................................ 7805(a), (c). 1536 ................................................ 1537 ................................................ 1538 ................................................ 3233. 1600 ................................................ 3301. 1601(a), (b), (c) ............................. 3302. 1601(d) ........................................... 6413(d). 1602 ................................................ 3303. 1603 ................................................ 3304. 1604(a) ........................................... 6011(a), 6065, 6071, 6091(b)(1) and (3). 1604(b) ........................................... 6081(a). 1604(c) .................................. 6106. 1605(a) ........................................... 3501. 1605(b) ........................................... 6601(a), (f)(1). 1605(c) ........................................... 6152(a)(3), (b), 6155(a), 6601(c)(2). 1605(d) ........................................... 6161(a)(1). 1605(e) ........................................... 6313. 1606 ................................................ 3305. 1607(a)-(J) ..................................... 3306(a)-(J). 1607(k) ........................................... 7701(a)(1). 1607(t)-(o) ..................................... 3306(k)-In). 1939 Code 1954 Code section number section number 1608 ................................................ 3307. 1609 ................................................ 7805(a), (c). 1610 .......................................... 1611 ................................................ 3308. 1621 ................................................ 3401. 1622(a), (b) .................................... 3402(a), (b). 1622(c)(I)(A ) ................................ 1622(c)(I1)(B ), (2)-( ) ................... 3402(c). 1622(d) ........................................... 3402(d). 1622(e) ........................................... 3502(b). 1622(f)(1) ...................................... 6414. 1622(f (2) ...................................... 6401, 6402. 1622(g)-(k) .................................... 3402(e)-(I). 1623 ................................................ 3403. 1624 ................................................ 3104, 6011(a). 1625(c) ........................................... 6081(a). 1626(a) ........................................... 7204. 1626(b) ........................................... 6674. 1626(d) ........................................... 7205. 1627 ................................................ 1631 ................................................ 6651(a). 1632 ................................................ 3504. 1633(a), (b) .................................... 6051(a)-(d). 1633(c) ........................................... 6081(a). 1634(a) ........................................... 7204. 1634(b) ........................................... 6659, 6674. 1635(a) ........................................... 6501(a). 1635(b) ........................................ 6501(c)(1), (3). 1635(c) ........................................... 6501(c)(2). 1635(d) ........................................... 6502(a). 1635(e) ........................................... 6501(b)(2). 1635(f) ........................................... 1635(g) ........................................... 1636(a)(1) ................................... 6511(a),(b)(1). 1638(a)(2) ...................................... 6511(b)(2). 1636(b) ......................................... 1636(c) ......................................... 6513(c). 1636(d) ........................................... 1636(e) ......................................... 1650 .. ................... .................... 4001, 4011, 4021,4471. 1651 ................................................ 4031. 1652 ................................................ 1653 ................................................ 1654 ................................................ - 1655 .............................................. 1656(a), (b), (c) ........................... 5063(a), (b), (c). 1657 ................................................ 1658 ................................................ 1659 ............................................. 1700 ............................................. 4231, 4232, 6011(a). 1701 ................................................ 4233. 1702 ................................................ 4234. 1703 ................................................ 4234. 1704 ................................................ 4232. 1710 .......................... 4241. 1711 ................................................ 4243. 1712 ................................................ 4242. 1715(a) ........................................... 4291. 1715(b), (c) .................................... 6151(a). 1715(d) ........................................... 6415(b), (c), (d), 6416(a). 1716(a) ........................................... 6011(a), 6065(a). 1716(b) ........................................... 6071, 6081(a). 1716(c) .......................................... 6091(b)(1), (2). 1717 ................................................ 6601(a), (f)(1). 1718(a) ........................................... 7201, 7203. 1718(b) ........................................... 7201, 7202. 1718(c) ........................................... 6659, 6671(a), 6672. 1718(d) ........................................... 6671(b),7343. 1719 ................................................ 6302(b). 1720 ................................................ 6001. 1721 ................................................ 1722 ................................................ 1723 ................................................ 1800 ................................................ 4301, 4311,4321. 1801 ................................................ 4311, 4312, 4313, 4314, 4315, 4381, 1802 ................................................ 4301, 4302, 4304, 4321, 4322, 4323, 4341, 4342. 4343, 4344, 4351.4352, 4353, 4381. 1804 ................................................ 4371, 4372. 4373. 1805 ................................................ 4891, 4892, 4894, 4895, 4896. 7701(a)I1). 1807 ............................................... 4451. 1808 ................................................ 4303, 4373,4382. 1809 ................................................ 4383, 4454, 4893, 6201(a)(2), 6801(a), (b). 1815 ................................................ 6804. 1816 ............................................. 1817(a) ........................................ 6802(1 ). 1817(b) ........................................... 6802(2). 1817(c) ........................................... 6802(3). 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TITLE 26-INTERNAL REVENUE CODE 1954 Code section number 1939 Code section number 2878(b) ........................................... 5009(c), 5193(b). 2878(c) ........................................... 5193(c). 2878(d) ........................................... 5193(d). 2879(a) ........................................... 5242(a). 2879(b) ........................................... 5006(a). 2879(c) ........................................... 5232(a). 2879(d) ........................................... 5232(a), (c). 2880(a) ........................................... 5006(b). 2881(a) ........................................... 5245. 2882(a) .................... 5244. 2883(a) .................... 5194(a). 2883(b) ........................................... 5194(d). 2883(c) ........................................... 5194(c). 2883(d) .................... 5194(e)(1). 2883(e) .................... 5025(d), 5194(f). 2883() .................... 5194(g). 2883(g) .................... 5194(h). 2884(a) .................... 5250(a). 2885(a) .................... 5247(a). 2885(b) ........................................... 5009(b), 5247(b). 2885(d) ........................................... 5648. 2886(a) ........................................... 5247(c). 2887 ...................... 5012(a). 2888(a) .................... 5247(d). 2891(a) .................... 5522(a). 2891(b) .................... 5011(a). 2900 ................................................ 5006(a). 2901(a)(1) ...................................... 5011(a)(1)(A). 2901(a)(2) ...................................... 5011(a)(I)(B ), 5011(b). 2901(b) ........................................... 5011(a)(1)(B), (2). 2901(c) ........................................... 5011(a)(3). 2901(d) ........................................... 5011(a)(4). 2903(a) ........................................... 5243(a). 2903(b) ........................................... 5008(a)(1). 2903(c) ........................................... 5008(a)(2). 2903(d) ........................................... 5008(a)(3). 2903(e) ........................................... 5008(a)(4). 2903(f) ........................................... 5243(d). 2903(g) ........................................... 5243(c). 2904(a) ........................................... 5243(a). (b). 2905 ................................................ 5243(e). 2908 ................................................ 5643. 2909 ................................................ 5644. 2910(a) ........................................... 5243(b). 2911 ................................................ 5243(f). 2912 ................................................ 5632. 2913 ................................................ 5632. 2914(a) ........................................... 5633. 2915(a) ........................................... 5241(c). 2916(a) ........................................... 5194(b). 3030(a) ........................................... 5001(a)(9). 3030(a)(1) ...................................... 5001(a)(5), (9), 5041(a), 5041(b), 5042(a)(2), 5302, 5368(b). 3030(a)(2) ...................................... 5022, 5041(b)(4). 3030(b) ........................................... 5043(b). 3031(a) ........................................... 5354. 5362, 5373(b)(1). 5373(b)(3), 5391. 3032(a) ........................................... 5373(a), 5382(b)(2). 3033(a) ........................................... 5373(b)(1). 3034(a) ........................................... 5366. 3035 ................................................ 5366. 3036 ................................................ 5025(f), 5373(a), 5381, 5382(a), (b)(1), (2); 5383(a). (b)(3), (4); 5392. 3037(a) ........................................... 5362, 5373(b)(4). 3038(a) ........................................... 5362. 3039(a) ........................................... 5370(a)(1). 3040(a) ........................................... 5351, 5354, 5356, 5368(a), (b); 5369. 3041(a) ........................................... 5043(b), 5368(a). 3042(a) ........................................... 5192(a). 5366. 3043(a) ........................................... 5661(a), (b); 5385(b). 3044 ................................................ 5381, 5382, 5383, 5392. 3045 ................................................ 5381, 5382, 5384. 3070(a) ........................................... 5331(a). 3070(b) ........................................... 5331(b), (c). 3072 ................................................ 5847. 3073(a) ........................................... 5332. 3074(a) ........................................... 5333. 3100(a) ........................................... 5301. 3101(a) ........................................... 5302. 3102 ................................................ 5303. 3103 ................................................ 5306. 3104(a) ........................................... 5309, 5412. 3105(a) ........................................... 5305. 3106(a) ........................................... 5307. 3107 ................................................ 5308. 3108(a) ........................................... 5310(a). 3108(b) ........................................... 5310(b). 3108(c) ........................................... 5310(c). 3108(d) ........................................... 5310(d). 3109 ................................................ 5310(a). 3110 ................................................ 5502. 3111 ...................... 5001(a)(6). 3112(a) ........................................... 5004(b), 5005(c). 3112(b) ........................................... 5007(d), 5689. 3113(a) ........................................... 5011(c). 3114(a) ........................................... 5304(a). 3114(b) .......................................... 5304(b). 3114(c) ............. .......................... 5304(c). 3114(d) ........................................... 5304(d). 3115(a) ......................... 5680(a). (b). 3116 ...................... 5686(a), (b); 7302. 3117(a) ........................................... 5314. 3118 ................................................ 5688(d). 3119 ................................................ 5315. 3120 ................................................ 5316 3121(a) ........................................... 5313(a). 3121(c) .................... 5313(b). 3121(d) ........................................... 5317(b). 3122 ................................................ 5317(a). 3123 ................................................ 5318. 3124(a) ........................................... 5319. 3125(a) ........................................... 5001(a)(8), 5007(d), 5311. 3125(b) ........................................... 5310(b). 3150(a) ........................................... 5051(a). 3150(b)(1) ...................................... 5054. 3150(b)(2) ...................................... 5055. 3150(b)(3) ...................................... 5689. 3150(c) ........................................... 5051(b). 3153(b) ........................................... 5053(a), 5401(b). 3153(c) ........................................... 5053(b). 3155(a) ........................................... 5401(a). 3155(b) ........................................... 5401(b). 3155(c) ........................................... 5415(a). 3155(f) ........................................... 5412,5413,5675. 3157(a) ....................... 5055, 3158 ................................................ 5402(a), 5411. 3159(a)-(c) .................................... 5671, 5672, 5673. 5674. 3159(e) ........................................ 5676(1). 3159(f) ........................................... 5676(2). 3159(g) ........................................... 5676(3). 3159(h) .......................................... 5676(4). 3159(i) ............................................ 5676(5). 3159(J) ............................................ 5674. 3160 ................................................ 5052(b). 3171(a) .................... 5367. 5555(a). 3172(a) ........................................... 5061(b). 3173(a) ........................................... 5883. 3173(b)(1)-(3) ............................... 5684. 3173(b)(4) ...................................... 5090. 3173(c) ........................................... 5685. 3173(d) ........................................... 5688(c). 3174 ................................................ 5064. 3175 ................................................ 5557. 3176(a) ........................................... 5556. 3177(a) ........................................... 5521(a). 3177(b) ........................................... 5521(c)(1), (2). 3177(c) ........................................... 5521(b). 3177(d)(1) ...................................... 5521(d)(1). 3177(d)(2) ...................................... 5521(d)(2). 3178 ................................................ 5523. 3179(a) ........................................... 5062(a). 3179(b) ........................................... 5062(b). 3182(a) ........................................... 5511. 3182(b) ........................................... 5001(a)(7). 3183(a) ........................................... 5217(a). 3183(b) ........................................... 5217(b). 3183(c) ........................................... 5217(c). 3206 ................................................ 4821. 3207 ................................................ 7235(d),7264. 3208 ................................................ 4822. 4826. 3210 ................................................ 4841. 3211 ................................................ 7266(a). 3212 ................................................ 4842. 3220 ................................................ 4721, 0001, 6151(a). 3221 ................................................ 4722. 3222 ................................................ 4772. 3223 ................................................ 3224 ................................................ 4724. 3225 ................................................ 7237(a). 3226 ................................................ 4775. 3227 ................................................ 4725. 3228 ................................................ 4731, 7343, 7701(a). 3230 ................................................ 4751. 4752, 6151(a). 3231 ......................... 4753. 3232 ................................................ 4772. 3233 ................................................ 4754, 6001, 6065(a), 6071. 6081(a), 6091(a). 1939 Code section number Page 10 1954 Code section number
TITLE 26-INTERNAL REVENUE CODE 1939 Code 1954 Code section number section number 3234 ................................................ 4755. ?235 ................................................ 7237(a). 3236 ................................................ 4775. 3237 ................................................ 4756. 3238 ................................................ 4761, 7701(a). 3239 .......................... 3250(a)(1) ...................................... 5111(a)(1), 5121(b)(1). 3250(a)(3) ...................................... 5111(a)(2). 3250(a)(4) ...................................... 5113(a). 3250(b)(1) ...................................... 5121(a)(1). 3250(b)(2) ...................................... 5122(c). 3250(b)(4) ...................................... 5121(a)(2). 3250(c)(1) ...................................... 5091. 3250(d)(1) ...................................... 5111(b)(1). 3250(d)(2) ...................................... 5111(b)(2). 3250(d)(3) ...................................... 5091, 5113(b). 3250(e)(1) ...................................... 5121(b)(1). 3250(e)(2) ...................................... 5121(b)(2). 3250(e)(3) ...................................... 5121(c). 3250(e)(4) ...................................... 5123(a). 3250(f)(1) ...................................... 5081. 3250(g) ........................................... 5113(c). 3250(h) .......................................... 5025(g). 3250(I) ............................................ 5025(h). 3250(j)(1) ...................................... 5101. 3250(J)(3) ....................................... 5106. 3250(t)(1) ....................................... 5131(a). 3250(t)(2) ....................................... 5131(b). 3250(l)(3) ....................................... 5132. 3250(t)(4) ....................................... 5133. 3250(1)(5) ....................................... 5134. 3251(a) ........................................... 5113(d)(1). 3251(b) ........................................... 5113(d)(2). 3251(c) ........................................... 5123(c). 3252(a) ........................................... 5124(a). 3252(b) ........................................... 5124(b). 3252(c) ........................................... 5124(c). 3252(d) ........................................... 5692. 3253 ................................................ 5691, 7301(a). 3254(b) ........................................... 5112(a). 3254(c)(1) ...................................... 5122(a). 3254(c)(2) ...................................... 5111. 3254(d) ........................................... 5052(a), 5092, 5402(a). 3254(e) ........................................... 5112(b). 3254(f) ........................................... 5122(b). 3254(g) .......................................... 5025(c), 5082, 5387(c). 3254(h) .................... 5102. 3255(a) .................... 5123(b)(1). 3255(b) .................... 5123(b)(2). 3255(c) .................... 5123(b)(3). 3260 ................................................ 5801(a). 3261(a) .................... 5802. 3261(b) ....................... 5841. 3262 ......................5 803. 3263(a) ........ j ........................ 5854(a). 3263(b) .................... 5854(a), (b). 3267 ...................... 4461, 4463, 4462. 3268 ...................... 4472, 4473,4471. 3270(a) .................... 5141, 7011(a). 3271 ................................................ 4901. 3271(a) ........................................... 5142(a). 3271(b) ........................................... 5142(b), 6151(a). 3271(c)(1) ...................................... 5104, 5142(c). 3272(a) ........................................... 5143(a), 6011(a). 6065(a), 6071, 6081(a), 6091(b), 6151(a). 3273(a) ........................................... 5145, 6801(a). 3273(b) ........................................... 5146, 6806(a). 3274 ................................................ 5693, 7273(a). 3275 ................................................ 5147, 6107. 3276 ................................................ 4906, 5148. 3277 ................................................ 4902, 5144(a). 3278 ................................................ 4903, 5144(c). 3279 ................................................ 4904, 5144(b). 3280(a) ........................................... 4905, 5144, 7011(b). 3281 ................................................ 6302(b). 3282 ................................................ 5149, 6302(b). 3283 ................................................ 4907, 5144(e). 3285 ................................................ 4401, 4404,4402,4421. 3286 ................................................ 6419. 3287 ................................................ 4403. 3290 ...................... 4411. 3291 ...................... 4412, 6091(b). 3292 ...................... 4413,4903,4907,6107. 3293 ...................... 6806(c). 3294 ....................... 7262, 7273(b)., 3297 ...................... 4422. 3298 ...................... 4423. 3300(a) .................... 6801(a). 3300(b) ........................................... 7208. 3300(c) ........................................... 1939 Code 1954 Code section number section number 3301(a) ........................................... 6801(b), 6804. 3301(b) ........................................... 3303 ................................................ 3304(a) ........................................... 6605(a). 3304(b) ........................................... 6805(b). 3804(c) ........................................... 6805(c). 3804(d) ........................................... 6805(d). 3304(e) ........................................... 3305 ................................................ 3310 ................................................ 6331(a). 3310(a) ........................................... 6011(a), 6071, 6601(c)(4), 6659. 3310(b) ........................................... 6011(a), 6601(c)(4), 6659. 3310(c) ........................................... 6601(a), 6601(f)(1), 6659. 3310(d) ........................................... 6155(a), 6601(f)(1), 6659. 3310(e) ........................................... 6659. 3310(f)(1) .................. : .................. 5703(c), 0011(a), 6071, 6081(a). 3310(f)(2) ...................................... 6302(c). 3311 ................................................ 6155(a), 6201(a)(2)(A). 6601(c)(4), 6659. 3312(a) ........................................... 6501(a). 3312(b) ........................................... 6501(c)(1), 6501(c)(3). 3312(c) ........................................... 6501(c)(2). 3312(d) ........................................... 6502(a). 3313 ................................................ 5705(a), 6511(a), 6511(b)(1), (2). 3314 ................................................ 3320(a) ........................................... 7268. 3320(b) ........................................... 3321 ................................................ 7206(4). 3321(b) ........................................... 7301. 3321(c) ........................................... 3322 ................................................ 7301(d). 3323(a)(1) ...................................... 7271(4). 3323(a)(2) ..................... 7271(4). 3323(a)(3) ...................................... 7208(5). 3323(b) ........................................... 7303(7). 3324(a) ........................................... 7341(a). 3324(b) ........................................... 7341(b). 3324(c) ........................................... 7341(c). 3325 ................................................ 7211. 3326 ................................................ 7304. 3330 ................................................ 6065(a). 3331 ................................................ 5704(b), 7510. 3332-3335 ...................................... 3350(a) ........................................... 7652(b)(1). 3350(b)..:.. ................ 7652(b)(2). 3351(a) .................... 7653(a)(2). 3351(b) ........................................... 7653(b). 3351(c) ........................................... 7653(c). 3360(a) ........................................... 7652(a)(1). 3360(b) ........................................... 7101, 7652(a)(2), 7803(c). 3360(c) ........................................... 7652(a)(3). 3361(a) ........................................... 7653(a)(1). 3361(b) ........................................... 7653(b). 3361(c) ........................................... 7653(c). 3400(a), (c) .................................... 4071, 4072, 4073. 3400(b) ........................................... 3401 ................................................ 3403 ................................................ 4061, 4062, 4063. 3403(e) ........................................... 6416(c). 3404 ................................................ 4141, 4142, 4143, 4151, 4152. 3405 ................................................ 4111, 4112, 4113. 3406(a)(1) ...................................... 4161. 3406(a)(2) ...................................... 3406(a)(3) ...................................... 4121. 3406(a)(4) ...................................... 4171,4172, 4173. 3406(a)(5) ...................................... 3406(a)(6) ...................................... 4191, 4192. 3406(a)(7) ...................................... 3406(a)(8) ...................................... 3406(a)(9) ...................................... 3406(a)(10) .................................... 4131. 3406(b) ........................................... 4221. 3406(c) ........................................... 3407 ................................................ 4151, 4182, 4224, 5831. 3408 ................................................ 4201,4221. 3408(b) ........................................... 6416(d). 3409(a) ........................................... 4211. 3409(b) ........................................... 3412(a)-(f) ..................................... 4081, 4082, 4083, 4101, 4102, 7101, 7232. 3412(g) ........................................... 6412(b). 3413 ................................................ 4091, 4092, 4093, 7101. 3414 ................................................ 3415 ................................................ 3420 ................................................ 4521, 4531, 4541, 4551. 3422 ................................................ 4521. 3423 ................................................ 4531,4532, 3424 ................................................ 4551, 4552, 4553. 3425 ................................................ 4541,4542. 3430 ................................................ 4601. Page 11
TITLE 26-INTERNAL REVENUE CODE 1954 Code section number 1939 Code section number 3431 .......................................... 3440 ................................................ 4217. 3441 ................................................ 4216. 3442 ................................................ 4220,4224. 3443 ................................................ 6416,6611. 3444 ................................................ 4218. 3445 ................................................ 4219. 3446 ................................................ 4223. 3447 ................................................ 3448(a) ........................................... 6011(a), 6065(a), 6071, 6081(a). 6091(b), 6151(a). 3448(b) ........................................... 6151(a), 6601(a), (f)(1). 3449 ................................................ 3450 ................................................ 3451 ................................................ 4222. 3453 ................................................ 3460 ......................................... 4281, 4282, 4283. 3461 ................................................ 6011(a), 6065(a), 6071, 6081, 6091(b), 6151(a). 3462 ............................................. 3465 .......................... 3466 .......................... 3467 ................................................ 3468 ................................................ 3469(a). (b), (c) ............................. 3469(d) ........................................... 3469(e) ........................................... 3469(f) ........................................... 3470 ................................................ 3471 ................................................ 3472 .......................... 3473 ................................................ 3474 ................................................ 4251, 4252, 4253, 4254. 4292,4253. 4291, 6011(a). 6065(a), 6071, 6081(a), 6091(b), 6151(a), 6161(a). 4261,4262. 4291, 6011(a), 6065(a), 6071, 6091(b), 6151(a). 6081(a), 6161(a). 4262, 4292. 6151(a), 6601(a), (f). 6415, 6416(f). 3475(a) .................... 4271,4272. 3475(b) .................... 4272,4292. 3475(c) ........................................... 4271, 4291, 6011(a), 6065(a), 6071, 6091(b), 6151(a). 3475(d) ........................................... 6081(a), 6161(a). 3475(e) ........................................... 4273,7272. 3480 ................................................ 4331;4361. 3481 ................................................ 4331, 4332, 4341, 4342, 4343, 4344, 4351, 4352, 4353. 3482 ................................................ 4361,4362. 3483 ................................................ 4382. 3490 ................................................ 4501,4503. 3491 ................................................ 4501, 6011(a). 6071, 6091(b). 6151(a). 3492 ................................................ 4502. 3493(a) ........................................... 6418(b). 3493(b) ........................................... 6511(e)(2). 3494(a) ........................................... 6418(a). 3494(b) .................... 6511(e)(1). 3495 ................................................ 6601(a), 6601(f). 3496 ................................................ 3497 ................................................ 3498 ............................... ..... 3500 ............................... 4501. 3501 ................................................ 4504. 3506 ................................................ 7240. 3507 ................................................ 4502, 7701(a). 3508 ................................................ 4501, 6412(c). 3600 ................................................ 7601(a). 3601(a)(1) ...................................... 7606(a). 3601(a)(2) .......................... 7606(b). 3601(b) ........................................... 7342. 3601(c) ........................................... 7212(a), (b). 3602 ................................................ 3603 ................................................ 6001. 3604(a) ........................................... 6046(a), 6071, 6091(a). 3604(b) ........................................... 6046(b), 6046(c), 6065(a). 3604(c) ........................................... 7203,7201. 3611(a)(1) ...................................... 6011(a), 6081(a), 6001(a), 3611(a)(2) ...................................... 3611(b) ........................................... 3611(c) ........................................... 3612(a) ........................................... 3612(c) ........................................... 3612(d)(1) ...................................... 3612(d)(2) ...................................... 3612(e) ........................................... 3612(f) ........................................... 3613 ................................................ 3614 ................................................ 3615 ................................................ 3615(a) ....................... 6091(b)(1), 6091(b)(2). 6020(a). 6071. 6065(a), 6071, 6091(a), 6091(b)(1), 6091(b)(2). 6020(b). 6020(b). 6651(a). 6653(b). 6201(a)(1). 6021. 7602, 7605(a). 7605(a). 7602. 3615(b) ........................................... 7602, 3615(c) ........................................... 7602. 3615(d) ........................................... 7603. 3615(e) ......................................... 7604(b). 3616(a) ......................................... 7207. 3616(b) ........................................... 7210. 3616(c) ........................................... 3617 ............................................... 3630 ............................................... 6101. 3631 ................................................ 7605(b). 3632(a) ........................................... 7622(a). 3632(a)(1) ...................................... 7602. 3632(b) ........................................... 7622(b), 3633 ................................................ 7402(b). 3633(a) ........................................... 7604(a). 3633(b) ........................................... 3634 ................................................ 6081(a). 3640 ................................................ 6201(a). 3641 ................................................ 6203. 3642 ................................................ 6204. 3643 ................................................ 3644 ................................................ 6202. 3645 ................................................ 3646 ................................................ 3647 ................................................ 6201(a). 3650 ................................................ 7621. 3651(a)(1) ...................................... 6301. 3651(a)(2) ...................................... 3651(b) ........................................... 3652 ................................................ 6302(a). 3653(a) ........................................... 7421(a). 3653(b) ........................................... 7421(b). 3654 ............................................... 3655(a) .......................................... 6303(a), 6659 3655(b) ........................................... 6601(a), 6601(f)(1), 6659. 3656(a)(1) ...................................... 6311(a). 3656(a)(2)(A) ................................ 6311(b)(1). 3656(a)(2)(B) ................................ 6311(b)(2). 3656(b)(1) ...................................... 6311(a). 3656(b)(2) ...................................... 6311(b)(1). 3657 ................................................ 6312(a). 3658 ................................................ 6313. 3659(a) ........................................... 6314(a). 3659(b) ......................................... 3660 .............................................. 6331(a). 3660(a) ........................................... 6155(a). 6862. 3660(b) ........................................... 6863(a), 7101. 3661 ................................................ 7501. 3662 ................................................ 3663 ................................................ 3670 ................................................ 6321. 3671 ................................................ 6322. 3672 ................................................ 7207. 3672(a) ........................................... 6323(a). 3672(b) ........................................... 6323(d). 3673(a) ........................................... 6325(a)(1). 3673(b) ........................................... 6325(a)(2). 3674(a) ........................................... 6325(b)(1). 3674(b) ........................................... 6325(b)(2). 3675 .............................................. 6325(c). 3676 ................................................ 7102. 3677 ............................................... 3678 ............................................... 7403. 3679(a) ........................................... 7424(a). 3679(b) ........................................... 3679(c) ........................................... 7424(b). 3679(d) ........................................... 7424(c). 3680 ................................................ 3690 ................................................ 6331(a), (b). 3691 ................................................ 6334. 3692 ................................................ 6331(a), 6331(b), 6334(c). 3693 ................................................ 6335(c)(2)(E ). 3693(a) ........................................... 6335(a). 3693(b) ........................................... 6335(b). 3693(c) ........................................... 6335(d). 3693(d) ........................................... 6335(e)(2)(F ). 3694 ................................................ 6342(a). 3695(a) ........................................... 6335(e)(1), 6335(c)(2)(A ). 3695(b) ........................................... 6335(c)(2). 7505(a). 3695(c) ........................................... 7505(b). 3696 ................................................ 6337(a). 3697(a) ........................................... 6339(a)(1). 3697(b) ........................................... 6339(a)(2). 3697(c) ........................................... 6339(a)(3). 3697(d) ........................................... 6339(a)(4). 3698 ............................................... 3700 ............................................... 6331(a), 6331(b). 3701 ................................................ 6335(e)(2)(E). 3701(a) ........................................... 6335(a). 3701(b) ........................................... 6335(b). 1939 Code section number Page 12 1954 Code section number
TITLE 26-INTERNAL REVENUE CODE 1954 Code 1939 Code section number section number 3701(c) ........................................... 6335(d). 3701(d) ........................................... 6335(e)(1), (2)(A ), (B ). 3701(e) ........................................... 6335(e)(1). 3701(f) ........................................... 6335(e)(2)(D ), (F ); 6335(e)(3). 3702(a) ........................................... 6337(a). 3702(b)(1) ...................................... 6337(b)(1). 3702(b)(2) ..................................... 6337(b)(2). 3702(c) ........................................... 6337(c). 3703(a) ........................................... 6338(c). 3703(b) ........................................... 6338(a). 3704(a) ........................................... 6338(c). 3704(b) ........................................... 6338(b). 3704(c)(1) ...................................... 6339(b)(1). 3704(c)(2) ...................................... 6339(b)(2). 3705 .......................................... 3706(a) ........................................... 6340(a). 3706(b) ........................................... 6340(a). 3706(c)-(e) ..................................... 3706(f) ........................................... 6340(b). 3707 ................................................ 3710(a) ........................................... 6332(a). 3710(b) ........................................... 6332(b). 3710(c) ........................................... 6332(c), 7343. 3711 ................................................ 6333 3712 ................................................ 6 335(c), 6342(b). 3713 ................................................ 3714(a) ........................................... 3714(b) ........................................... 6502(b). 3715 ................................................ 6331(c). 3716 ................................................ 6341. 3717 ................................................ 3720(a)(1) ...................................... 7301(a). 3720(a)(2) ...................................... 7301(b). 3720.a)(3) ...................................... 7301(c). 3720(b) ........................................... 7321. 3720(c) ........................................... 3721 ................................................ 7322. 3722 ................................................ 7324. 3722(a) ........................................... 7324(1). 3722(b) ........................................... 7324(2). 3722(c) ........................................... 7324(3). 3722(d) ........................................... 7324(4). 3723(a) ........................................... 7323(a). 3723(b) ........................................... 7323(b). 3723(c) ........................................... 7323(c). 3723(d) ........................................... 3724 ...................... 7101,7325. 3725 ................................................ 6807. 3726 ................................................ 7327. 3727 ................................................ 3740 ................................................ 7401. 3742 ................................................ 3743 ................................................ 3745 ................................................ 3746(a) ........................................... 7405(a). 3746(b) ........................................... 6532(b), 7405(b). 3746(c) ........................................... 3746(d) ........................................... 6602 3747 ............................................... 7406. 3748 ................................................ 6531. 3760 ................................................ 7121. 3761 ................................................ 7122. 3762 ................................................ 7206(5). 3770(a)(1) ...................................... 6402(a), 6404(a). 3770(a)(2) ...................................... 6401(a). 3770(a)(3) ...................................... 6407. 3770(a)(4) ...................................... 6402(a). 3770(a)(5) ...................................... 6402(a), 6404(a). 3770(b) ........................................... 7423. 3770(b)(1) ...................................... 7423(1). 3770(b)(2) ...................................... 7423(2). 3770(c) ........................................... 6401(c). 3771(a) ........................................... 6611(a). 3771(b)(1) ................................... 6811(b)(1). 3771(b)(2) ...................................... 6611(b)(2), 6611(e). 3771(c) ........................................... 6611(c). 3771(d) ........................................... 3771(e) ........................................... 6611(f), 3771(f),(g) .............. ..................... 3772(a)(1) ...................................... 7422(a). 3772(a)(2) ...................................... 6532(a)(1). 3772(a)(3) ...................................... 6532(a)(4). 3772(b) ........................................... 7422(b). 3772(c) ........................................... 3772(d) ........................................... 7422(c). 3772(e) ........................................... 7422(d). 3773 ................................................ 3774 ................................................ 6514(a). 3774(b) ........................................... 6532(a)(2). 3775 ................................................ 6514(b). 3777(a) ........................................... 6405(a). 3777(b) ........................................... 6405(b). 3777(c) ........................................... 6405(c). 3778 ................................................ 3779(a) ........................................... 6091(a), 6164(a). 3779(b) ........................................... 6065(a), 6071, 6081(a), 6164(b), 3779(c) ........................................... 6164(c). 3779(d) ........................................... 6164(d). 3779(e) ........................................... 6164(e). 3779(f) ........................................... 6164(f). 3779(g) ........................................... 6164(g). 3779(h) .......................................... 6155(a), 6164(h). 3779() ............................................ 6601(a), 6601(e), 6601(f)(1). 3780(a) ........................................... 6065(a), (b); 6071, 6091(a), 6411(a). 3780(b) ........................................... 6411(b). 3780(c) ........................................... 6213(b)(2). 3781 ................................................ 6164(), 6411(c). 3790 ................................................ 6406, 6611(g). 3791(a) ........................................... 6071, 6081(a), 6091(a), 6091(b)(1), (2); 7805(a). 3791(b) ........................................... 7805(b). 3792 ................................................ 7623. 3793 ................................................ 7206(3). 3793(a)(2) ...................................... 7303(8). 3793(b) ........................................... 7206(2), 7207. 3793(b)(2) ...................................... 7343. 3794 ................................................ 6601(a). 3795(a) ........................................... 7506(a). 3795(b) ........................................... 7506(b). 3795(c) ........................................... 7506(c). 3795(d) ........................................... 7506(d). 3797(a)(1)-(11) ............................ 7701(a)(1)-(11). 3797(a)(12) .................................... 7701(a)(13). 3797(a)(13) .................................... 3797(a)(14)-(20) ........................... 1465, 7701(a)(14)-(20). 3797(b) ........................................... 7701(b). 3797(c) ........................................... 7701(c). 3798 ................................................ 7507. 3799 ................................................ 77. 3800 ................................................ 7402(a). 3801 ............................................... 1311-1314. 3802 ................................................ 7511. 3803 ................................................ 7852(a). 3893 ................................................ 3893 ................................................ 3804(a) .................... 7508(a). 3804(b), (c) .................................... 3804(d) .................... 7508(b). 3804(e) ........................................... 3804(f) ........................................... 7508(a), 3805 ................................................ 6072(e), 3806 ............................................... 1481. 3808 ................................................ 3809(a) ........................................... 7206(1). 3809(b) ........................................... 6061,6064. 3809(c) ........................................... 6065(a). 3810 ................................................ 3811 ................................................ 7651. 3812 ................................................ 6521. 3813 ................................................ 503. 3814 ................................................ 504. 3900 ................................................ 7802. 3901(a) ........................................... 6801(a), 7805(c). 3901(b) ........................................... 7803(b)(2). 3905 .......................................... 3906 ................................................ 3910 ................................................ 3911 ................................................ 3915 ................................................ 3916 ................................................ 3920 ................................................ 7803(a). 3921 ................................................ 7803(a). 3930(a) .. ................. .................. 7801(b). 3930(b) ........................................... 3931 ................................................ 7801(b). 3932 ................................................ 7801(c). 3940 ................................................ 3941 ................................................ 3942 ........................................ ........ 3943 ........................................ ... 7803(c).7101. 3944 ................................................ 3950 ................................................ 3951 ................................................ 3952 ................................................ 3953 ................................................ 3954 ................................................ 3955 ................................................ 3960 ................................................ 3961 ............................................... Page 13 1939 Code section number 1954 Code section number
TITLE 26-INTERNAL REVENUE CODE 1939 Code section number 1954 Code section number 3962 ................................ ........... 3963 ................................................ 3964 ................................................ 396 9 ................................................ 3966 ................................................ 3967 ................................................ 3970 ................................................ 7808. 3971(a) ........................................... 7809(a). 3971(b) ........................................... 7809(b). 3971(b)(1) ...................................... 7809(b)(1). 3971(b)(2) ...................................... 7809(b)(2). 3971(b)(3) .................. 7809(b)(3). 3975 .................................... 7803(d). 3976 ................................................ 7803(d). 3977 ................................................ 7803(d). 3978 ................................................ 7803(d). 3990 ................................................ 3991 ................................................ 3992 ................................................ 7101. 7402(d). 7803(c). 3993 ................................................ 3994 ................................................ 3995(c) ........................................... 7402(d). 3996 ................................................ 3997 ................................................ 4000 ................................................ 7803(p). 4001 ................................................ 4002 ................................................ 4003 ................................................ 4010 ................................................ 7101, 7803(c). 4011 ................................................ 4012 ................................................ 4013(a) ....................5 241. 4013(b)-(d) ................... 4014 ............................................... 4015 ................................................ 4016 ................................................ 4017 ................................................ 4018 ................................................ 4019 ................................................ 4020 ................................................ 4021 ................................................ 4022 ................................................ 4030 ................................................ 4031 ................................................ 4032 ................................................ 4033 ................................................ 4040 ...................... 7803(b)(1). 4041(a) .................... 7803(a). 4041(b) ........................................... 4042 ................................................ 7402(c). 4043 ................................................ 4044 ................................................ 4045 ................................................ 4046 .................................... . .. 4047(a)(1) .......................... 7213(b). 4047(b) .................... 7214(b). 4047(c), (d) .................................... 4047(e) ........................................... 7214(a). 4048 ................................................ 7344. 5000 ................................................ 8001. 5001 ...................... 8002. 5002 ......................... 8003. 5003 ................................................ 8004. 5004 ................................................ 8005. 5010 ................................................ 8021. 5011 ................................................ 8022. 5012 ................................................ 8023. TABLE II 1954 Code section number 1939 Code section number I ...................................................... 11, 12(b)(3), (c), M .) 2 ...................................................... 12(d). 3 ...................................................... 400. 4 ...................................................... 23(aa)(4). 401, 402, 404. 5 ................................................ 11 .................................................... 13, 15, 104(b), 261. 12 . ...... ........ .. ..... ............ 21 .................................................... 108. 31 .................................................... 35, 322(a)(4). 32 .................................................... 32. 33 .................................................... 31. 34 ............. ..................... 35 .................................................... 25. 36 .................................................... 23(aa)(2). 37.... ... o........ .............. . 38 . .... ........ .. ............. 61 .................................................... 22(a). 62 ................................................... 22(n). 1954 Code section number a 63 .................................................... 21. 71 .................................................... 22(k). 72 .................................................... 22(b)(2). 73 .................................................... 22(m ). 74 ............... ....... ............. 2.2.. 75 .................................................... 22(o). 76 ................................................. 220 ). 37 77 ................................................. 123. 101 ................................................. 22(b)(1). 102 .................................................. 22(b)(3). 103 .................................................. 22(b)(4). 104 .................................................. 22(b)(5). 106 ................. ,... ................... 106 .. ........... .I . ................. I 107 .................................................. 22(b)(6). 108 .................................................. 22(b)(9), 109 .................................................. 22(b)(11) 110 .......... ........................ 111 .................................................. 22(b)(12) 112 ................................................. 22(b)(13) 113 .................................................. 22(b)(14) 114 .................................................. 22(b)(16) 115 .................................................. 22(b)(8), 116 .................................................. 117 .................................................. 118 ................................. 119 .................................................. 120 .........,,,,............................ 121 .................................................. 22(b)(17) 141 .................................................. 23(aa)(1) 142 .................................................. 23(aa)(4) 143 .................................................. 23(aa)(6) 144 .................................................. 23(aa)(3) 145 ........................... 151 .................................................. 25(b)(1). 152 .................................................. 25(b)(3). 153 .................................................. 25(b)(2). 154 ........................... 161 .................................................. 23. 162 .................................................. 23(a)(1). 163 .................................................. 23(b). 164 .................................................. 23(c), (d) 165 .................................................. 23(e), (M2 166 ............... ............... 167 .................................................. 168 ....................... ........... 169 .......... ............. ........... , 170 .................................................. 171,............................................. 172............................ 173 .................................................. 174 ........................... 175........... 211 ................................... .... 212 ........ ,,,,,....................... 213 .................................................. 214 .................................................. 218 .................................................. 218 ............................................... , 217 .................................................. 242 ........................................ 243,... ........................... 244 ........................... 245 .................................................. 246................................... 247............ .......... 248 ............................................ 261 .................................................. 262 ............................................. 263 ........................................ 264 ............................................. 268 ............................... ............. 266 ........................................... , 267 ............................................ 268.......................................... 269 ......................................... 270 .............................................. 271 ........................................... 272........................ .................... 273 ...................... ................ 301 .................................................. 302 ........................................... 303 ............... .......................... 304 .................................... 305 ........ ..... ................ ......... 306.................................. 307.........,.......... ...... , 311 ,,,.,.........,.,,.......... ,•,.,,. 1939 Code ection number D. (10). 116(d), (e). ,116(i). (5), 213(d). (7). (h),(1).,(k)(2). 23(k). 23(l), 23(n), 114(a). 23(t). 124A. 23(t), 124B. 23(o), (q), 120. 23(v), 125. 23(s), 122. 23(bb). 23. 23(a)(2). 23(x). 23(u). 23(z). 26. 26(a). 26(b)(1). 26(b)(2). 26(b)(3). 26(b). 26(h). 24(a). 24(a)(1). 23(a)(1)(C), 24(a)(2), (3). 24(a)(4), (6). 23(b), 24(a)(5). 24(a)(7). 24(b), (c). 24(f). 129. 130. 23(k)(6). 24(d). 22(e), 115(a), (b), (d), (e), (j). 115(c),(g)(1).,M. 115(g)(3). 115(g)(2). 115(f). 113(a)(19). Page 14 ), (g)(1). (2), (3). (4).
Page 15 1954 Code section number TITLE 26-INTERNAL REVENUE CODE 1939 Code section number 1954 Code section number 312 .................................................. 115(c), (h), (1), (m ), 394(d). 318 ........................ 115(a), (b). 317 .................. .. ................. 318 ........ .......... ........ 331 .................................................. 115(c), 332 .................................................. 112(b)(6). 333 .................................................. 112(b)(7). 334 ........................ 13(a)(15), (18). 338 .................................................. 337 ................ ........................... 338 .......................................... 341 .................................................. 117(m ). 342 .................................................. 115(c). 346 .................................................. 115(i). 351 .................................................. 112(b)(5), (c), (e). 354 .................................................. 112(b)(3). 355 .................................................. 112(b)(3). (11). 356 .................................................. 112(c), (e). 357 .................................................. 112(k). 318 .................................................. 113(a)(6), (23). 381 .................................................. 112(b)(4), (d), (Ce). 362 .................................................. 113(a)(7), (8). 363 .................................................. 367 .................................................. 1120i). 368 .................................................. 112(g)(1). (2), (h). 371 .................................................. 112(b)(10), (c), (d), (Ce). (k), (). 372 .................................................. 113(a)(22). 373 .................................................. 112(b)(9), 113(a)(20), (21). 381 .................................................. 382 .................................................. 391 .................................................. 392 ............................................. 393 .................................................. 394 .................................................. 395 ...................... 401 ...................................... 165(a). 402 .................................................. 165(b), (c), (d). 403 .................................................. 22(b)(2)(B). 404 .................................................. 23(p). 421 ........................ 130A. 441 ....................... 41, 48(a), (b). 442 .................................................. 46. 443 .................................................. 47(a), (c), (e), (g); 146(a). 446 .................................................. 41. 451 .................................................. 42(a). 452 ....................................... . 453 ...................................... .... 44. 454 .......................... 42(b), (c), (d). 461 ......................... 43. 462 .............................................. 471 ..................................... ..... 22(c). 472 .................................................. 22(d)(I)-(5). 481 .................................................. 482 ................................................. 45, 501 .................................................. 101 except (12) and last par.; 165(a), 421. 502 .................................................. Last par. 101. 503 .................................................. 3813. 504 .................................................. 3814. 511 .................................................. 421. 512 .................................................. 421(C). (d); 422. 513 .................................................. 422(b). 514 .................................................. 423. 515 .................................................. 424. 521 .................................................. 101012)(A). 522 .................................................. 101(12)(B). 526 .................................................. 116(g). 531 ........................ 102(a). 532 ........................ 102(a). 533 .................................................. 102(b), (c). 534 ......... ........................... 535 ..................................... 26(d), 27(b)(2). 102(d). 536 .................................................. 102(f). 537 ................................. 541 .................................................. 500. 542 .................................................. 501. 543 .................................................. 502, 507(b). 544 .................................................. 503. 545...: ............................................. 26(c), (d); 504, 505. 546 .................................................. 505(e). 547 .................................................. 506. 551 .................................................. 337. 552 .................................................. 331. 553 .................................................. 332. 554 .................................................. 333. 555 .................................................. 334. 556 .................................................. 26(c), 335, 336. 557 .................................................. 336(d). 561 .................................................. 26(f), 27(a). 562 .................................................. 26(f), 27(b)-CI). 563 .................................................. 504(c). 564 .................................................. 26(f), 27(c)-Cl). 565 .................................................. 26(g), 28. 581 .................................................. 104(a). 582 .................................................. 23(k)(2), 117(i) 583 .................................................. 121. 584 .................................................. 169, second se 591 .................................................. 23(r). 592 .................................................. 23(dd). 593 .................................................. 23(k). 594 .................................................. 110. 601 .................................................. 26(d). 611 .................................................. 23(m ). 612 .................................................. 114(b)(1). 613 .................................................. 114(b)(3), (4). 614 .................................................. 615 .................................................. 23(ff). 616 .................................................. 23(cc). 621 ................................................. 22(b)(15). 631 ................................................. 117(k). 632 .................................................. 105. 641 .................................................. 161. 642 .................................................. 162(a), (e), f) 172. ntence of 170. 163, 168, 170, 643 .................................................. 162(d). 651 .................................................. 162(b). 652 .................................................. 162(b), 164. 661 .................................................. 162(b), (c). 662 .................................................. 162(b), (c), 164. 663 .................................................. 162(d). 665 .................................................. 666 .................................................. 667 .................................................. 668 .................................................. 671 ................................................. 672 .................................................. 673 .................................................. 674 .................................................. 675 .................................................. 676 .................................................. 166. 677 .................................................. 167. 678 .................................................. 681 .................................................. 162(g). 682 .................................................. 171. 683 .................................................. 691 ........ ...... ................ 126. 692 ...... ....... ....................... 154. 701 .................................................. 181. 702 .................................................. 182, 183, 184, 186, 189. 703 .................................................. 183, 189. 704 .................................................. 191, 3797(a)(2). 705 ........................... 706 .................................................. 188. 707 .................................................. 708 .................................................. 721 .................................................. 722 .................................................. 723 .................................................. 113(a)(13). 731 .................................................. 732 .................................................. 113(a)(13). 733 .................................................. 734 .................................................. 735 .................................................. 736 .................................................. 741 .................................................. 742 .................................................. 743 .................................................. 751 .................................................. 752 .................................................. 753 .................................................. 754 ...................... 755 .................................................. 761 .................................................. 3797 a)(2). 801 ................................................. 201(b) 802 .................................................. 201(a)(1). 803 .................................................. 201(c)(1)-7), (d). Ce). 804 .................................................. 202(b). 805 .................................................. 203A(b), Cc), (d). 806 .................................................. 202(c). 807 .................................................. 201(a)(2), (3). 821 .................................................. 207(a). 822 .................................................. 207(a)(5), Cb)C1). (4), (c), (d), Ce), Ml. 823 .................................................. 207(b)(2), (3). 831 .................................................. 204(a). 832 .................................................. 204(a)(2), Cb)-C . 841 .................................................. 205. 842 .................................................. 206. 851 .................................................. 361. 1939 Code section number
TITLE 26-INTERNAL REVENUE CODE 1939 Code section number 1954 Code section number 852 .................................................. 362(a), Cb)C1)-(7). 853 .................................................. 854 .................................................. 855 .................................................. 362(b)(8). 861 .................................................. 119(a), (b), (e). 862 .................................................. 119(c), (d), (e). 863 .................................................. 119(e). 864 .................................................. 119(f). 871 .................................................. 211(a), (b). (c). 872 .................................................. 212. 873 .................................................. 213, 214. 874 ........................................ 215, 216. 875 .................................................. 219. 876 .................................................. 220. 877 .................................................. 221. 881 .................................................. 231(a). 882 .................................................. 231(b), (c); 232(a), (b); 233, 234, 235(a). 883 .................................................. 231(d). 884 .................................................. 236(b). 237. 238. 891 .................................................. 103. 892 .................................................. 116(c). 893 .................................................. 116(h). 894 .................................................. 22(b)(7). 901 .................................................. 131(a), ). 902 .................................................. 131(f)(1). (2). 903 .................................................. 131(h). 904 .................................................. 131(b)(1). 905 .................................................. 131(c), (d), (e). 911 .................................................. 116(a). 912 .................................................. 116(J) ( c). 921 .................................................. 109. 922 .................................................. 26(1). 931 .................................................. 251. 932 .................................................. 252. 933 .................................................. 116(t). 941 .................................................. 262. 942 .................................................. 263. 943 .................................................. 116(f), 265. 1001 ............................................. 111. 1002 ................................................ 112(a). 1011 ................................................ 113(M ), except (1)- 4). 1012 ................................................ 113(a). 1013 ................................................ 113(a)(1). 1014 ................................................ 113(a)(5). 1015 ................................................ 113(a)(2), (3), (4). 1016 ................................................ 113(b)(1), (2). 1017 ................................................ 113(b)(3). 1018 ................................................ 113(b)(4). 1019 ................................................ 113(c). 1020 ................................................ 113(d). 1021 ................................................ 1022 ................................................ 113(e). 1031 ................................................ 112(b)(1), (c)(1), (e), 113(a)(6). 1032 ................................................ 1033 ................................................ 112(f), 113(a)(9). 1034 ................................................ 112(n). 1035 ................................................ 1036 ................................................ 112(b)(2). 1051 ................................................ 113(a)(11). 1052 ................................................ 113(a)(12), (16). 1053 ................................................ 113(a)(14). 1054 ...................................... .. 1071 ...................................... 112(m ). 1081 ................................................ 112(b)(8), 371. 1082 ................................................ 372, 113(a)(17). 1083 ................................................ 373. 1091 ................................................ 118, 113(a)(10). 1201 ................................................ 117(c). 1202 ................................................ 23(ee), 117(b). 1211 ................................................ 117(d). 1212 ................................................ 117(e). 1221 ................................................ 117(a)(1). 1222 ................................................ 117(a)(2)-(10). 1223 ................................................ 117(h). 1231 ................................................ 117(J). 1232 ............................................. 117(f). 1233 ................................................ 117(e), (g)(1). 1234 ................................................ 117(g)(2). 1235 ................................................ 1236 ................................................ 117(n). 1237 ................................................ 1238 ................................................ 117(g)(3). 1239 ................................................ 117(o). 1240 ................................................ 117(p). 1241 ................................................ 1301 ................................................ 107(a). 1302 ................................................ 107(b). 1303 ................................................ 107(d). 1304 ................................................ 107(c), (e). 1311 ................................................ 3801(b). 1312 ................................................ 3801(b). 1313 ................................................ 3801(a). 1314 ................................................ 3801(c), (d), (e), ), (g), 1315 ................................................ 1321 .............................................. 22(d)(6). 1331 ................................................ 127(c)(1). 1332 ................................................ 127(c)(2). 1333 ................................................ 127(c)(3). 1334 ................................................ 127(c)(4). 1335 ................................................ 127(c)(5). 1336 ................................................ 127(d). 1337 ................................................ 127(e), CM . 1341 ................................................ 1346 ................................................ 128. 1347 ................................................ 106. 1351 ................................................ 1361 ................................................ 1401 ................................................ 480. 1402 ................................................ 481. 1403 ................................................ 482. 1441 ................................................ 143(b). 1442 ................................................ 144. 1443 ................................................ 143(h). 1451 ................................................ 143(a). 1461 ................................................ 143(c). 1462 ................................................ 143(d). 1463 ................................................ 143(e). 1464 ................................................ 143(f). 1465 ................................................ 3797(a)(16). 1471 ................................................ 650,651. 1481 ................................................ 3806. 1491 ................................................ 1250. 1492 ................................................ 1251. 1493 ................................................ 1252. 1494 ................................................ 1253. 1501 ................................................ 141(a). 1502 ................................................ 141(b). 1503 ................................................ 141(c). 1504 ................................................ 141(d), (e), (), (g). 1505 ................................................ 141(h), (I). 1551 ................................................ 15(c). 1552 ................................................ 2001 ................................................ 810.935. 2002 ................................................ 822(b). 2011 ................................................ 810, 813(b). 2012 ................................................ 813(a)(2), 936(b). 2013 ................................................ 2014 ................................................ 813(c), 936(c). 2015 ................................................ 927. 2016 ................................................ 874(b)(3). 2031 ................................................ 811(k). 2032 ................................................ 811(J). 2033 ................................................ 811(a). 2034 ................................................ 811(b). 2035 ................................................ 811(c)(1)(A ), 811(1). 2036 ................................................ 811(c)(1)(B ). 2037 ................................................ 811(c)(1)(C ), (c)(2), (3). 2038 ................................................ 811(d). 2039 ................................................ 2040 ................................................ 811(e). 2041 ................................................ 811(f); 403(d)(2) R .A . 1942; 2. P.L. 635 (80th Cong.). 2042 ............................................ 811(g). 2043 ................................................ 811(), 812(b). 2044 ................................................ 811(h). 2051 ................................................ 812. 2052 ................................................ 935(c). 2053 ................................................ 812(b). 2054 ................................................ 812(b). 2055 ................................................ 812(d). 2056 ................................................ 812(e). 2101 ................................................ 860, 935. 2102 ................................................ 861(a)(2). 2103 ................................................ 861(a). 2104 ................................................ 862. 2105 ................................................ 863. 2106 ............................................ 8 1. 2201 ................................................ 939. 2202 ................................................ 850. 2203 ................................................ 930(a). 2204 ................................................ 825(a). 2205 ................................................ 826(b). 2206 ................................................ 826(c). 2207 ................................................ 826(d). 2501 ................................................ 1000(a). 2502 ................................................ 1001(a), (b); 1008(a), 1030(a). 2503 ................................................ 1003(a), 1003(b). 2504 ................................................ 2511 ................................................ 1000(b), 1030(b). 1954 Code section number Page 16 1939 Code section number
TITLE 26-INTERNAL REVENUE CODE 1939 Code section number 1954 Code section number 2512 ................................................ 1002. 1005 2513 ................................................ 1000(f). 2514 ................................................ 1000(c); 452(b)(2) R.A. 1942; 2, P.L 635 (80th Cong.). 2515 ................................................ 2516 ................................................ 2521 ................................................ 1004(a)(1). 2522 ................................................ 1004(a)(2), 1004(b). 2523 ................................................ 1004(a)(3). 2524 ................................................ 1004(c). 3101 ................................................ 1400. 3102 ................................................ 1401(a), (b). 3111 ................................................ 1410. 3112 ................................................ 1412. 3121 ................................................ 1426(a)-(e), (g)-(). 3122 ................................................ 1420(e). 3123 ................................................ 1427. 3124 ................................................ 1428. 3125 ................................................ 1432. 3201 ................................................ 1500. 3202 ...................... 1501(a), (b). 3211 ................................................ 1510. 3212 ................................................ 1511. 3221 ................................................ 1520. 3231 ................................................ 1532(a)-(e), (g), (h). 3232 ................................................ 1534. 3233 ................................................ 1538. 3301 ................................................ 1600. 3302 ................................................ 1601(a), (b), (c). 3303 ........................ 1602. 3304 ....................... 1603. 3305 ....................... 1606. 3306 ....................... 1607(a)-(J), (L)-(o). 3307 ....................... 1608. 3308 ....................... 1611. 3401 ....................... 1621. 3402 ....................... 1622(a)-(d), (g)-(k). 3403 ................................................ 1623. 3404 ....................... 1624. 3501 ....................... 1420(a), 1530(a), 1605(a). 3502 ................................................ 1402, 1503, 1512, 1622(e). 3503 ....................... 1422, 1531. 3504 ....................... 1632. 4001 ................................................ 1650, 2400. 4002 ...................... 2412(a). 4003 ...................... 2400, 2412(b). 4011 ................................................ 1650, 2401. 4012 ...................... 2401, 2412(a). 4013 ...................... 2412(b). 4021 ....................... 1650, 2402(a). 4022 ...................... 2402(a), (b). 4031 ....................... 1651(a). 4041 ....................... 2450. 4051 ................................................ 2403(c). 4052 ................................................ 2404. 4053 ................................................ 2405. 4054 ................................................ 2413. 4055 ...................... 2406, 2453. 4056 ...................... 2406. 4057 ................................................ 4061 ................................................ 3403(a). (b), (c). 4062 ................................................ 4063 ....................... 3403(c), (d). 4071 ....................... 3400(a). 4072 ................................................ 3400(c). 4073 ................................................ 3400(a). 4081 ................................................ 3412(a). 4082 ................................................ 3412(b), 3412(c). 4083 ................................................ 3412(a). 4091 ................................................ 3413. 4092 ................................................ 3413. 4093 ................................................ 3413. 4101 ................................................ 3412(d). 4102 ................................................ 3412(e). 4111 ................................................ 3405. 4112 ................................................ 3405. 4113 ................................................ 3405(b). 4121 ................................................ 3406(a)(3). 4131 ................................................ 3406(a). 4141 ................................................ 3404(a). 4142 ................................................ 3404(b). 4143 ................................................ 3404(a), 3404(b). 4151 ................................................ 3404(d). 4152 ................................................ 3404(d). 4161 ................................................ 3406(a)(1). 4171 ................................................ 3406(a). 4172 ................................................ 3406(a)(4). 4173 ...................... 3406(a)(4). 4181 ....................... 2700(a),3407. 4182 ................................................ 2700(b)(2), 3407; 706, P.L. 911 (81st Cong.). 4191 ................................................ 3406(a)(6). 4192 ................................................ 3406(a)(6). 4201 ................................................ 3408(a). 4211 ................................................ 3409(a). 4216 ................................................ 2704,3441. 4217 ................................................ 3440. 4218 ................................................ 3444. 4219 ................................................ 3445. 4220 ................................................ 3442. 4221 ................................................ 3406(b), 3408(b). 4222 ................................................ 2456,3451. 4223 ................................................ 3446. 4224 ................................................ 2700(b), 3407, 3442(3). 4225 ................................................ 2705. 4226 ................................................ 4231 ................................................ 1700. 4232 ................................................ 1700(e), 1704. 4233 ................................................ 1701. 4234 ............................................... 1702, 1703. 4241 ............................................... 1710. 4242 ................................................ 1712. 4243 ................................................ 1711. 4251 ................................................ 3465. 4252 ............................................... 3485. 4253 ................................................ 3465, 3466(b), (c). 4254 ................................................ 3465. 4261 ................................................ 3469. 4262 ................................................ 3469(a), (b),(). 4271 ................................................ 3475(a), (c). 4272 ................................................ 3475(a), (b). 4273 ................................................ 3475(e), 4281 ................................................ 3460(a). 4282 ................................................ 3460(b). 4283 ................................................ 3460(c). 4286 ................................................ 1850. 4287 ................................................ 1857. 4291 ................................................ 1715(a), 1851, 3467(b), 3469(d), 3475(c). 4292 ................................................ 3466(a), 3469(f), 3475(b)(1). 4293 ................................................ 307 R .A. 1943. 4294 ................................................ 4301 ................................................ 1800, 1602(a). 4302 ................................................ 1802(a). 4303 ................................................ 1808(g). 4304 ................................................ 1802(a). 4305 ................................................ 4311 ................................................ 1800, 1801. 4312 ................................................ 1801. 4313 ................................................ 1801. 4314 ................................................ 1801. 4315 ................................................ 1801. 4316 ............................................... 4321 ............................................... 1800, 1802(b). 4322 ............................................... 1802(b). 4323 ................................................ 1802(b). 4324 ............................................... 4331 ............................................... 3480, 3481(a). 4332 ................................................ 3481(a). 4333 ............................................... 4341 ............................................... 1802(b), 3481(a). 4342 ................................................ 1802(b), 3481(a). 4343 ................................................ 1802(c), 3481(b). 4344 ................................................ 1802(b), 3481. 4345 ............................................... 4351 ............................................... 1802(b), 3481(a). 4352 ................................................ 1802(b), 3481(a). 4353 ................................................ 1802(b). 3481(a). 4354 .............................................. 4361 .............................................. 3480.3482. 4362 ................................................ 3482. 4363 ............................................... 4371 ............................................... 1804(a)-(c). 4372 ................................................ 1804(a)-(d). 4373 ................................................ 1804. 1808(b). 4374 ................................................ 1821(b)(3). 4375 ............................................... 4381 ............................................. 1801, 1802(a), (b). 4382 ............................................. 1808(a)-(f), except (b), 3483. 4383 ................................................ 1809(a). 4401 ................................................ 3285(a), (c), (d). 4402 ................................................ 3285(e). 4403 ................................................ 3287. 4404 ................................................ 3285(f). 4405 .............................................. 4411 .............................................. 3290. 4412 ................................................ 3291. 4413 ................................................ 3292. 4414 ................................................ 4421 ................................................ 3285(b). 4422 ................................................ 3297. Page 17 1954 Code section number 1939 Code section number
TITLE 26-INTERNAL REVENUE CODE 1939 Code section number 1954 Code section number 4423 ................................................ 3298. 4451 ................................................ 1807. 4452 ................................................ 1831(a). 4453 ................................................ 1830. 4454 ................................................ 1809(a). 4455 ................................................ 1831(b). 4456 ................................................ 1832. 4457 ................................................ 4461 ................................................ 3267(a). 4462 ................................................ 3267(b). 4463 ................................................ 3267(c). 4471 ................................................ 1650, 3268(a). 4472 ................................................ 3268(a). 4473 ................................................ 3268(a). 4474 ................................................ 4501 ................................................ 3490(a), 3491(a), 3500, 3508. 4502 ................................................ 3492,3507. 4503 ................................................ 3490(b). 4504 ...................... 3501. 4511 ...................... 2470(a)(1), (2). 4512 ................................................ 2477. 4513 ................................................ 2470(a)(2), 2470(b), 2474. 4514 ................................................ 4521 ................................................ 3420,3422. 4531 ................................................ 3420.3423. 4532 ................................................ 3423. 4541 ................................................ 3420,3425. 4542 ................................................ 3425. 4551 ................................................ 3420,3424. 4552 ................................................ 3424. 4553 ................................................ 3424(a). 4561 ................................................ 2490, 2491(a). 4562 ................................................ 2491(a). 4571 ................................................ 2490, 2491(b), 2491(d). 4572 ................................................ 2491(f). 4581 ............................................... .490, 2491(c). 4582 ................................................ 2491(c), (g), 2492. 4591 ................................................ 2306, 2311(a). 4592 ................................................ 2300. 4593 ................................................ 2300,2307. 4594 ................................................ 2302. 4595 ...................... 2303,2404. 4596 ...................... 2302(e). 4597 ................................................ 2303(c). 4601 ................................................ 2493,3430. 4802 ................................................ 2492. 4603 .................................. . ... 4701 ................................... . 2550(a), (b). 4702 ................................................ 2551(a), (b), (c). 4703 ................................................ 2552(a). 4704 ................................................ 2553. 4705 ................................................ 2554. 4706 ................................................ 2558(a), (c). 4707 ................................................ 4711 ................................................ 2567(a). 4712 ................................................ 2567(b),2568. 4713 ................................................ 2569. 4714 ................................................ 2571. 4715 ................................................ 4721 ................................................ 3220. 4722 ................................................ 3221. 4723 ................................................ 2553(a). 4724 ................................................ 3224. 4725 ................................................ 3227(a). 4726 ................................................ 4731 ................................................ P.L. 240, (83d Cong.); 3228(a). 4732 ................................................ 2555. 4733 ................................................ 2558(b). 4734 ................................................ 2561. 4735 ................................................ 2564; P.L. 238, (83d Cong.). 4736 ................................................ 2562. 4741 ...................... 2590(a), (b). 4742 ...................... 2591. 4743 ................................................ 2592(a). 4744 ...................... 2593. 4745 ...................... 2598. 4746 ................................................ 4751 ...................... 3230(a). 4752 ...................... 3230(b), (c), (d). 4753 ...................... 3231. 4754 ...................... 3233. 4755 ................................................ 3234. 4756 ................................................ 2601,3237. 4757 ................................................ 4761 ...................... 3238. 4762 ...................... 2603. 4771 ................................................ 2550(c)(1), (2); 2552(b), 2590(c), 2592(b). 4772 ................................................ 3222.3232. 4773 ................................................ 2556.2595. 4774 ................................................ 2563, 2602. 4775 ................................................ 3226, 3236. 4776 ................................................ 4801 ................................................ 2651(a), (b). 4802 ................................................ 2650. 4803 ................................................ 2651(c), 2659(a). 4804 ................................................ 2653. 4805 ................................................ 2654, 2655. 4806 ................................................ 4811 ................................................ 2321(a), (b). 4812 ................................................ 2306, 2327(a). 4813 ................................................ 2305, 2321(c), 232 4814 ................................................ 2322(b)-(e). 4815 ................................................ 2323(c), 2324. 4816 ................................................ 2307, 2327(a). 4817 ................................................ 2325. 4818 ................................................ 2311, 2327(a). 4819 ................................................ 4821 ................................................ 3206. 4822 ................................................ 3208. 4826 ................................................ 2320, 2322(a). 3208. 7(a), (d). 2323(a), (b); 4831 ................................................ 2351(a), (b); 2356. 4832 ................................................ 2351(c), 2355, 2356, 2361. 4833 ................................................ 2352(b)-(e). 4834 ................................................ 2353(b), 2354(b), (c). 4835 ................................................ 2360. 4836 ................................................ 4841 ............................................... 3210. 4842 ................................................ 3212. 4846 ................................................ 2350, 2352(a), 2353(a), 2354(a). 4851 ................................................ 1920(a), (b). 4852 ................................................ 1931. 4853 ................................................ 1925. 4854 ................................................ 1926. 486 1 ................................................ 1921. 4862 ................................................ 1927. 4863 ................................................ 1922. 4864 ................................................ 1923. 4865 ................................................ 1924. 4871 ................................................ 1920(c). 4872 ................................................ 1928. 4873 ................................................ 1932. 4874 ................................................ 1930. 4875 ................................................ 1935. 4876 ................................................ 1933. 4877 ................................................ 4881 ....................... 1900. 4882. ....................... 1905. 4883 ................................................ 1901, 1906. 4884 ................................................ 1902. 4885 ................................................ 1903. 4886 ................................................ 4891 ................................................ 1805. 4892 ................................................ 1805. 4893 ................................................ 1809(a). 4894 ................................................ 1805. 4895 ................................................ 1805. 4896 ................................................ 1805. 4897 ................................................ 4901 ................................................ 3271. 4902 ................................................ 3277. 4903 ................................................ 3278,3292. 4904 ................................................ 3279. 4905 ................................................ 3280. 4906 ................................................ 3276. 4907 ................................................ 3283, 3292. 5001 ................................................ 2800(a)(1), (4), (6), (c); 3030(a)(1); 3111; 3125(a); 3182(b). 5002 ................................................ 2809(a). (b)(1), (2), (c), (d). 5003 .......................................... 5004 ................................................ 2800(e)(1), (2), (3), (4); 3112. 5005 ................................................ 2800(a)(1), (d); 3112. 5006 ................................................ 2800(a)(1), (b)(2), (); 2879(b); 2880. 2900(a). 5007 ................................................ 2800(f), (a)(3), (4); 2846(a), 2847(a); 3112(b); 3125(a). 5008 ................................................ 2803(a)-(e), 2903(b)-(e). 5009 ................................................ 2802, 2885, 2878. 5010 ................................................ 2802(a), (b): 2866. 5011 ................................................ 2891(b), 2901(a), (b), (c), (d); 3113. 5012 ................................................ 2887. 5021 ................................................ 2800(a)(5), 2801(b). 5022 ...................... 3030(a)(2). 5023 ....................... 2801(e)(5). 5024 ................................................ 5025 ................................................ 2800(a)(5); 2801(c)(2), (e); 2883(e), 3036(a), 3250(h), (i); 3254(g). 1954 Code section number Page 18 1939 Code section number
TITLE 26-INTERNAL REVENUE CODE 1954 Code section number 1939 Code section number 5026 ................................................ 2800(a)(1)(A ). 5027 ................................................ 2802(c). 5028 ................................................ 5041 ................................................ 3030(a)(1), (2). 5042 ................................................ 3030(a)(1). 5043 ................................................ 3030(b), 3041. 5044 ................................................ 5045 ................................................ 5051 ................................................ 3150(a), (c). 5052 ................................................ 3160, 3254. 5053 ................................................ 3153(b)(c). 5054 ................................................ 3150(b)(1). 5055 ................................................ 3150(b)(2), 3157(a). 5056 ................................................ 5057 ................................................ 5061 ................................................ 3172(a). 5062 ................................................ 3179(a), (b). 5063 ................................................ 1656(a), (b), (c). 5054 ................................................ 3174. 5065 ................................................ 5081 ................................................ 3250(f)(1). 5082 ................................................ 3254(g). 5083 ................................................ 5084 ................................................ 5091 ............................................... 3250(c)(1), (d)(3). 5092 ................................................ 3254(d). 5093 ................................................ 5101 ...................... 3250(j)(1). 5102 ...................... 3254(h). 5103 ................................................ 5104 ................................................ 3271(c)(1). 5105 ................................................ 2818(a). 5106 ................................................ 3250(j)(3). 5111 ................................................ 3250(a)(1), (a)(3), (d)(1), (d)(2); 3254(c)(2). 5112 ................................................ 3254(b), (e). 5113 ................................................ 3250(a)(4), (d)(3), (g); 3251(a), (b). 5114 ................................................ 2857,2858. 5115 ...................... 2863. 5116 ......................... 2831. 5121 ................................................ 3250(b)(1), (b)(4), (e)(1), (2), (3). 5122 ................................................ 3250(b)(2), 3254(c)(1), (). 5123 ................................................ 3250(e)(4); 3251(c); 3255(a), (b), (c). 5124 ................................................ 3252(a), (b), (c). 5131 ...................... 3250(l)(1), (2). 5132 ................................................ 3250(l)(3). 5133 ................................................ 3250(t)(4). 5134 ................................................ 3250(t)(5). 5141 ................................................ 3270. 5142 ................................................ 3271(a), (b), (c). 5143 .................... ......................... 3272(a). 5144 .............................................. 3277, 3278, 3279, 3280(a), 3283. 5145 ............................................... 3273(a). 5146 ............................................... 3273(b). 5147 ................................................ 3275(a). 5148 ................................................ 3276. 5149 ................................................ 3282. 5171 ................................................ 2819. 5172 ................................................ 2832, 5173 ................................................ 2820(a), 2822, 2823. 5174 .. ................... ..................... 2010. 5175 ................................................ 2812. 5176 ................................................ 0 14(a)(1), (a)(2). 5177 ................................................ 2814(a)(1); 2815(a), (b)(1)(A ), (B), (C), (D). 5178 ................................................ 2)16. 5179 ................................................ 2817(a), (b). 5180 ................................................ 2831. 5191 ................................................ 2849, 2850(a). 5192 ................................................ 2820, 2838, 2877. 3042. 5193 ................................................ 2820, 2878(a), (b), (c), (d). 5194 ................................................ 2883(a)-(g), 2916. 5195 ................................................ 2836,2870. 5196 ................................................ 2826. 2827, 2828, 2830, 2839. 5197 ................................................ 2841, 2844, 2859. 5211 ................................................ 2464. 5212 ................................................ 2808. 5213 ................................................ 2811. 5214 ...................... 2871. 5215 ................................................ 2825. 5216 ................................................ 2834. 5217 ................................................ 3183(a), (b), (c). 5231 ................................................ 2872, 2873, 2875. 5232 ................................................ 28711(c), (d). 5233 ................................................ 5241 ................................................ 2872, 2873, 2915. 4013(a). 5242 ............................................... 2879(a). 1954 Code section number 5243 ................................................ 1939 Code section number 2903(a), (), (g); 2904, 2905, 2910.2911. 5244 ................................................ 2882. 5245 ................................................ 2881. 5246 ................................................ 2875. 5247 ................................................ 2885(a), (b), 2886, 2888. 5248 ................................................ 5249 .............................................. 5250 .............................................. 2884. 5251 ................................................ 5252 ................................................ 2874. 5271 ....................... 2812. 5272 ................................................ 2801(e)(1). 5273 ................................................ 2801(e)(2). 5274 ................................................ 2831. 5275 .............................................. 5281 .............................................. 2801(e)(1), (d). 5282 ................................................ 2813,28061,2862. 5283 ................................................ 2828.2830. 5284 .............................................. 5285 .............................................. 2855,2857. 5301 ................................................ 3100. 5302 ................................................ 3101. 5303 ................................................ 3102. 5304 ................................................ 3114. 5305 ................................................ 3105. 5306 ................................................ 3103. 5307 ................................................ 3106. 5308 ................................................ 3107. 5309 ................................................ 3104. 5310 ................................................ 3108(a)-(d); 3109, 3125(b). 5311 ................................................ 3125(a). 5312 ............................................... 5313 ............................................. .3121(a), (c). 5314 ................................................ 3117. 5315 ................................................ 3119. 5316 ................................................ 3120. 5317 ................................................ 3121(d), 3122. 5318 ................................................ 3123. 5319 ................................................ 3124. 5320 ................................................ 5331 ................................................ 3070(a), (b). 5332 ................................................ 3073 5333 ................................................ 3074. 5334 ................................................ 5351 ................................................ 3040. 5352 ................................................ 5353 ............................................. 5354 ............................................. 3031(a), 3040. 5355 ................................................ 5356 ................................................ 3040. 5357 ................................................ 5361 ............................................... 5362 ............................................... 3030(a)(1), 3031(a), 3037, 3038; 19 U.S.C. 81(c), 1309, 1311. 5363 ................................................ 5364 ................................................ 5365 ................................................ 5366 ................................................ 3034, 3035, 3042. 5367 ................................................ 3171. 5368 ................................................ 3030(a)(1), 3040, 3041. 5369 ................................................ 3040. 5370 ................................................ 3039. 5371 ................................................ 5372 ................................................ 5373 ................................................ 3031, 3032, 3033, 3036, 3037(a). 5381 ................................................ 3036, 3044(a), 3045. 5382 ................................................ 3032, 3036. 3044, 3045. 5383 ................................................ 3030, 3044(b), (c). 5384 ................................................ 3045. 5385 ................................................ 3043(a). 5386 ................................................ 2801(e)(3), (4). 5387 ................................................ 3254(g). 5388 ............................................ 5391 ............................................ 2801(c), (e)(3); 3031(a). 5392 ................................................ 3036, 3044(b), 3045. 5401 ................................................ 3153(b); 3155(a), (b). 5402 ................................................ 3158, 3254(d). 5403 ................................................ 5411 ................................................ 3158. 5412 ................................................ 3104, 3155(f). 5413 ................................................ 3155(f). 5414 ................................................ 5415 ................................................ 3155(c). 5416 ................................................ 5501 ............................................... 3 5502 ................................................ 3110. 5511 ................................................ 3182(a). 5512 ................................................ 5521 ................................................ 3177(a), (b), (c), (d)(1). Page 19
TITLE 26-INTERNAL REVENUE CODE 1939 Code section number 1954 Code section number Page 20 1939 Code section number 5522 ................................................ 2891(a). 5523 ...................... 3178. 5551 ...................... 2815(c), (d), (e). 5552 ................................................ 2829. 5553 ....................... .................. 5554 ................................................ 5555 ................................................ 3171. 5556 ................................................ 3176. 5557 ................................................ 3175. 5601 ................................................ 2810. 5602 ................................................ 2818. 5803 ................................................ 2812. 5604 ................................................ 2814. 5605 ................................................ 2815(a). 5608 ................................................ 2833. 5607 ................................................ 2819. 5608 ................................................ 2834. 5609 ................................................ 2811. 5610 ................................................ 2843. 58611 ................................................ 2842. 5812 ................................................ 2838. 5613 ................................................ 2836. 5814 ................................................ 2870. 5615 ................................................ 2828. 5616 ................................................ 2827. 5617 ................................................ 2826. 58618 ................................................ 2822. 5619 ................................................ 2839. 58620 ................................................ 2841. 5621 ................................................ 2857(a), 2859. 5822 ................................................ 2807. 58623 ............................................... 2853. 5624 ................................................ 2852. 58625 ................................................ 2806(c). 5826 ......................... 2806(f). 58627 ....................... 2801(e)(2). 5628 ................................................ 2801(f). 5629 ................................................ 2856. 5630 ............................................. 288 5. 5631 ................................................ 2876. 5832 ................................................ 2912, 2913. 58633 ................................................ 2914(a). 5634 ................................................ 2806(a)(1)(2). 5635 ............................................... 2867. 58636 ............................................. 2866. 5637 ............................................. 2868. 5838 ............................................. 2869. 58639 ................................................ 2806(d). 5640 ................................................ 2803(f). 5641 ................................................ 2871. 5842 ................................................ 2803(g). 5643 ................................................ 2908. 5644 ................................................ 2909. 58645 ................................................ 2806(b)(1). 5646 ................................................ 2806(e). 58647 ................................................ 3072. 5648 ................................................ 2885(d). 5649 ................................................ 2854. 5650 ................................................ 2850. 5661 ................................................ 3043. 58662 ................................................ 5863 ................................................ 5871 ................................................ 3159. 5672 ................................................ 3159. 5873 ................................................ 3159. 58674 ................................................ 3159. 5675 ................................................ 3155(f). 5676 ................................................ 3159(e), ( ), (g), (h), i). 5681 ................................................ 2831. 5682 ................................................ 2821, 2851. 568 3 ................................................ 3173(a). 5684 ................................................ 3173(b). 5685 ................................................ 3173(c). 5686 ................................................ 3115, 3118. 5887 ................................................ 2806(g). 5688 ................................................ 2805(a)-(b); 3118, 3173(d), 63 Stat. 377 et seq. 5689 ................................................ 2800(a)(1)(B ), 3112(b), 3150(b)(3). 5890 ................................................ 3173(b)(4). 5691 ................................................ 3253. 5692 ................................................ 3252. 5693 ................................................ 3274. 5701 ................................................ 2000. 5702 ................................................ 2010, 2030. 2050, 2110. 5703 ................................................ 2001, 2002(b), (c), 2194, 3310(f)(2). 5704 ................................................ 2040, 2101, 2111(f); 2130(d); 2135(a)(1), (2), (3); 2197(b); 2130(d). 5705 ................................................ 2137, 2198, 3313. 5706 ................................................ 2136. 5707 ................................................ 2000(g)(1), (2), (3). 5711 ................................................ 2013, 2033. 2039(a). 2053. 5712 ................................................ 2012, 2032, 2052. 5713 ................................................ 2014, 2054. 5721 ................................................ 2017, 2036. 5722 ................................................ 2019, 2038, 2039(b), 2194. 5723 ................................................ 2100, 2102, 2103(a)(1), 2111, 2112(a)(1), 2130(a)(b)(c). 5731 ................................................ 2059, 2060. 5732 ................................................ 2058. 5741 ................................................ 2018, 2037, 2039(b)(1), 2058, 2194. 5751 ................................................ 2104(a), 2113, 2170(a)(2). 5752 ................................................ 2103(e), 2112(e). 5753 ................................................ 2190. 5761 ................................................ 2156(c), 2161(m )(1), 2180(1). 5762 ................................................ 2130(a), (b), (c); 2151(a), (c); 2155(a), 2156, 2160(a)-(e), (g), (i); 2161(a), (c), (e)-(g); 2162(a)(2), (4), (b); 2170(a)(2), (4), (b); 2171(a), (b)(2); 2172, 2173(a), 2174, 2176(a)(2), (3); 2180(a), (d)- f). 5763 ................................................ 2155(b), 2160(h), 2161(b), (h), (i)(1). (j)(1), (1)(1), (m)(2); 2170(b), 2171(a), 2175, 2180(b), (g)(1), (h), (i), (k), (1)(1), (2). 5801 ............................................ 3260. 5802 ................................................ 3261(a). 5803 ............................................ 3262. 5811 ................................................ 2720. 5812 ................................................ 2721. 5813 ................................................ 2722. 5814 ................................................ 2723. 5821 ................................................ 2734. 5831 ................................................ 2700, 3407. 5841 ................................................ 3261(b). 5842 ................................................ 2724. 5843 ................................................ 2725. 5844 ................................................ 2727. 5845 ................................................ 2728. 5846 ................................................ 2731. 5847 ................................................ 2732. 5848 ................................................ 2733. 5851 ................................................ 2726(a). 5852 ................................................ 2726(b). 5853 ................................................ 2726(c). 5854 ............................................ 3263. 5861 ................................................ 2729. 5862 ................................................ 2730. 6001 ................................................ 51, 54(a), (b); 821(d), 1007(a), (b): 1720, 1835, 1928(b), 2302, 2303, 2322(c), 2324, 2352, 2555, 2569(d), 2594(a), 2653(b), 2709, 2724, 3220(c), 3233(a). 3603. 6011(a) ........................................... 47(a), 51, 143(c), 215(a), 217, 235, 251(g), 1420(c), 1530(b), 1604(a), 1624, 1700 (c)(2), (d)(2), (e)(2); 1716(a), 1852(a), 1902(a)(1), 2403(a), 2451(a). 2471, 2701, 3272(a). 3310(a), (b), (f)(1). 3448(a), 3461, 3467(b), 3469(d), 3475(c), 3491(a), 3611(a)(1). 6011(b) ........................................... 6012(a) ........................................... 51(a), 52(a), 142(a)(2), (3), (4): 217(b), 235(b). 6012(b)(1) ...................................... 51(b)(4), (c), (g)(5); 142(a)(1). 6012(b)(2) ...................................... 51(c), 58(f), 142(a). 6012(b)(3) ...................................... 52(a). 6012(b)(4) ...................................... 142(a). 6012(b)(5) ...................................... 142(b). 6013(a) ........................................... 51(b)(1), (2), (3), (4), (5). 6013(b) ........................................... 51(g)(1)-(5). 6014(a) ........................................... 51(f)(1), (2), (4). 6014(b) ........................................... 51(b)(1), 51(f)(3). 6015(a) ........................................... 58(a). 6015(b) ........................................... 58(c). 6015(c) ........................................... 58(b). 6015(d) ........................................... 58(b). 6015(e) ........................................... 58(d)(2). 6015(f) .................... 58(d)(3). 6015(g) ........................................... 60(b). 6015(h) .......................................... 58(a). 6016 ................................................ 1954 Code section number
TITLE 26-INTERNAL REVENUE CODE 1939 Code section number 1954 Code section number 6017 ................................................ 482(a). 6018(a) ........................................... 821(a)(1). 864(a)(l), 837. 6018(b) ........................................... 821(a)(2). 864(a)(2). 6019(a) ........................................... 1006(a). 6019(b) ........................................... 6020(a) ........................................... 3611(a)(2). 6020(b) ........................................... 3612(a), (c). 6020(c) ........................................... 6021 ................................................ 3613. 6031 ................................................ 187. 6032 ................................................ 169(f), 6033(a) ........................................... 54(f). 6033(b) ........................................... 153(a). 8033(c) ........................................... 6034(a) ........................................... 153(b). 6034(b) ........................................... 153(b). 6035(a) ........................................... 338. 6035(b) ........................................... 339. 6036 ................................................ 274(a), 820. 6037 ................................................ 6041(a) ........................................... 147(b)(2). 6041(b) ........................................... 147(b)(1). 6041(c) ........................................... 147(c). 6041(d) ........................................... 6042 ................................................ 148(a), (b), (c). 6043 ................................................ 148(d). (c). 6044(a) ........................................... 148(f). 6044(b) ........................................... 148(f). 6044(c) ........................................... 148(f). 6045 ................................................ 149. 6046(a) ........................................... 3604(a). 6046(b) ........................................... 3604(b). 6046(c) ........................................... 3604(b). 6046(d) ........................................... 6051(a) ........................................... 1403. 1633(a). (b). 6051(b) ........................................... 1633(a). 6051(c) ........................................... 1633(b). 6051(d) ........................................... 1633(b). 6061 ................................................ 3809(b). 6062 ................................................ 52(a). 6063 ........................ 187. 6064 ................................................ 58(g), 3809(b). 6065(a) ........................................... 142(a), (b), 148(a), (d), (e); 149. 169(f), 187, 233, 821(a), 864(a), 1006(a). 1604(a), 1716(a), 1852(a), 1902(a)(1), 240 (a), 2471, 2555(a). (c); 2701, 3233(a), 3272(a), 3330. 3448(a), 3461, 3467(b), 3469(d), 3475(c), 3604(b), 3611(a), (c), 3779(b), 3780(a), 3809(c). 6065(b) ........................................... 51(a), 54(f), 58(b), 215(a), 3780(a). 6071 ................................................ 141(b), 147(a). 148(a), (b), (c). (e): 149. 150, 153(a), (b), 821(b), 864(b), 874(b)(3), 1253(a), 1420(c), 1530(b), 1604(a), 1716(b), 1852(a), 1902(a)(l), 2403(a), 2451(a). 2471, 2555(b), (c), 2701, 2734(e), 3233(a), 3272(a), 3310(a), (f)(1); 3448(a), 3461. 3467(b), 3469(d), 3475(c). 3491(a), 3604(a), 3611(b), (c); 3779(b), 3780(a), 3791(a). 6072(a) ........................................... 53(a)(1), 143(c). 6072(b) ........................................... 53(a). 6072(c) ........................................... 217(a), 235(a). 6072(d) ........................................... 6072(e) ........................................... 3805. 6073(a) ........................................... 58(d)(1). 6073(b) ........................................... 60(a). 6073(c) ........................................... 58(d)(2), 6073(d) ........................................... 60(b). 6073(e) .................... 60(c). 6074(a) ........................ 6074(b) ........................................... 6074(c) ........................................... 6075(a) ........................................... 821(b), 864(b), 6075(b) ........................................... 1006(b). 6081(a) ........................................... 53(a)(2), 58(e), 141(b), 147(a), 148(a). (b), (c), (c); 149, 150, 153(a), (b); 821(b), 864(b), 874(b)(3). 1253(a), 1420(c), 1530(b), 1604(b), 1625(c). 1633(c), 1716(b), 2403(a), 2451(a), 2471, 2555(e)(1), 2701, 3233(a), 3272(a), 3310(f)(1), 3448(a), 3461. 3467(b), 3469(e), 3475(d), 361l(a)(1), 3634, 3779(b), 3791(a). 6081(b) ........................................... e081(c) ........................................... 6091(a) ........................................... 6091(b)(1) ...................................... 6091(b)(2) ...................................... 147(a), 148(b), (c), (d), 149, 150, 153(a), (b), 820, 874(b)(3), 1253(a), 1420(c). 1530(b), 2555(c)(1), 2734(c), 3233(a), 3604(a), 3611(a)(1), (c); 3779(a), 3780(a), 3791(a). 53(b)(1), 58(d)(2), 60(b), 143(c), 821(c), 864(c), 1006(b), 1604(a), 1716(c), 1852(b), 1902(a)(2), 2403(a). 2451(a), 2471, 2701, 3272(a), 3291(a), 3448(a), 3461, 3467(b), 3469(d), 3475(c), 3491(c), 3611(a)(1), (c); 3791(a). 53(b)(2), 141(b), 143(c), 1604(a), 1716(c), 1852(b), 1902(a)(2). 2403(a), 2451(a), 2471, 2701, 3272(a), 3291(a), 3448(a), 3461. 3467(b), 3469(d). 3475(c), 3491(c), 3611(a)(1), (c); 3791(a). 6091(b)(3) ...................................... 821(c), 864(c). 6091(b )(4) ...................................... 6101 ............................................... 3630. 6102 ........................... 6103(a) ........................................... 55(a). 6103(b) ........................................... 55(b). 6103tc) ........................................... 55(c). 6103(d) ........................................... 55(d). 6103(c) ........................................... 58(h). 6103(f) ........................................... 55(e ). 6104 ................................................ 153(c). 6105 ................................................ 722(g). 6106 ................................................ 1604(c). 6107 ................................................ 3275,3292. 6108 ................................................ 6 3. 6109 ................................................ 6151(a) ........................................... 56(a). 143(c). (h); 144. 218(a), 236(a), 822(a)(1), 1001(a), 1253(a), 1530(b), 1715(b). (c); 1853(a), (b); 1902(a)(3), (b); 2403(b), 2451(a), (b); 2472, 2702(a), 3220, 3230, 3271(b), 3272(a), 3448(a), (b); 3461, 3467(b), 3469(b), 3470, 3475(c), 3491(a), (c). 6151(b) ........................................... 51(f)(2), 56(0). 6151(c) ........................................... 322(b)(4), (e). 6152(a)(1) ...................................... 56(b)(2)(A). 6152(a)(1)(A) ............................... 56(b)(2)(A). 6152(a)(1)(B) ............................... 56(b)(2)(B). 6152(a)(2) ................................... 56(b)(1). 6152(a)(3) ............ i ......................... 1605(c). 6152(b)(1) .................. 56(b)(3)(A), 1605(c). 6152(b)(2) .................. 56(b)(3)(B). 6152(c) ...... .............. 272d). 6152(d) .................... 56(b)(4). 6153(a) ...... 59(a). 6153(b) .......... 60(a), 6153(c) ....... ............. 59(b). 6153(d) .................... 60(b). 6153(e) ........... ......... 60(c). 6153(f) .............. ...................... 59(c). 6154 .......................................... 6155(a) ....................................... 22(d)(6)(P). 51(f)(2), 131(c), 6155(b) ........................................... 6156 ............................................. 6161(a)(1) ................................... 146(a), 272(b), (c); 273(a), (g), (); 274(b), 292(a), 871(b), (c), (I); 872(a), (g), (1); 874(b)(3), 891, 1012(b), (c); 1013(a), (g), (I): 1015(b), 1021, 1117(g), 1605(c), 3310(d), 3311, 3660(a), 3779(h). 56(c), 58(e), 1008(b), 1605(d), 3467(b). 3469(e), 3475(d). 71-999 0 - 78 - 4 (Vol. 7) Page 21 1954 Code section number 1939 Code section number
TITLE 26-INTERNAL REVENUE CODE 1939 Code section number 1954 Code section number 8161(a)(2) ...................................... 822(a)(2). 6161(b)(1) .................. 272(J). 1012(I). 6161(b)(2) .................. 871(h). 6161(c) ........................................... 274(b). 1015(b). 6161(d) ........................................... 6162(a) ........................................... 56(c)(2). 6162(b) .................................. 6163(a) ......................... ....... 925, 926. 6163(b) ........................................... 6164(a) .................... 3779(a). 6164(b)... ................. 3779(b). 6164(c) ........................................... 3779(c). 6104(d) ........................................... 3779(d). 6164(e) ........................................... 3779(e). 6164(f) ........................................... 3779(f). 6164(g) ........................................... 3779(g). 61 4(h) .......................................... 3779(h). 6164() ............................................ 3781. 6165 ................................................ 56(c)(2), 272(j), 822(a)(2), 871(h), 1012(i). 6201(a) ........................................... 3640, 3647. 6201(a)(1) ...................................... 3812(f). 6201(a)(2)(A) ................................ 1809(b)(2), 2351(c)(2), 2651(c)(2), 3311. 6201(a)(2)(B) ................................ 6201(a)(3) ...................................... 6201(b) ........................................... 59(d). 6201(c) ........................................... 22(m )(4). 6201(d) ........................................... 6202 ................................................ 3644. 6203 ................................................ 3641. 6204 ................................................ 3642. 6205(a)(1) ...................................... 1401(c), 1411, 1501(c), 1521. 6205(a)(2) ...................................... 1411. 6205(b) ........................................... 1421, 1502, 1522. 6206 ................................................ 6211(a) ........................................... 271(a), 870, 1011. 6211(b)(1) ...................................... 271(b)(1). 6211(b)(2) ...................................... 271(b)(2). 6211(b)(3) ................................. 271(b)(3). 6212(a) ........................................... 272(a), 871(a), 1012(a). 6212(b)(1) ...................................... 272(k), 1012(j). 6212(b)(2) ...................................... 272(a). 6212(b)(3) ...................................... 901(d). 6212(c)(1) ...................................... 272(f), 871(f), 1012(f). 6212(c)(2) ....................... ..... 6213(a) ............................ 272(a), 871(a), 1012(a). 6213(b)(1) ...................................... 272(f), 871(f), 1012(f). 6213(b)(2) ...................................... 3780(c). 6213(b)(3) ...................................... 6213(c) ... ............... ................. 272(c), 871(c), 1012(c). 6213(d) ........................................... 272(d), 871(d), 1012(d). 6213(e) ........................................... 6214(a) ........................................... 272(e), 871(e), 1012(e). 6214(b) .................... 272(g), 1012(g). 6214(c) .......................................... 272(h), 871(g), 1012(h). 6215(a) ......................................... 272(b), 871(b), 1012(b). 6215(b) ........................................... 6216 ................................................ 6301 ................................................ 3651(a)(1). 6302(a) ........................................... 3652. 6302(b) ........................................... 1420(c), 1719, 2550(c), 2708, 3281,3282. 6302(c) ........................................... 3310(f)(2). 6303(a) ........................................... 3655(a). 6303(b) ........................................... 6304 ............................... .......... 6311(a) ........................... ...... 3656(a)(1), (b)(1). 6311(b)(1) ...................................... 3656(a)(2)(A), (b)(2). 6311(b)(2) ...................................... 3656(a)(2)(B). 6312(a) ........................................... 3657. 6312(b) ........................... .......... 6313 ................................ . ..... 58(g), 1008(d), 1420(d), 1530(d). 1605(e), 3658. 6314(a) ........................................... 1008(e), 3659(a). 6314(b) ....................... 823. 6314(c) ............................ ..... 6315 ................................ ...... 59(d). 6316 ................................................ 6321 ................................................ 3670. 6322 ............................................... 3671. 6323(a) ........................................... 3672(a). 6323(a)(1) ...................................... 3672(a)(1). 6323(a)(2) ...................................... 3672(a)(2). 6323(a)(3) ...................................... 3672(a)(3). 6323(b) ........................................... 6323(c) ............................ ..... 8323(d)(1) ....................... 3672(b)(1). 6323(d)(2) ...................................... 3672(b)(2). 6323(e) ........................................... 6324(a)(1) ...................................... 827(a). 8324(a)(2) ...................................... 827(b). 6324(a)(3) ...................................... 827(c). 6324(b) ........................................... 1009. 6324(c) ........................................... 6325(a)(1) ...................................... 827(a), 1009, 3873(a). 6325(a)(2) .................. 3673(b). 6325(b)(1) .................. 3674(a). 6325(b)(2) ...................................... 3674(b). 6325(c) ........................................... 3675. 6325(d) ........................................... 6326 ................................................ 6331(a) ........................................... 3310, 3660, 3690, 3692, 3700. 6331(b) ........................................... 3690, 3692, 3700. 6331(c) ........................................... 3715. 6331(d) ........................................... 6332(a) ........................................... 3710(a). 6332(b) ........................................... 3710(b). 6332(c) ........................................ 3710(c). 6333 ............................................. 3711. 6334(a) ........................................... 3691(a). 6334(b) .......................................... 3691(b). 6334(c) ........................................... 3692. 6335(a) ........................................... 3693(a), 3701(a). 6335(b) ........................................... 3693(b), 3701(b). 6335(c) ........................................... 3712. 6335(d) ........................................... 3693(c), 3701(c). 6335(e)(1) ...................................... 3695(a), 3701(d), (e). 6335(e)(2) ...................................... 3695(b). 6335(e)(2)(A) ................................ 3695(a), 3701(d). 6335(e)(2)(B) ................................ 3701(d). 6335(e)(2)(C) ................................ 6335(e)(2)(D) ................................ 3701(f). 6335(e)(2)(E) ................................ 3693, 3701. 6336(e)(2)(F) ................................. 3693(d), 3701(f). 6335(e)(3) ...................................... 3701(f). 6336 ................................................ 6337(a) ........................................... 3696, 3702. 6337(b)(1) ...................................... 3702(b)(1). 6337(b)(2) ...................................... 3702(b)(2). 6337(c) ........................................... 3702(c). 6338(a) ........................................... 3703(b). 6338(b) ........................................... 3704(b). 6338(c) ........................................... 3703(a), 3704(a). 6339(a)(1) ...................................... 3697(a)(1). 8339(a)(2) ...................................... 3697(b). 6339(a)(3) ...................................... 3697(c). 6339(a)(4) ...................................... 3697(d). 6339(a)(5) ...................................... 6339(b)(1) ...................................... 3704(c)(1). 6339(b)(2) ...................................... 3704(c)(2). 6340(a) ........................................... 3706(a), (b). 6340(b) ........................................... 3706(f). 6341 ................................................ 3718. 6342(a) ........................................... 3694. 8342(b) ........................................... 3712. 6343 ......................................... 6344 ............................................... 0401(a) .......................................... 3770(a)(2). 6401(b) ........................................... 322(a)(2). 6401(c) ........................................... 3770(c). 6402(a) .......................................... 1027(a), 3770(a)(1), (4), (5). 6402(b) ........................................... 322(a)(3). 6403 ................................................ 321. 6404(a) ........................................... 3770(a)(1), (5). 6404(b) ........................................... 273(J), 873. 1014. 6404(c) ........................................... 6405(a) ........................................... 3777(a). 6405(b) ........................................... 3777(b), 6405(c) ........................................... 3777(c). 6406 ................................................ 3790. 6407 ................................................ 3770(a)(3). 8411(a)..... .............. 3780(a). 6411(b) .................... 3780(b). 6411(c) ........... ......... 3781. 6412(a) ................... 6412(b)(1) ...................................... 3412(g)(1). 6412(b)(2) ...................................... 3412(g)(2). 6412(c) ........................................... 6412(d) .................... 3508. 6412(e) ........................................... 6413(a)(1) ...................................... 1401(c), 1411, 1501(c), 1521. 6413(a)(2) ...................................... 1411. 6413(b) ........................................... 1421, 1502, 1522. 0413(c)(1) ...................................... 1401(d)(3). 6413(c)(2) ...................................... 1401(d)(4). 6413(d) ........................................... 1601(d). 6414 ....................... 143(f), 1622(f)(1). 6415(a) ..................... 1854(a), 3471(a). 6415(b) ........................................... 1715(d)(1). (2); 1854(b), (c); 3471(b), (c). 1954 Code section number Page 22 1939 Code section number
TITLE 26-INTERNAL REVENUE CODE 1939 Code section number 1954 Code section number 6415(c) ........................................... 1715(d)(2). 6415(d) ........................................... 1715(d)(1), 1854(c), 3471(c). 6416(a) ........................................... 1715(d), 2407(b), 2452(b), 3443(a)(3)(B). (b), (d). 6410(b)(1) ...................................... 2407(a), 3443(a)(2). 6416(b)(2)(A) ................................ 3443(a)(3)(A)(i), 6416(b)(2)(B) ................................ 3443(a)(3)(A)(ii), 6416(b)(2)(C) ................................ 3443(a)(3)(A)(iii). 6416(b)(2)iD) ................................ 2452(a). 6416(b)(2)(E) ................................ 3443(a)(3)(A)(iv). 6416(b)(2)(F) ................................ 3443(a)(3)(A)(v). 6416(b)(2)(O) ................................ 3443(a)(3)(A)(vi). 6416(b)(2)(H) ................................ 3443(a)(3)(A)(vii). 6416(b)(3) ...................................... 3443(a)(1). 6416(c) ........................................... 3403(e). 6416(d) ........................................... 3408(b). 6416(e) ........................................... 2705. 6416(f) ........................................... 2703(a), 3471(b). 6417(a) ........................................... 2473. 6417(b) ........................................... 2474. 6418(a) ........................................... 3494(a). 6418(b) ........................................... 3493(a). 6419 ................................................ 3286. 6420 ................................................ 6501(a) ........................................... 275(a), 874(a), 1016(a), 1635(a), 3312(a). 6501(b)(1) ...................................... 275(f). 6501(b)(2) ...................................... 1635(e). 6501(b)(3) ...................................... 6501(c)(1) ...................................... 276(a), 874(b)(1), 1016(b)(1), 1635(b), 3312(b). 6501(c)(2) ...................................... 1635(c), 3312(c). 6501(c)(3) .................. 276(a), 874(b)(1), 1016(b)(1), 1635(b), 3312(b). 6501(c)(4) ...................................... 276(b). 6501(c)(5) ...................................... 6501(d) ........................................... 275(b). 6501(e)(1)(A) ................................ 275(c). 6501(e)(1)(B) ................................ 275(d)(1). 6501(e)(2) ...................................... 6501(f) ........................................... 6501(g) ........................................... 6502(a) ........................................... 276(c), 874(b)(2), 1016(b)(2), 1635(d), 3312(d). 6502(b) ........................................... 3714(b). 6503(a)(1) ...................................... 277, 875, 1017. 6503(a)(2) ...................................... 141(h). 6503(b) ........................................... 274(b), 1015(b). 6503(c) ..................................... 6503(d) ........................................... 822(a)(2), 871(h). 6503(e) ........................................... 6504 ................................................ 6511(a) ........................................... 322(b)(1), 910. 1027(b)(1), 1636(a)(1), 3313. 6511(b)(1) ...................................... 322(b)(1), 910, 1027(b)(1), 1636(a)(1), 3313. 6511(b)(2) ...................................... 322(b)(2), 910, 1027(b)(2), 1636(a)(2), 3313. 6511(c) ........................................... 322(b)(3). 6511(d)(1) ...................................... 322(b)(5). 6511(d)(2)(A) ................................ 322(b)(6). 6511(d)(2)(B) ................................ 322(g). 6511(d)(3) ...................................... 6511(e)(1) ...................................... 3494(b). 6511(e)(2) ...................................... 3493(b). 6511(f) ........................................... 6512(a) ........................................... 322(c), 911, 1027( 6512(b) ........................................... 322(d), 912, 1027 6513(a) ........................................... 322(b)(4). 6513(b) ........................................... 322(e). 6513(c) ........................................... 1636(c). 6513(d) ........................................... 6514(a) ........................................... 3774. 6514(b) ........................................... 3775. 6515 ................................................ 6521 ................................................ 3812. 6531 ................................................ 3748(a). 6532(a)(1) ...................................... 3772(a)(2). 6532(a)(2) ...................................... 3774(b). 6532(a)(3) ...................................... 6532(a)(4) ...................................... 3772(a)(3). 6532(b) ........................................... 3746(a), (b), (c). 6533 ................................................ c). (d). 6001(a) ........................................... 146(f), ^92(a), (c), (d); 294(a)(1), (2). (b), (c); 295, 296, 297. 2C8, 890(a), (b), 891, 892, 893(a)(1), (2); (b)(1), (2), (3), (4): 925, 1020(a), (b). 1021, 1022, 1023(a)(1), (2); (b)(1), (2), (3). (4), (5), 1420(b), 1530(c), 1605(b), 1717, 1853(c), 2403(b), 2451(b), 2475, 2706, 3310(c), 3448(b), 3470, 3495, 3655(b), 3779(1), 3794. 6601(b) ........................................... 890(a), 925. 6601(c)(1) ...................................... 294(a)(2), 296, 893(a)(2), (b)(3); 1023(a)(2), (b)(3). 6601(c)(2) ...................................... 56(b), 272(i), 1605(c). 6601(c)(3) ...................................... 297,892, 1022. 6601(c)(4) ...................................... 3310(a), (b), 3311. 6601(d) ........................................... 292(a), 891, 1021. 6601(e) .................... 292(c), 3779(0). 6601(f)(1) ...................................... 292(a), 294(b), 295, 296, 298, 890(a), (b), 891, 893(a), (b). 1020(a), (b), 1021, 1023(a), (b). 1420(b), 1530(c), 1605(b), 1717, 1853(c), 2403(b), 2451(b), 2475, 2706, 3310(c), (d), 3448(b), 3470. 3495, 3655(b), 3779(). 6601(f)(2) ...................................... 6601(f)(3) ...................................... 6601(g) ........................................... 59(d). 6601(h) .......................................... 6602 ................................................ 3746(d). 6611(a) ........................................... 3443(c). 3771(a). 6611(b)(1) ...................................... 3771(b)(1). 6611(b)(2) ...................................... 3771(b)(2). 6611(c) ........................................... 3771(c). 6611(d) ........................................... 322(b)(4), (e); 1636. 6611(e) ........................................... 3771(b)(2). 6611(f) ........................................... 3771(e). 6611(g) ........................................... 3790. 6612....... .............. 6651(a) .................... 291, 894(a), 1631, 3612(d)(1). 6651(b) ................... 6651(c).................... 294(d)(1)(A). 6652 ................................................ 6653(a) ........................................... 51(g)(6)(A), 293(a), 894(a) 1019(a). 6653(b) .......................................... 51(g)(6)(B), 293(b), 871(i), 1019(b), 3612(d)(2). 6653(c)(1) ...................................... 271, 870, 1011. 6853(c)(2) ...................................... 6653(d) ........................................... 6653(e) ........................................... 1821(a)(3). 6654 ................................................ 294(d)(1)(B). 6655 ................................................ 6656 ................................................ 6657 ................................................ 6658 ................................................ 146(f). 6659 ................................................ 51(g)(6), 291, 293, 871(i), 1019, 1117(g), 1634(b), 1718(c), 1821(a)(3), 3310(a)-(e), 3311. 3655(a)(b). 6671(a) ........................................... 1718(c), 1821(a)(3), 2557(b)(4), 2707(a). 6671(b) ........................................... 1718(d). 1821(a)(4), 2557(b)(8), 2707(d). 6672 ................................................ 1718(c), 1821(a)(3), 2557(b)(4), 2707(a). 6673 ................................................ 1117(g). 6674 ................................................ 1634(b). 6801(a) ........................................... 1809(b)(1), 2652(a), 3273(a), 3300(a), 3901(a)(2). 6801(b) ........................................... 1809(b)(1). 3301(a). 6802(1) ........................................... 1423(a), 1817(a). 6802(2) ....................................... 1817(b). 6802(3) ........................................... 1817(c). 6803(a)(1) ...................................... 1423(b). 6803(a)(2) ...................................... 1423(c). 6803(b)(1) ...................................... 1818(a). 6803(b)(2) ...................................... 1818(b). 6804 ................................................ 1815, 1920(c), 3301(a). 6805(a) .................... 3304(a). 6805(b) ........................................... 3304(b). 6805(c) .......................................... 3304(c). 6805(d) ........................................... 3304(d). 6806(a) ........................................... 3273(b). 6806(b) ........................................ 6806(c) ........................................ 3293. 6807 ................................................ 3725. Page 23 1954 Code section number 1939 Code section number B
TITLE 26-INTERNAL REVENUE CODE 1939 Code section number 1954 Code section number Page 24 1939 Code section number 6808 ................................................ 6851(a)(1) ...................................... 146(a)(1). 6851(a)(2) ...................................... 146(a)(2). 6851(b) ........................................... 6851(c) ........................................... 146(d). 6851(d) ........................................... 146(e). 6851(e) .................... 146(b). 6861(a) ........................................ 273(a), 872(a). 1013(a). 6861(b) ......................................... 273(b), 872(b), 1013(b). 6861(c) ........................................... 273(c), 872(c), 1013(c). 6861(d) ........................................... 273(d), 872(d). 1013(d). 6861(e) ........................................... 273(e), 872(e), 1013(e). 6861(f) ........................................... 273(I), 872(1). 1013(1). 6861(g) ........................................... 273(k), 872(J), 1013(J). 6861(h) .......................................... 6862(a) ........................................... 3660(a). 6862(b) ........................................... 6863(a) ........................................... 273(f), (h); 872(f), (h); 1013(f). (h); 3660(b). 6863(b)(1) ...................................... 273(g), 872(g), 1013(g). 6863(b)(2) ...................................... 273(f). (h); 872(f), (h); 1013(f), (h). 6864 ................................................ 6871(a) ........................................... 274(a), 1015(a). 6871(b) ........................................... 274(a), 1015(a). 6872 ................................................ 274(a). 6873(a) .......................................... 274(b), 1015(b). 6873(b) ........................................... 6901(a) ........................................... 311(a), 6 6901(b) ........................................... 311(a). 69 6901(c) ........................................... 311(b), 9 6901(d) ........................................... 311(b)(4 6901(e) ..................... 311(c), 1 6901(f1) ........................................... 311(d),9 6901(g) ........................................... 311(e), 1 6901(h) .......................................... 311(f), 9 6901(f) ......................... ...... 6902(a) .................... 1119(a). 6902(b) ........................................... 1119(b). 6903(a) ........................................... 312(a), 9 6903(b) ........................................... 312(c), 9 6904 ................................................ 7001(a) ........................................... 150. 7001(b) ........................................... 7011(a) ........................................... 3270(a). 7011(b) ........................................... 3280(a). 7012 ................................................ 7101 ................................................ 44(d), 00(a), 1025(a). '00(a), 1025(a). 00(b), 1025(b). 1, 025(c). 00(c), 1025d). 025(g). 00(e). 1025(f1). 01(a), 1026(a). 01(c), 1026(c). 56(c)(2), 112(b)(6)(D), 131(c), 146(b), 272(J), 273(f), 822(a)(2), 871(h), 872(f), 926, 1012(0). 1013(f), 1145, 1818(a), 2302(e), 2322(e), 2352(e), 2474, 2569(b), 2653(d), 3360(d)(2)(B), 3412(d), 3413, 3660(b), 3722(c), 3724(c), 3943, 3992. 4010, and 6 U.S.C. 15. 7102 ................................................ 3676. 7103 ................................................ 7121(a) ........................................... 3760. 7121(b) ........................................... 3760. 7122(a) ........................................... 3761. 7122(b) ........................................... 3761. 7123 ................................................ 7201 ................................................ 145(a), (b), 153(d), 340, 894(b)(2)(B), (C); 937, 1024(a), (b); 1718(a), (b); 1821(a)(1), (2), (b)(4); 2557(b)(2) (b)(3j: 2656(f). 2707(b), 2707(c), 3604(c). 7202 ................................................ 145(b), 894(b)(2)(C), 1718(b). 1821(a)(2), 2557(b)(3), 2707(c). 7203 ................................................ 145(a), 153(d), 340, 894(b)(2)(B), 937, 1024(a), 1718(a), 1821(a)(1), 2557(b)(2), 2707(b), 3604(c). 7204 ................................................ 1634(a). 7205 ................................................ 1626(d). 7206(1) ........................................... 3809(a). 7206(2) ........................................... 3793(b). 7206(3) ........................................... 3793(a). 7206(4) ........................................... 2656(a), 3321. 7206(5) ........................................... 3762. 7207 ................................................ 894(b)(2). 3616(a). 3672, 3793(b). 7208 ................................................ 3300(b). 7208(1) ........................................... 1425(b). 7208(2) ........................................... 1823(a). 7208(3) .................... 1822, 1823(b). 7208(4) ........................................... 1823(c). 7208(5) ........................................... 3323(a)(3). 7209 ................................................ 1425(a). 7210 ................................................ 3616(b). 7211 ................................................ 3325. 7212(a) ........................................... 3601(c). 7212(b) ........................................... 3601(c)(2). 7213(a)(1) ...................................... 55(f)(1). 7213(a)(2) ...................................... 55(t)(2). 7213(a)(3) ...................................... 55(f)(3). 7213(b) .................... 4047(a)(1). 7213(c) ........................................... 7214(a) ........................................... 4047(e). 7214(b) ........................................... 4047. 7214(c) ........................................... 7231 .............................................. 150. 7232 ................................................ 3412(d). 7233(1) ........................................... 1929(a(1). 7233(2) ........................................... 1929(a)(2). 7234(a) ........................................... 2308(a). 7234(b) ........................................... 2308(c). 7234(c) ........................................... 2308(h). 7234(d)(1) ...................................... 2308(11(1). 7234(d)(2)(A) ................................ 2308(g)(1). 7234(d)(2)(B) ................................ 2308(g)(2). 7234(d)(3) ...................................... 2308(l)(2). 7234(d)(4) ...................................... 2308(d). 7235(a) ........................................... 2326(a). 7235(b) ........................................... 2326(b). 7235(c) ........................................... 2326(c). 7235(d) ........................................... 3207(b). 7235(e) ........................................... 2327. 7236 ................................................ 2357(b). 7237(a) ........................................... 2557(b)(1), 2596, 3225, 3235. 7237(b) .......................................... 2557(a). 7238 ................................................ 2570. 7239(a) ........................................... 2656(b). 7239(b) ........................................... 2656(d). 7240 ................................................ 3506. 7261 ................................................ 2409. 7262 ................................................ 3294(a). 7263(a) ........................................... 1929(c). 7263(b) ........................................... 1929(b). 7264 ............................................... 3207(a). 7265(a)(1) ...................................... 2308(b). 7265(a)(2) ...................................... 2326(a)(2). 7265(b) ........................................... 2308(c), 2327(a), 7265(c) ........................................... 2308(J), 2327(a). 7266(a)(1) ...................................... 3211(a). 7266(a)(2) ...................................... 3211(b). 7266(a)(3) ...................................... 3211(c). 7266(b) ........................................... 2357(a). 7266(c) ........................................... 2357(c). 726d(d) ........................................... 2357(d). 7.66(e) ........................................... 2357(c). 7266(f) ........................................... 2357(f). 7267(a) ........................................... 2656(J). 7267(b) ........................................... 2656(k). 7267(c) ........................................... 2656d). 7267(d) ........................................... 2656(h). 7268 ................................................ 3320(a). 7269 ................................................ 894(b)(1). 7270 ................................................ 1821(b)(3). 7271(1) ........................................... 1822, 2656(c). 7271(2) ........................................... 1820(b). 7271(3) ..................... 1820(a). 7271(4) ........................................... 3323(a)(1), (2). 7272(a) ........................................... 1831(c), 2656(g), 3475(c). 7272(b) ......................................... 7273(a) .................... 3274. 7273(b) ........................................... 3294(b). 7274 ................................................ 2656. 7275 ................................................ 7301(a) ........................................... 2558(a). (b); 2571, 2598(a), (b), (c); 3253, 3321(b)(1), 3720(a)(1). 7301(b) ........................................... 3321(b)(1), 3720(a)(2). 7301(c) ........................................... 2657(e), 3321(b)(1), 3720(a)(3). 7301(d) ........................................... 3321(b)(2), 3322. 7301(e) ........................................... 3321(b)(3). 7302 ................................................ 3116. 7303(1) ........................................... 1823. 7303(2) ........................................... 2309(b), 2358(b). 7303(3) ........................................... 2309(d). 7303(4) ........................................... 2358(a). 7303(5) ........................................... 2309(b), 2358(b), 7303(6)(A) ..................................... 2657(c). 7303(6)(B) ..................................... 2656(c), 2657(a)(b), (). 7303(7) ........................................... 3323(b). 7303(8) ........................................... 3793(a)(2). 1954 Code section number
TITLE 26-INTERNAL REVENUE CODE 1939 Code 1954 Code section number section number 7304 ................................................ 3326. 7321 ................................................ 3720(b). 7322 ................................................ 3721. 7323(a) ........................................... 3723(a). 7323(b) ........................................... 3723(b). 7323(c) ........................................... 3723(c). 7324 ................................................ 3722. 7325 ................................................ 3724. 7326 ..................................... ..... 7327 ...................................... 3720. 7328 ................................................ 2657. 7329 ............................................ 7341(a) .................... 3324(a). 7341(b) ........................................... 3324(b). 7341(c) ........................................... 3324(c). 7342 ................................................ 3601(b). 7343 ................................................ 145(d), 894(b)(2)(D ), 1718(d), 1821(a)(4), 2557(b)(8), 2707(d), 3228, 3710(c), 3793(b)(2) 7344 ................................................ 4048. 7401 ................................................ 3740. 7402(a) ........................................... 3800. 7402(b) ........................................... 3633. 7402(c) ........................................... 4042. 7402(d) ........................................... 3992, 3995(c). 7402(e) ........................................... 7403(a) ........................................... 3678(a). 7403(b) ........................................... 3678(b). 7403(c) ........................................... 3678(c). 7403(d) ........................................... 3678(d). 7404 ................................................ 826(a). 7405(a) ........................................... 3746(a). 7405(b) ........................................... 3746(b). 7405(c) ........................................... 7405(d) ........................................... 7406 ................................................ 3747. 7407 ................................................ 7421(a) ........................................... 3653(a). 7421(b) ........................................... 3653(b). 7422(a) ........................................... 3772(a)(1). 7422(b) ........................................... 3772(b). 7422(c) ........................................... 3772(d). 7422(d) ........................................... 3772(e). 7422(e) ......................... 7422(f) ........................................... 7423(1) ........................................... 3770(b)(1). 7423(2) ........................................... 3770(b)(2). 7424(a)(1) ...................................... 3679(a)(1). 7424(a)(2) ...................................... 3679(a)(2). 7424(a)(3) ...................................... 3679(a)(3). 7424(b) ........................................... 3679(c). 7424(c) ........................................... 3679(d). 7425 ................................................ 7441 ................................................ 1100. 7442 ................................................ 1101. 7443(a) ........................................... 1102(a). 7443(b) ........................................... 1102(b). 7443(c) ........................................... 1102(c). 7443(d) ........................................... 1102(d). 7443(e) ........................................... 1102(e). 7443(f) ........................................... 1102(f). 7443(g) ........................................... 1102(g). 7444(a) ........................................... 1103(a). 7444(b) ........................................... 1103(b). 7444(c) ........................................... 1103(c). 7444(d) ........................................... 1103(d). 7445 ................................................ 1104. 7446 ................................................ 1105. 7447(a) ........................................... 1106(a). 7447(b) ........................................... 1106(b). 7447(c) ........................................... 1106(c). 7447(d) .................... 1106(d). 7447(e) .................... 1106(e). 7447(f) ........................................... 1106(f). 7447(g) ........................................... 1106(g). 7451 .............................................. 1110. 7452 ....................... 504(b), R.A. 1942. 7453 ............................... ....... 1111. 7454(a) ........................................... 1112. 7454(b) ........................................... 7455 ....................... 1113. 7456(a) .................... 1114. 7456(b) ........................................... 7456(c) ..................... 1114(b). 7457(a) ..................... 1115(a). 7457(b) ........................................... 1115(b). 7458 ....................... 1116. 7459(a) .................... 1117(a). 7459(b) ........................................... 1117(b). 7459(c) ........................................... 1117(c). 7459(d) ........................................... 1117(d). 7459(e) ........................................... 1117(e). 7459(f) ........................................... 1117(f). 7459(g) ........................................... 7460(a) ........................................... 1118(a). 7460(b) ........................................... 1118(b). 7461 ................................................ 1120. 7462 ................................................ 1121. 7463 ................................................ 7471(a) ........................................... 1130(a). 7471(b) ........................................... 1130(b), 7471(c) ........................................... 7472 ................................................ 1131. 7473 ................................................ 1132. 7474 ................................................ 1133. 7461 ................................................ 1140. 7482(a) .................... 1141(a). 7482(b) ........................................... 1141(b). 7482(c) .................... 1141(c). 7483 ................................................ 1142. 7484 ................................................ 1143. 7485(a) ........................................... 1145. 7485(b) ........................................... 7486 ................................................ 1146. 7487 ................................................ 7491 ................................................ 2597. 7492 ................................................ 1925(b). 7493 ................................................ 1930. 7501(a) ........................................... 3661. 7501(b) ........................................... 7502 ................................................ 7503 ................................................ 7504 ................................................ 7505(a) ........................................... 3695(b). 7505(b) ........................................... 3695(c). 7506(a) ........................................... 3795(a). 7506(b) ........................................... 3795(b). 7506(c) ........................................... 3795(c). 7506(d) ........................................... 3795(d). 7507(a) ........................................... 3798(a). 7507(b) ........................................... 3798(b). 7507(c) ........................................... 3798(c). 7507(d) ........................................... 3798(d). 7508(a) ........................................... 3804(a). 7508(b) ........................................... 3804(d). 7509 ................................................ 1424. 7510 ................................................ 3331. 7511 ................................................ 3802. 7601(a) ........................................... 3600. 7601(b) ........................................... 7602 ................................................ 3614, 3615(a), 3632(a)(1). 7603 ................................................ 3615(d). 7604(a) ........................................... 3633(a). 7604(b) ........................................... 3615(e). (1 7604(c) ........................................... 7605(a) ........................................... 3614, 3615. 7605(b) ........................................... 3631. 7606(a) ........................................... 3601(a)(1). 7606(b) ........................................... 3601(a)(2). 7606(c) ........................................... 7607 ................................................ 7621 ................................................ 3650. 7622(a) ........................................... 3632(a). 3622(b) ........................................... 3632(b). 7623 ................................................ 3792. 7641 ................................................ 2302(c), 2322(c), 2569(d)(4), 2653(b). 7651(2)(A) ..................................... 3811. 7652(a)(1) ...................................... 3360(a). 7652(a)(2) ...................................... 3360(b). 1652(a)(3) ...................................... 3360(c). 7652(b)(1) ...................................... 3350(a). 7652(b)(2) ...................................... 3350(b). 7653(a)(1) ...................................... 3361(a). 7653(a)(2) ...................................... 3351(a). 7653(b) ........................................... 3351(b), 3361(b). 7653(c) ........................................... 3351(c). 3361(c). 7653(d) ........................................... 7654 ................................................ 2483. 7655 .......................................... 7701(a)(i) ...................................... 1426(f), 1532(i), 1607 1931(b), 2133(i), 3238(a), 3507(a), 7701(a)(2) ...................................... 3797(a)(2). 7701(a)(3) ...................................... 3797(a)(3). 7701(a)(4) ...................................... 3797(a)(4). 7701(a)(5) ...................................... 3797(a)(5). 7701(a)(0) ...................................... 3797(a)(6). Page 25 1954 Code section number 1939 Code section number b), (c); 2352(c), (k), 1805, 3228(a), 3797(a)(1).
TITLE 26-INTERNAL REVENUE CODE 1954 Code 1939 Code section number section number 7701(a)(7) ...................................... 3797(a)(7). 7701(a)(8) ...................................... 3797(a)(8). 7701(a)(9) ...................................... 3797(a)(9). 7701(a)(10) .................................... 3797(a)(10). 7701(a)(11) .................................... 3797(a)(11). 7701(a)(12) .................................... 7701(a)(13) .................................... 3797(a)(12). 7701(a)(14) .................................... 3797(a)(14). 7701(a)(15) .................................... 3797(a)(15). 7701(a)(18) .................................... 3797(a)(18). 7701(a)(17) .................................... 3797(a)(17). 7701(a)(18) .................................... 3797(a)(18). 7701(a)(19) ................... 3797(a)(19). 7701(a)(20) .................................... 377(a)(20). 7701(a)(21) .................................... 7701(a)(22) .................................... 7701(a)(23) .................................... 48(a). 7701(a)(24) .................................... 48(b). 7701(a)(25) .................................... 48(c). 7701(a)(26) .................................... 48(d). 7701(a)(27) .................................... 7701(a)(28) .................................... 7701(b) ........................................... 3797(b). 7701(c)(1) ...................................... 3797(c). 7701(c)(2) ...................................... 7801(a) ........................................... Reorg. Plan No. 26 of 1950. 7801(b) ........................................... 3930(a), 3931. 7801(c) ........................................... 3932. 7802 ................................................ 3900. 7803(a) ........................................... 3920, 3921, 4000, 4041(a). 7803(b)(1) ...................................... 4040. 7803(b)(2) ...................................... 3901(b). 7803(c) ........................................... 3360(b)(2)(B), 3943, 3992, 4010. 7803(d) ........................................... 3975, 3978. 3977, 3978. 7804(a) ........................................... 818 R.A. 1951. 7804(b) ........................................... 3, P.L. 567 (82d Cong.). 7805(a) ........................................... 62, 3791(a). 7805(b) ........................................... 3791(b). 7805(c) ........................................... 3901(a)(2). 7806(a) ........................................ 2. 7806(b) ........................................... Ch. 1, Sec. 6, P.L. 1. 7807(a) ........................................... 7807(b) ........................................... 7808 ...................... 3970. 7809(a) .................... 2480, 3971(a). 7809(b) ........................................... 3971(b). 7809(b)(1) ...................................... 3971(b)(1). 7809(b)(2) ...................................... 3971(b)(2). 7809(b)(3) ...................................... 3971(b)(3). 7851(a) ........................................... See 28 U.S.C. 3, 4. 7851(b) ........................................... See 26 U.S.C. 4(b). 7851(c) ........................................... See 26 U.S.C. 4(c). 7851(d) ........................................... See 26 U.S.C. 4(d). 7852(a) ........................................... 3803. 7852(b) ........................................... See 28 U.S.C. 4(a), 5, 7. 7852(c) ........................................... 7852(d) ........................................... 108 R A. 1941: 109 R.A. 1942; 138 R.A. 1943; 214 R.A. 1950; 615 R.A. 1951; See 22(b)(7). 8001 ................................................ 5000. 8002 ................................................ 5001. 8003 ................................................ 5002. 8004 ................................................ 5003. 8005 ................................................ 5004. 8021 ................................................ 5010. 8022 ................................................ 5011. 8023 ................................................ 5012. An Act to revise the internal revenue laws of the United States. Be it enacted by the Senate and House of Representatives of the United States of Amer- ica in Congress assembled, That (a) Citation (1) The provisions of this Act set forth under the heading "Internal Revenue Title" may be cited as the "Internal Revenue Code of 1954". (2) The Internal Revenue Code enacted on February 10, 1939, as amended, may be cited as the "Internal Revenue Code of 1939". (b) Publication This Act shall be published as volume 68A of the United States Statutes at Large, with a comprehensive table of contents and an appen- dix; but without an index or marginal refer- ences. The date of enactment, bill number, public law number, and chapter number, shall be printed as a headnote. (c) Cross reference For saving provisions, effective date provi- sions, and other related provisions, see chapter 80 (sec. 7801 and following) of the Internal Rev- enue Code of 1954. (d) Enactment of Internal Revenue Title into law The Internal Revenue Title referred to in subsection (a)(1) is as follows: * * * (Aug. 16, 1954, ch. 736, 68A Stat. 3.) INTERNAL REVENUE TITLE Subtitle A. Income taxes §§ 1-1552.* B. Estate and gift taxes §§ 2001-2524. C. Employment taxes §§ 3101-3504. D. Miscellaneous excise taxes §§ 4001-4907. E. Alcohol, tobacco, and certain other excise taxes §§ 5001-5862. F. Procedure and administration §§ 6001-7852. G. The Joint Committee on Taxation §§ 8001-8023. H. Financing of Presidential election campaigns §§ 9001-9042. AMENDMENTS 1976-Pub. L. 94-455, title XIX, § 1907(b)(2), Oct. 4, 1976, 90 Stat. 1836, substituted in Subtitle G heading "The Joint Committee on Taxation" for "The Joint Committee on Internal Revenue Taxation". 1974-Pub. L. 93-443, title IV, § 408(a). Oct. 15, 1974, 88 Stat. 1297, added Subtitle H heading "Financing of Presidential election campaigns". TABLE OF CONTENTS This Table of Contents is inserted for con- venience of users and was not enacted as Part of the Internal Revenue Code of 1954. Subtitle A-Income Taxes Chapter Sec. 1. Normal taxes and surtaxes .................... 1 2. Tax on self-employment Income ........... 1401 3. Withholding of tax on nonresident aliens and foreign corporations and tax-free covenant bonds ...................... 1441 4. Rules applicable to recovery of exces- sive profits on government con- tracts ...................................................... 1471 5. Tax on transfers to avoid income tax.. 1491 6. Consolidated returns .............................. 1501 Subtitle B-Estate and Gift Taxes 11. Estate tax .................................................. .2001 12. G ift tax ..................................................... 2501 Subtitle C-Employment Taxes Federal insurance contributions act .... Railroad retirement tax act ................... Federal unemployment t;,x act ............. Collection of income tE' at source on w ages ....................................... General provisions relating to em- ploym ent taxes ..................................... Subtitle D-Miscellaneous Excise Taxes 31. Special fuels ............................................. 4001 32. Manufacturers excise taxes ................... 4061 *Section numbers editorially supplied for conve. olence of users. Page 26
TITLE 26-INTERNAL REVENUE CODE Chapter 33. Facilities and services ............................. 34. Policies issued by foreign insurers ....... 35. Taxes on wagering .................................. 36. Certain other excise taxes ..................... 37. S ugar ......................................................... [38. R epealed] .................................................. [39. R epealed] .................................................. 40. General provisions relating to occupa- tional taxes ............................................ 41. Public charities ........................................ 42. Private foundations ................................ 43. Qualified pension, etc., plans ................ 44. Real estate investment trusts ............... Sec. 4231 4301 4401 4451 4501 4521 4701 4901 4911 4940 4971 4981 Subtitle E-Alcohol, Tobacco, and Certain Other Excise Taxes Distilled spirits, wines, and beer ........... Tobacco, cigars, cigarettes, and ciga- rette papers and tubes ......................... Machine guns and certain other fire- arms.,.... ..... .... ..... .... ,I...o Subtitle F-Procedure and Administration Information and returns ........................ Time and place for paying tax .............. Assessm ent ............................................... C ollection .................................................. Abatements, credits, and refunds ......... Lim itations ............................................... Interest ...................................................... Additions to the tax, additional amounts, and assessable penalties.... General provisions relating to stamps. Jeopardy, bankruptcy and receiver- sh ips ....................................................... Transferees and fiduciaries ................... Licensing and registration ..................... B onds ......................................................... Closing agreements and compromises. Crimes, other offenses, and forfei- tures ....................................................... Judicial proceedings ................................ Miscellaneous provisions ........................ Discovery of liability and enforce- m ent of title .......................................... D efinitions ................................................ G eneral R ules .......................................... 60( 61f 62( 63( 64( 651 661 66 68 68 69' 70' 71 71 72 74 75 76 77 78 Subtitle G-The Joint Committee on Taxation 91. Organization and membership of the Joint Committee ................................. 80 92. Powers and duties of the Joint Com- m ittee ................................................... . 80 Subtitle H-Financing of Presidential Election Campaigns 95. Presidential election campaign fund ... 90 96. Presidential primary matching pay- ment account ....................................... 90 Subtitle A-Income Taxes Cliapter 1. Normal taxes and surtaxes. 2. Tax on self-employment income. 3. Withholding of tax on nonresident aliens and for- eign corporations and tax-free covenant bonds. 4. Rules applicable to recovery of excessive profits on government contracts. 5. Tax on transfers to avoid income tax. 6. Consolidated returns. 01 51 01 01 01 01 01 51 01 SUBTITLE REFERRED TO IN OTHER SECTIONS This subtitle is referred to in sections 2107, 3402, 3502, 4911, 6012, 6013, 6164, 6201, 6211, 6212, 6213, 6214, 6315, 6420, 6421, 6424, 6427, 6501, 6511, 6601, 6611, 6613, 6694, 6695, 6696, 6905, 7463, 7701 of this title; title 31 section 757c; title 45 section 231m; title 48 section 1421i; title 50 App. section 2017e. CHAPTER 1-NORMAL TAXES AND SURTAXES Subchapter A. Determination of tax liability ............. B. Computation of taxable income ........... C. Corporate distributions and adjust- m ents ...................................................... D. Deferred compensation, etc ................... E. Accounting periods and methods of accounting ............................................. F. Exempt organizations ............................. 0. Corporations used to avoid income tax on shareholders ............................. H. Banking institutions ............................... I. Natural resources ................................. J. Estates, trusts, beneficiaries, and de- ceden ts ....................................... K. Partners and partnerships ..................... L. Insurance companies .............................. M. Regulated investment companies and real estate investment trusts ............. N. Tax based on income from sources within or without the United States 0. Gain or loss on disposition of proper- ty ...................................... P. Capital gains and losses .......................... Q. Readjustment of tax between years and special limitations ........................ [R. Repealed.] S. Election of certain small business corporations as to taxable status ...... T. Cooperatives and their patrons ............ Sec.' 1 61 301 401 441 501 531 581 611 641 701 801 851 861 1001 1201 1301 1371 1381 1 AMENDMENTS 01 01 1966-Pub. L. 89-389, § 4(b)(2), Apr. 14, 1966, 80 Stat. 01 116, struck out Subchapter R effective January 1, 21 1969. 1962-Pub. L. 87-834, § 17(b)(4), Oct. 16, 1962, 76 01 Stat. 1051, added subchapter T. 01 1960-Pub. L. 86-779, § 10(c), Sept. 14, 1960, 74 Stat. 01 1009, added to Subchapter M the words "and u,' estate investment trusts". 01 1958-Pub. L. 85-866, title I § 64(d)(1), Sept. 2, 1958, 01 72 Stat. 1656, added subchapter S. 01 CHAPTER REFERRED TO IN OTHER SECTIONS This chapter is referred to in sections 1501, 3402, 6013, 6017A, 6038, 6096, 6103, 6161, 6166, 6166A, 6167, 6201, 6211, 6361, 6362, 6428, 6654, 6655, 6683, 7216, 7654, 7701 of this title; title 7 sections 1926, 1929a; title 22 section 277d-23; title 25 section 1486; title 42 sec- 01 tions 291j-7, 300e-7, 411, 1382, 1440, 5308; title 45 sec- tion 602; title 46 section 1177; title 48 section 1574b. 21 CHAPTER REFERRED TO IN D.C. CODE This chapter is referred to in sections 1-1182, 1-1446 of the District of Columbia Code. Subchapter A-Determination of Tax Liability Part I. Tax on in dividuals. II. Tax on corporations. III. Changes in rates during a taxable year. IV. Credits against tax. (V. Repealed.] VI. Minimum tax for tax preferences. AMENDMENTS 1976-Pub. L. 94-455, title XIX, § 1901(b)(2), Oct. 4, 1976, 90 Stat. 1792, struck out Part V "Tax surcharge" in the table of Parts of Subchapter A of Chapter 1. *Section number editorially supplied for convenience of users. Page 27
TITLE 26-INTERNAL REVENUE CODE 1969-Pub. L. 91-172, title III, §301(b)(1), Dec. 30, 1969, 83 Stat. 585, added Part VI. 1968-Pub. L. 90-364. title I. § 102(d), June 28, 1968, 82 Stat. 259, added Part V. PART I-TAX ON INDIVIDUALS Sec. 1. Tax imposed. 2. Definitions and special rules. 3. Tax tables for individuals having taxable income of less than $20,000. 4. Repealed.] 5. Cross references relating to tax on individuals. AMENDMENTS 1976-Pub. L. 94-455, title V, § 501(c)(1), Oct. 4, 1976, 90 Stat. 1559, substituted in item 3. "Tax tables for in- dividuals having taxable income of less than $20,000" for "Optional tax tables for individuals" and deleted item 4 relating to rules for optional tax. 1969-Pub. L. 91-172, title VIII, § 803(d)(9), Dec. 30, 1969, 83 Stat. 685, substituted "Definitions and special rules" and "Optional tax tables for individuals" for "Tax in case of Joint return or return of surviving spouse" and "Optional tax if adjusted gross income is less than $5,000" in items 2 and 3, respectively. PART REERRED TO IN OTHER SEC'rIONS This part is referred to in section 21 of this title. § I. Tax imposed (a) Married individuals filing joint returns and sur- viving spouses There is hereby imposed on the taxable income of- (1) every married individual (as defined in section 143) who makes a singl return jointly with his spouse under section 6013, and (2) every surviving spouse (as defined in sec- tion 2(a)), A tax determined lowing table: If the taxable income is: Not over $1,000 ...... Over $1,000 but not over $2,000. Over $2,000 but not over $3,000. Over $3,000 but not over $4,000. Over $4,000 but not over $8,000. Over $8,000 but not over $12,000. Over $12,000 but not over $16,000. Over $16,000 but not over $20,000. Over $20,000 but not over $24,000. Over $24,000 but not over $28,000. Over $28,000 but not over $32,000. Over $32,000 but not over $36,000. Over $36,000 but not over $40,000. Over $40,000 but not over $44,000. Over $44,000 but not over $52,000.. in accordance with the fol- The tax is: 14% of the taxable income. $140, plus 15% of excess over $1,000. $290, plus 16% of excess over $2,000. $450, plus 17% of excess over $3,000. $620, plus 19% of excess over $4,000. $1,380, plus 22% of excess over $8,000. $2,260, plus 25% of excess over $12,000. $3,260, plus 28% of excess over $16,000. $4,380, plus 32% of excess over $20,000. $5,660, plus 36% of excess over $24,000. $7,100, plus 39% of excess over $28,000. $8,660, plus 42% of excess over $32,000. $10,340, plus 45% of excess over $36,000. $12,140, plus 48% of excess over $40,000. $14,060, plus 50% of excess over $44,000. U the taxable income is: The tax Is: Over $52,000 but $18,060, plus 53% of excess not over $64,000. over $52,000. Over $64,000 but $24,420, plus 55% of excess not over $76,000. over $64,000. Over $76,000 but $31,020, plus 58% of excess not over $88,000. over $76,000. Over $88,000 but $37,980, plus 60% of excess not over over $88,000. $100,000. Over $100,000 but $45,180, plus 62% of excess not over over $100,000. $120,000. Over $120,000 but $57,580, plus 64% of excess not over over $120,000. $140,000. Over $140,000 but $70,380, plus 66% of excess not over over $140,000. $160,000. Over $160,000 but $83,580, plus 68% of excess not over over $160,000. $180,000. Over $180,000 but $97,180, plus 69% of excess not over over $180,000. $200,000. Over $200,000 ........ $110,980, plus 70% of excess over $200,000. (b) Heads of households There is hereby imposed on the taxable income of every individual who is the head of a household (as defined in section 2(b)) a tax de- termined in accordance with the following table: If 1te taxable income is: Not over $1,000 ...... Over $1,000 but not over $2,000. Over $2,000 but not over $4,000. Over $4,000 but not over $6,000. Over $6,000 but not over $8,000. Over $8,000 but not over $10,000. Over $10,000 but not over $12,000. Over $12,000 but not over $14,000.. Over $14,000 but not over $16,000. Over $16,000 but not over $18,000. Over $18,000 but not over $20,000. Over $20,000 but not over $22,000.. Over $22,000 but not over $24,000.. Over $24,000 but not over $26,000. Over $26,000 but not over $28,000. Over $28,000 but not over $32,000. Over $32,000 but not over $36,000. Over $36,000 but not over $38,000. Over $38,000 but not over $40,000. The tax is: 14% of the taxable income. $140, plus 16% of excess over $1,000. $300, plus 18% of excess over $2,000. $660, plus 19% of excess over $4,000. $1,040, plus 22% of excess over $6,000. $1,480, plus 23% of excess over $8,000, $1,940, plus 25% of excess over $10,000. $2,440 plus 27% of excess over $12,000. $2,980, plus 28% of excess over $14,000. $3,540, plus 31% of excess over $16,000. $4,160, plus 32% of excess over $18,000. $4,800, plus 35% of excess over $20,000. $5,500, plus 36% of excess over $22,000. $6,220, plus 38% of excess over $24,000. $6,980, plus 41% of excess over $26,000. $7,800, plus 42% of excess over $28,000. $9,480, plus 45% of excess over $32,000. $11,280, plus 48% of excess over $36,000. $12,240, plus 51% of excess over $38.000. Page 28
TITLE 26-INTERNAL REVENUE CODE If the taxable income is: Over $40,000 but not over $44,000. Over $44,000 but not over $50,000. Over $50,000 but not over $52,000. Over $52,000 but not over $64,000. Over $64,000 but not over $70,000. Over $70,000 but not over $76,000. Over $76,000 but not over $80,000. Over $80,000 but not over $88,000. Over $88,000 but not over $100,000. Over $100,000 but not over $120,000. Over $120,000 but not over $140,000. Over $140,000 but not over $160,000. Over $160,000 but not over $180,000. Over $180,000 ........ The tax is: $13,260, plus 52% of excess over $40,000. $15,340, plus 55% of excess over $44,000. $18,640, plus 56% of excess over $50,000. $19,760, plus 58% of excess over $52,000. $26,720, plus 59% of excess over $64,000 $30,260, plus 61% of excess over $70,000. $33,920, plus 62% of excess over $76,000. $36,400, plus 63% of excess over $80,000. $41,440, plus 64% of excess over $88,000. $49,120, plus 66% of excess over $100,000. $62,320, plus 67% of excess over $120,000. $75,720, plus 68% of excess over $140,000. $89,320, plus 69% of excess over $160,000. $103,120, plus 70% of excess over $180,000. (c) Unmarried individuals (other than surviving spouses and heads of households) There is hereby imposed on the taxable income of every individual (other than a surviv- ing spouse as defined in section 2(a) or the head of a household as dfined in section 2(b) who is not a married individual (as defined in section 143) a tax determined in accordance with the following table: If the taxable income is: Te tax is: Not over $500 ......... 14% of the taxable income. Over $500 but not $70, plus 15% of excess over over $1,000.. $,00. Over $1,000 but $14E, plus 16% of excess over not over $1,500. $1,000. Over $1,500 but $225, plus 17% of excess over not over $2,000. $1,500. Over $2,000 but $310, plus 19% of excess over not over $4,000. $2,000. Over $4,000 but $690, plus 21% of excess over not over $6,000. $4,000. Over $6,000 but $1,110 plus 24% of excess not over $8,000. over $6,000. Over $8,000 but $1,590, plus 25% of excess not over $10,000. over $8,000. Over $10,000 but $2,090, plus 27% of excess not over $12,000. over $10,000. Over $12,000 but $2,630, plus 29% of excess not over $14,000. over $12,000. Over $14,000 but $3,210, plus 31% of excess not over $16,000.. over $14,000. Over $16,000 but $3,830, plus 34% of excess not over $18,000. over $16,000. Over $18,000 but $4,510, plus 36% of excess not over $20,000. over $18,000. Over $20,000 but $5,230, plus 38% of excess not over $22,000. over $20,000. If the taxable income it: Over $22,000 but not over $26,000. Over $26,000 but not over $32,000. Over $32,000 but not over $38,000. Over $38,000 but not over $44,000. Over $44,000 but not over $50,000. Over $50,000 but not over $60,000. Over $60,000 but not over $70,000. Over $70,000 but not over $80,000. Over $80,000 but not over $90,000. Over $90,000 but not over $100,000. Over $100,000 ........ The tax is: $5,990, plus 40% of excess over $22,000. $7,5 0, plus 45% of excess over $26,000. $10,290, plus 50% of excess over $32,000. $13,290, plus 55% of excess over $38,000. $16,590, plus 60% of excess over $44,000. $20,190, plus 62% of excess over $50,000. $26,390, plus 64% of excess over $60,000. $32,790, plus 66% of excess over $70,000. $39,390, plus 68% of excess over $80,000. $46,190, plus 69% of excess over $90,000. $53,090, plus 70% of excess over $100,000. (d) Married individuals filing separate returns; es- tates and trusts There is hereby imposed on the taxable income of every married individual (as defined in section 143) who does not make a single return jointly with his spouse under section 6013, and of every estate and trust taxable under this subsection, a tax determined in ac- cordance with the following table: If the taxable income is: The tax is: Not over $500 ......... 14% of the taxable income. Over $500 but not $70, plus 15% of excess of over $1,000.. $500. Over $1,000 but $145, plus 16% of excess over not over $1,500.. $1,000. Over $1,500 but $225, plus 17% of excess over not over $2,000. $1,500. Over $2,000 but $310, plus 19% of excess over not over $4,000. $2,000. Over $4,000 but $690, plus 22% of excess over not over $6,000. $4,000. Over $6,000 but $1,130, plus 25% of excess not over $8,000. over $6,000. Over $8,000 but $1,630, plus 28% of excess not over $10,000. over $8,000. Over $10,000 but $2,190, plus 32% of excess not over $12,000. over $10,000. Over $12,000 but $2,830, plus 36% of excess not over $14,000. over $12,000. Over $14,000 but $3,550, plus 39% of excess not over $16,000. over $14,000. Over $16,000 but $4,330, plus 42% of excess not over $18,000. over $16,000. Over $18,000 but $5,170, plus 45% of excess not over $20,000. over $18,000. Over $20,000 but $6,070, plus 48% of excess not over $22,000. over $20,000. Over $22,000 but $7,030, plus 50% of excess not over $26,000. over $22,000. Over $26,000 but $9,030, plus 53% of excess not over $32,000. over $26,000. Over $32,000 but $12,210, plus 55% of excess not over $38,000. over $32,000. Over $38,000 but $15,510, plus 58% of excess not over $44,000. over $38,000. Over $44,000 but $18,990, plus 60% of excess not over $50,000. over $44,000. Page 29
TITLE 26-INTERNAL REVENUE CODE I the taxable Income is: The tax Is: Over $50,000 but $22,590, plus 62% of excess not over $60,000. over $50,000. Over $60,000 but $28,790. plus 64% of excess not over $70,000. over $60,000. Over $70,000 but $35,190, plus 66% of excess not over $80,000. over $70,000. Over $80,000 but $41,790, plus 68% of excess not over $90,000. over $80,000. Over $90,000 but $48,590, plus 69% of excess not over over $90,000. $100,000. Over $100,000 ........ $55,490, plus 70% of excess over $100,000. (Aug. 16, 1954, ch. 736, 68A Stat. 5; Feb. 26, 1964, Pub. L. 88-272, title I, § 111, 78 Stat. 19; Nov. 13, 1966, Pub. L. 89-809, title I, § 103(a)(2), 80 Stat. 1550; Dec. 30, 1969, Pub. L. 91-172, title VIII, § 803(a), 83 Stat. 678.) AMENDMENTS 1969-Subsec. (a). Pub. L. 91-172 substituted a table of rates of tax for married individuals filing joint re- turns and surviving spouses for the tables of rates of tax on individuals, For rates of taxes on unmarried in- dividuals and married persons filing separate returns, see subsecs. (c) and (d) of this section. Subsec. (b). Pub. L. 91-172 generally revised the rates of tax of heads of household downwards and struck out provisions defining head of household, de- termination of status, and limitations. For definition of head of household, determination of status, and limitations, see section 2(b) of this title. Subsec. (c). Pub. L. 91-172 substituted rates of tax on unmarried individuals (other than surviving spouses and heads of household) for special rules ex- plaining the rates of tax imposed under former sub- secs. (a) and (b)(1) and prescribing a maximum limit of 87 percent of the taxable year. Subsec. (d). Pub. L. 91-172 substituted a table of rates of tax lor married individuals filing separate re- turns for provision prescribing the applicability of the rates to non-resident aliens. For applicability of rates of tax to non-resident aliens, see section 2(d) of this title. Subsec. (e). Pub. L. 91-172 struck out cross reference to section 63. Such crobs reference is now set out as section 2(e) of this title. 1966-Subsec. (d). Pub. L. 89-809 added subsec. (d) and redesignated former subsec. (d) as (e). Subsec. (e). Pub. L. 89-809 redesignated former subsec. (d) as (e). 1964-Pub. L. 88-272 amended section generally by splitting the former first bracket which started at $2,000 into four new brackets, the 14 percent bracket representing a 30 percent reduction, the 15 percent bracket a 25 percent cut, and the 16 percent bracket a 20 percent cut, and reducing all other brackets by cuts averaging about 20 percent and effectuated these cuts in two steps, one in 1964, and one in 1965. EFECTIVE DATE OF 1969 AMENDMENT Section 803(f) of Pub. L. 91-172 provided that: "The amendments made by subsections (a) [amending sec- tion 1 of this title], (b) [amending section 2 of this title], and (d) (other than paragraphs (1) and (8)) [amending sections 5(b)(1), (5), 511(b)(1), 632, 641(a), 1347, and 6015(a)(1) of this title] shall apply to tax- able years beginning after December 31, 1970, except that section 2(c) of the Internal Revenue Code of 1954 [section 2(c) of this title], as amended by subsection (b), shall also apply to taxable years beginning after December 31, 1969. The amendments made by subsec- tions (c) [amending section 3 of this title], (d)(1) [amending section 6014(a) of this title], and (d)(8) [amending section 1304(b)(1) of this title] shall apply to taxable years beginning after December 31, 1969". En'EcTIvE DATE OF 1966 AMENDMENT Section 103(n) of Pub. L. 89-809 provided that: "(1) The amendments made by this section (other than the amendments made by subsections (h), (i), and (k)) [enacting section 877 of this title, amending sections 1, 116, 154, 871, 872, 873, 874, 875, 932, 6015, and 7701 of this title, renumbering section 877 as 878, and repealing section 1493 of this title] shall apply with respect to taxable years beginning after December 31, 1966. "(2) The amendments made by subsection (h) [amending section 1441 of this title] shall apply with respect to payments made in taxable years of recipi- ents beginning after December 31, 1966. "(3) The amendments made by subsection (i) [amending section 1461 of this title] shall apply with respect to payments occurring after December 31, 1966. "(4) The amendments made by subsection (k) [amending section 3401 of this title] shall apply with respect to remuneration paid after December 31, 1966." EFFEcTIVE DATE OF 1964 AMENDMENT Section 131 of Pub. L. 88-272 provided that: "Except for purposes of section 21 of the Internal Revenue Code of 1954 [section 21 of this title] (relating to effect of changes in rates during a taxable year), the amendments made by parts I and II of this title [to sections 1, 2. 11, 37, 141, 144, 242, 821, 871, 963, 6016, 6074, 6154, 6212, 6504 and 6655 of this title] shall apply with respect to taxable years beginning after December 31, 1963." SHORT TITLE OF 1976 AMENDMENT Pub. L. 94-455, title I, § 101, Oct. 4, 1976, 90 Stat. 1525, provided that: "This Act (which amended this title generally] may be cited as the 'Tax Reform Act of 1976'." For complete classification of this Act to the Code, see Tables volume. SHORT TITLE OF 1975 AMENDMENT Pub. L. 94-164, § 1, Dec. 23, 1975, 89 Stat. 970, pro- vided that: "This Act [amending sections 11. 21, 42, 43, 103, 141, 883, 962, 1561, 3402, 6012, 6153, and 6154 of this title and provisions set out as notes under sections 42, 43, and 3402 of this title, and enacting provisions set out as notes under sections 1, 11, 42, 43, 103, and 883 of this title] may be cited as the 'Revenue Adjust- ment Act of 1975'." Pub. L. 94-12, § 1(a), Mar. 29, 1975, 89 Stat. 26, pro- vided that: "This Act [enacting sections, 42, 43, 44, 613A, 907, 955, and 6428 of th~s title, amending sec- tions 3, 11, 12, 21, 46, 47, 48, 50A, 50B. 56, 141, 214, 535, 613, 703, 851, 901, 902. 951, 954, 962, 993, 1034, 1561, 3304 note, 3402, 6012, 6096, 6201, and 6401 of this title, repealing sections 955 and 963 of this title, and enact- ing provisions set out as notes under sections 11, 42, 43, 44, 46, 48, 50A, 214, 410, 535, 613A, 907, 955, 993, 3304, 3402, 6428, and 6611 of this title and section 402 of Title 42, The Public Health and Welfare] may be cited as the 'Tax Reduction Act of 1975'." SHORT TITLE OF 1973 AMENDMENT Pub. L. 93-69, title I, § 110, July 10, 1973, 87 Stat. 166, provided that: "This title [amending sections 3201, 3202, 3211 and 3221 of this title and sections 228b, 228c and 2284 of Title 45, Railroads, enacting provisions set out as notes under section 3201 of this title and sections 228b, 228c, 228f and 2280 of Title 45, and amending provisions set out as notes under sec- tion 228c of Title 45] may be cited as the 'Railroad re- tirement Amendments of 1973'." SHORT TITLE OF 1971 AMENDMENT Pub. L. 92-178. § 1(a), Dec. 10, 1971, 85 Stat. 497, pro- vided that: "This Act [enacting sections 4(d)(5), 21(e), 40, 41, 46(b)(3), (c)(3)(C), (d)(3), (e), 48(a)(2)(B)(viii) to (x), (3)(C), (7) to (9), 50, 50A, 50B, 56(a)(2)(iv), (v), 57(a)(10), 103(c)(4)(G), 141(e), 144(a)(4), 163(d)(7), (m), Page 30
TITLE 26-INTERNAL REVENUE CODE 183(e), 188. 218, 246(d). 263(f), 301(b)(1)(D), (d)(3), 381(c)(24), 383, 642(a)(3), (I), 861(a)(2)(D), (e), 862(c), 904(f)(5), 971(a)(3), 991 to 997, 1014(d), 1441(c)(8), 1504(b)(7), 3402(f)(1)(0), (7), 4063(a)(6), (7), 4071(e), 4464, 6011(e), 6331(d), 6416(b)(2)(S), 6501(g)(3), (o), 6511(d)(7), 6601(e)(4), 0611(f)(4), 6686, 7216, 9001 to 9013, and 9021 of this title, amending sections 46(b)(1), (5), (6), (c)(2), (3)(A), (B), 47(a)(6)(A), 48(a)(1), (a)(1)(B)(1i), (Ili), (5), (6), (d), 49(a), (b), (d), 56(c)(1), 57(b)(1), (2)(C), (c), 58(g)(2), 103(c)(4), (E), (F), (c)(6)(F)(iii), 141(b), (c), 144(a)(1), (2). 151, 162(c), (c)(2), (3), 163(d)(1)(B), (3)(C), (4)(A)(i), 214, 263(e), 301(b)(1)(B), (d)(2), 642(f). 665(g), 703(b), 871(a)(1) (A), (C), 881(a)(1), (3), 901(d), 904(f), (f)(1), (3), 922, 931(a), 1082(a)(2)(B), 1245(a)(2), (3)(B)(ii), (ii), (D), 1250(b)(3), 1251(b)(2)(B). 1441(b), 1442, 3402(a), (b)(1), (c)(6), (m)(1)(B), (2)(A), (D), (3). 4061(a), (b)(2), 4221(c). 4222(d), 6012(a)(1), 6013(b)(3)(A), (c)(6), 6015(a), 6072(b), 6096(a), 6411, 6416(b)(2)(R), (g), 6501(n) and 7422(f)(1) of this title, renumbering sec- tions 42 and 219 of this title, repealing sections 46(c)(4), 47(a)(4), (5), 169(h), 6412(a)(1) of this title, section 1232a of Title 15, Commerce and Trade, and section 971 to 973 of Title 31, Money and Finance, en- acting provisions set out as notes under sections 4, 38, 41, 46 to 48, BOA, 57, 58, 103, 141, 144, 151, 162, 167, 183, 188, 214, 263, 301, 383, 665, 861, 871, 921, 970. 991, 1251, 3402, 4061, 4464, 6012, 6013, 6015, 6096, 6331, 6654, 7216, 7422, and 9001 of this title and section 1232a of Title 15, and repealing provisions set out as notes under sections 141, 151, 3402, 6012, and 6013 of this title] may be cited as the 'Revenue Act of 1971'." SHORT TITLE OF 1969 AMENDMENT Pub. L. 91-172, § l(a), Dec. 30, 1969, 83 Stat. 487, pro- vided that: "This Act [enacting sections 49, 56 to 58, 82, 83, 123, 169, 183, 184 to 187, 249, 278, 279, 385, 585, 586, 596, 636, 638, 664, 844, 1039, 1251 to 1253. 1348, 1379, 1564 and 7463 of this title, amending sections 1 2 to 5, 11, 12, 21, 46 to 48, 51, 62, 72, 103, 124, 141 to 143, 151, 152, 162, 163, 166, 167, 170, 172, 179, 216, 217, 243, 246, 263, 301, 305, 311, 312, 341, 381, 402 to 407, 443, 451, 453, 481, 501, 511, 535, 537, 545, 563, 582, 593, 613 to 617, 632, 641, 642, 663, 665 to 669, 673, 677, 703, 751, 802, 804, 805, 809, 810, 815, 823, 825, 851, 852, 857, 861, 901, 904, 954, 963, 964, 1001, 1011, 1016, 1031, 1033, 1082, 1201, 1211, 1212, 1221, 1222, 1231, 1232, 1243, 1245, 1248, 1250, 1301 to 1304, 1314, 1347, 1373, 1375, 1378, 1382, 1388, 1441, 1561 to 1563, 2055, 2104, 2106, 2522, 3102, 3121, 3402, 4061, 4065, 4216, 4251, 5684, 6013 to 6015, 6049, 6051, 6212, 6214, 6334, 6401, 6411, 6412, 6501, 6511, 6601, 6611, 6653, 6654, 6656, 7441, 7447, 7448, 7453, 7456, 7471, 7481, 7485, 7487 and 7701 of this title, and sections 401 to 403, 415, 427 and 428 of Title 42, The Public Health and Welfare, repealing sections 270, 1562, and 4251 to 4254 of this title, and enacting provisions set out as notes under sections 1, 4, 51, 56, 83, 103, 123, 141, 151, 152, 162, 163, 167, 169, 170, 183, 184, 186, 187, 216, 217, 249, 252, 263, 278, 279, 305, 311, 333, 402, 451, 453, 537, 563, 582, 585, 593, 596, 613, 615, 636. 665, 677, 805, 851. 861, 901, 954, 101, 1031, 1033, 1039, 1201, 1211, 1212, 1221, 1231, 1232, 1245, 1251, 1301, 1348, 1379, 1382, 1561, 1562, 3402, 4063, 4216, 6012 to 6015, 6153, 6334, 6601, 6651, 7441, 7443, 7447, 7463, and 7483 of this title and sections 401 to 403, 415 and 427 of Title 42] may be cited as the 'Tax Reform Act of 1969'." SHORT TITLE OF 1968 AMENDMENT Pub. L. 90-364, § l(a), June 28, 1968, 82 Stat. 251, provided that: "This Act [enacting sections 51 and 6425 of this title, amending sections 103, 243, 276, 501, 963, 3402, 4061, 4251, 6020, 6154, 6412, 6651, 6655, 7203, 7502, and 7701 of this title and sections 603, 607, and 1396b of Title 42, The Public Health and Welfare, re- pealing sections 6016, 6074, and 4251 to 4254 of this title, enacting provisions set out as notes under sec- tions 51, 103, 276, 501, 4061, 6154, and 7502 of this title, section 3101 of Title 5, Government Organization and Employees, sections 11 and 757b of Title 31, Money and Finance, and section 1396b of Title 42, and amend- ing notes under section 1396b of Title 42,] may be cited as the 'Revenue and Expenditure Control Act of 19681." SHORT TITLE OF 1965 AMENDMENT Pub. L. 89-44, § l(a), June 21, 1965, 7V Stat. 167, pro- vided that: "This Act (adding sections 39, 4094 and 6424 of this title, amending sections 72, 874, 1314, 1481, 4041, 4055, 4057, 4061, 4063. 4082, 4091, 4101, 4161, 4216, 4218, 4221, 4222, 4227, 4251, 4252, 4253, 4254, 4261 note, 4262, 4291, 4361, 4371, 4374, 4402, 4461, 4462, 4901, 4905, 4914, 5001, 5002, 5004, 5008, 5022, 5025, 5041, 5051, 5053, 5062, 5083, 5215, 5223, 5234, 5382, 5383, 5384, 5385, 5392, 5608, 5701, 6701 note, 5702, 5704, 5705, 5711, 5741, 5753, 5762, 5763, 6011, 6040, 6103, 6201, 6206, 6211, 6213, 6334, 6401, 6412, 6415, 6416, 6420, 6421, 6501, 6675, 6802, 6806, 6808, 7012, 7103. 7210, 7232, 7272, 7326, 7603, 7604, 7605, and 7652 of this title and adding a provision set out as a note under section 120 of Title 23, Highways, redesignating section 39 of this title as section 40 and subchapters E, F, and Q of chapter 52 of this title as suhchapters D, E, and F respectively, repealing sec- tions 4001 to 4003, 4011 to 4013, 4021, 4022, 4031, 4051 to 4053, 4111, 4121, 4131, 4141 to 4143, 4151, 4171 to 4173, 4191, 4192, 4201, 4211, 4224, 4231 to 4234, 4241 to 4243, 4286, 4287, 4301 to 4305, 4311 to 4315, 4321 to 4324, 4331 to 4333, 4341 to 4346, 4351 to 4354, 4381, 4451 to 4457, 4712 to 4474, 5063, 5707, 5731, 5732, and 7275 of this title, and enacting provisions set out as notes under sections 501, 4041, 4061, 4063, 4082, 4251, 4261, 4262, 4287, 4291, 4361, 4374, 4402, 4461, 4905, 5002, 5008, 5025, 5041, 5383, 5701. 5702, 5705, 6103, 6334, 6412, 6420, and 6501 of this title] may be cited as the 'Excise Tax Reduction Act of 1965'." SHORT TITLE OF 1964 AMENDMENT Pub. L. 88-272, § 2(a), Feb. 26, 1964, 78 Stat 19, pro- vided that: "This Act [enacting sections 79, 121, 217, 275, 406, 407, 422 to 425, 483, 1022, 1250, 1301 to 1305, 1561 to 1563, 6039, and 6052 of this title, amending sec- tions 1 to 5, 11, 12, 21, 34, 35, 37, 46, 48, 62, 72, 105, 116, 141, 144, 163 to 165, 170, 172, 213, 214, 242 to 244, 246, 264, 265, 269, 272, 274, 301, 312, 316, 331, 333, 341, 368, 381, 401 to 403, 421, 441, 453, 461, 535, 541 to 545, 551, 553, 554, 556, 562, 584, 614, 631, 642, 691, 702, 751, 802, 804, 809, 818, 821, 822, 832, 852 to 857, 871, 901, 903, 904, 911, 963, 1016, 1033, 1034, 1212, 1222, 1231, 1245, 1341, 1361, 1371, 1375, 1402, 1441, 1503, 1551, 1552, 3121, 3401, 3402, 6012, 6014, 6016, 6074, 6154, 6163, 6212. 6323, 6324, 6501, 6504, 6511, 6652, 6655, 6678, and 7701 of this title, and sections 409 and 411 of Title 42, The Public Health and Welfare, repealing section 181 of this title, and enacting provisions set out as notes under sections 1, 3, 21, 34, 35, 37, 38, 48, 62, 79, 105, 121, 163 to 165, 170, 172, 213, 214. 243, 264, 265, 272, 274, 316, 333, 368, 401, 406, 421, 453, 461, 614, 809, 852, 911, 1212, 1250, 1301, 1371, 1503, 1551, 3402, 6163, and 6323 of this title] may be cited as the 'Revenue Act of 1964'." SHORT TITLE OF 1963 AMENDMENT Pub. L. 88-52, § 1, June 29, 1963, 77 Stat. 72, pro- vided: "That this Act [amending sections 11, 821, 4061, 4251, 4261, 5001, 5022. 5041, 5051, 5063, 5701, 5707, 6412 of this title, and provisions set out as notes under sections 4261 and 5701 of this title] may be cited as the 'Tax Rate Extension Act of 1963'." SHORT TITLE OF 1962 AMENDMENT Pub. L. 87-834, § l(a), Oct. 16, 1962, 76 Stat. 962, pro- vided that: "This Act [adding sections 38, 46 to 48, 78, 181, 182, 274, 595, 669, 823 to 826, 951 to 964, 970 to 972, 1245 to 1249, 1381 to 1383, 1385, 1388, 6048, 6049 and 6677 to 6679 of this title, amending sections 72, 162, 167, 170, 179, 216, 245, 263, 301, 312, 318, 341, 381, 453, 501, 521, 535, 545, 591, 593, 613, 642, 643, 665, 666, 668, 751, 821, 822, 831, 832, 841, 861, 901, 902, 904, 911, 1016, 1201, 1223, 1307, 2031, 2033 to 2038, 2040, 2041, 4382, 6038, 6041, 6042, 6044, 6046, 6072, 6501, 6511, Page 31
TITLE 26-INTERNAL REVENUE CODE 6601, 6611, 6652 and 7701 of this title, and section 1464 of Title 12, Banks and Banking, renumbering section 38 as section 39 of this title and section 823 as section 822(f) of this title, repealing section 522 of this title, enacting provisions set out as notes under sections 38, 72, 162, 170, 216, 301, 593, 595, 643, 821, 902, 904, 911, 951, 1245, 1246, 1248, 1249, 1307, 1371, 1374, 1381, 2031, 4382, 6038, 6042, 6046, 7701 and 7852 of this title and under section 1984 of Title 50, Appendix, War and Na- tional Defense, and amending section 188 of the Inter- nal Revenue Code of 1939] may be cited as the 'Rev- enue Act of 1962'." Pub. L. 87-508, § 1, June 28, 1962, 76 Stat. 114 pro- vided: "That this Act [amending sections 11, 821, 4061, 4251 to 4253, 4261 to 4264, 5001, 5002, 5041, 5051, 5063, 5701, 6707, 6412, 6416, and 6421 of this title, enacting provisions set out as notes under section 4261, 6416, and 6421 of this title, and amending provisions set out as a note under section 5701 of this title] may be cited as the 'Tax Rate Extension Act of 1962'." SHORT TITLE OF 1961 AMENDMENT Pub. L, 87-72, § 1, June 30, 1961, 75 Stat. 193, pro- vided: "That this Act [amending sections 11, 821, 4061, 4251, 4261, 5001, 5022, 5041, 5051, 5063, 5701, 5707 and 6412 of this title, and a provision set out as a note under section 5701 of this title] may be cited as the 'Tax Rate Extension Act of 1961'." SHORT TITLE OF 1959 AMENDMENT Pub. L. 86-75, § 1, June 30, 1959, 73 Stat. 157, pro- vided: "That this Act [amending sections 11, 821, 4061, 4251, 4261, 5001, 5022, 5041, 5051, 5063, 5701, 5707 and 6412 of this title, and provisions set out as a note under section 5701 of this title] may be cited as the 'Tax Rate Extension Act of 1959'." SHORT TITLE OF 1958 AMENDMENT Pub. L. 85-866, § 1(a), Sept. 2, 1958, 72 Stat. 1606, provided that: "This title [enacting sections 178, 455, 558, 1242, 1243, 1306, 1371 to 1377, 1482, 2208, 2517, 6037, 7513, and 7514 of this title, amending sections 35, 75, 101, 152, 162, 164 to 168, 170 to 172, 213, 243, 246, 337, 341, 358, 372, 381, 391, 403, 404, 421, 453, 481, 503, 534, 535, 545, 556, 582, 611, 613, 614, 851, 852, 871, 904, 905, 911, 1015, 1016, 1031, 1033, 1034, 1053, 1071, 1231 to 1235, 1237, 1239, 1312, 1314, 1341, 1347, 1441, 1504, 2011, 2014, 2015, 2039, 2055, 2106, 2501, 2517, 2522, 3121, 3122, 3504, 6012, 6013, 6015, 6033, 6104, 6163, 6164, 6212, 6325. 6333, 6339, 6501, 6504, 6532, 6601, 6611, 6652, 6653, 6851, 6871, 7213, 7324, 7325, 7422, 7455, and 7502 of this title, and sections 22, 131, 812, 813, 925 to 927, 3771 and 3794 of Internal Revenue Code of 1939, repealing section 120 of this title, and enacting notes set out under sections 75, 120, 152, 162, 164, 168, 170 to 172, 178, 213, 243, 246, 341, 372, 391, 403, 421, 453, 455, 481, 545, 556, 613, 614, 852, 871, 904, 905, 1016, 1071, 1231, 1233, 1235, 1306, 1312, 1341, 1347, 1361, 1482, 2011, 2015, 2039, 2517, 3504, 6012, 6104, 6163, 6511, 6601, and 7502 of this title, and under sec- tions 22, 42, 106, 812 and 3772 of Internal Revenue Code of 1939] may be cited as the 'Technical Amend- ments Act of 1958'." Pub. L. 85-866, § 201, Sept. 2, 1958, 72 Stat. 1676, pro- vided that: "This title [amending sections 165, 172, 179, 535, 1244, 1551, 6161, 6166, 6503, and 6601 of this title, and enacting provisions set out as notes under sections 172, 179, 535, 6161 of this title] may be cited as the 'Small Business Tax Revision Act of 1958'." Pub. L. 85-475, § 1, June 30, 1958, 72 Stat. 259 pro- vided: "That this Act [amending sections 11, 821, 4061, 4292, 5001, 5022, 5041, 5051, 5063, 5134, 5701, 5707, 6412, 6415, 6416, 7012 and 7272 of this title, and re- pealing sections 4271 to 4273 and 4281 to 4283 of this title] may be cited as the 'Tax Rate Extension Act of 1958'."1 EFFECTIVE DATE OF CERTAIN DEFINITIONS AND DESIGNATIONS Pub. L. 94-455, title XIX, § 1908, Oct. 4, 1976, 90 Stat. 1836, provided that: "For purposes of any amend- ment made by any provision of this Act [see Tables volume for distribution of Pub. L. 94-455] (other than this title)- "(1) which contains a term the meaning of which is defined in or modified by any provision of this title, and "(2) which has an effective date earlier than the effective date of the provision of this title defining or modifying such term, that definition or modification shall be considered to take effect as of such earlier effective date." CONGRESSIONAL DECLARATION RELATING TO 1975 AMENDMENT Pub. L. 94-164, § IA, Dec. 23, 1975, 89 Stat. 970, pro- vided that: "(a) Congress is determined to continue the tax re- duction for the first 6 months of 1976 in order to assure continued economic recovery. "(b) Congress is also determined to continue to con- trol spending levels in order to reduce the national deficit. "(c) Congress reaffirms its commitments to the pro. cedures established by the Congressional Budget and Impoundment Control Act of 1974 [See Tables volume for distribution of Pub. L. 93-344, July 12, 1974, 88 Stat. 297] under which it has already established a binding spending ceiling for the fiscal year 1976. "(d) If the Congress adopts a continuation of the tax reduction provided by this Act [see Short Title of 1975 Amendment note above] beyond June 30, 1976, and if economic conditions warrant doing so, Congress shall provide, through the procedures in the Budget Act [Pub. L. 93-344], for reductions in the level of spend. ing in the fiscal year 1977 below what would otherwise occur, equal to any additional reduction in taxes (from the 1974 tax rate levels) provided for the fiscal year 1977: Provided, however, That nothing shall preclude the right of the Congrebs to pass a budget resolution containing a higher or lower expenditure figure if the Congress concludes that this is warranted by economic conditions or unforeseen circumstances." CONGRESSIONAL DECLARATION RELATING TO THE 1964 AMENDMENTS Pub. L. 88-272, § 1, Feb. 26, 1964, 78 Stat. 19, pro. vided that: "It is the sense of Congress that the tax re- duction provided by this Act [see Short Title of 1964 Amendment note under this section] through stimula- tion of the economy, will, after a brief transitional period, raise (rather than lower) revenues and that such revenue increases should first be used to elimi- nate the deficits in the administrative budgets and then to reduce the public debt. To further the objec- tive of obtaining balanced budgets in the near future, Congress by this action, recognizes the importance of taking all reasonable means to restrain Government spending and urges the President to declare his accord with this objective." CROSS REFERENCES Deductions for individuals, Additional itemized allowable, see section 211 et seq. of this title. Individuals not eligible for standard deduction, see section 142 of this title. Itemized deductions, see section 161 et seq. of this title. Personal exemptions, see section 151 et seq. of this title. Standard, see section 141 et seq. of this title. Dependent defined, see section 152 of this title. Effect of change of rate of tax, see section 21 of this title. Page 32
TITLE 26-INTERNAL REVENUE CODE Head of household, Declaration of estimated tax, see section 6015 of this title. Medical expenses, etc., deduction, see section 213 of this title. Imposition of net income taxes by State on income derived from interstate commerce, see section 381 et seq. of Title 15, Commerce and Trade. Income exempt under treaty, see section 894 of this title. Income tax collected at source, see section 3402 of this title. Nonresident aliens, see section 871 et seq. of this title. Partners subject to income tax in individual capaci- ties, see section 701 of this title. Rate of tax under Federal Insurance Contributions Act, see section 3101 of this title. Treaty obligations observed, see section 7852 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to In sections 2, 3, 142, 511, 641, 871, 876, 877, 891, 911, 962, 1201, 1348, 6014, 6361 of this title. § 2. Definitions and special rules (a) Definition of surviving spouse (1) In general For purposes of section 1, the term "surviv- ing spouse" means a taxpayer- (A) whose spouse died during either of his two tacable years immediately preceding the taxable year, and (B) who maintains as his home a house- hold which constitutes for the taxable year the principal place of abode (as a member of such household) of a dependent (I) who (within the meaning of section 152) is a son, stepson, daughter, or stepdaughter of the taxpayer, and (it) with respect to whom the taxpayer is entitled to a deduction for the taxable year under section 151. For purposes of this paragraph, an individual shall be considered as maintaining a house- hold only if over half of the cost of maintain- ing the household during the taxable year is furnished by such individual. (2) Limitations Notwithstanding paragraph (1), for pur- poses of section I a taxpayer shall not be con- sidered to be a surviving spous-- (A) if the taxpayer has remarried at any time before the close of the taxable year, or (B) unless, for the taxpayer's taxable year during which his spouse died, a joint return could have been made under the provisions of section 6013 (without regard to subsec- tion (a)(3) thereof). (3) Special rule where deceased spouse was in miss- ing status If an individual was in a missing status (within the meaning of section 6013(f)(3)) as a result of service in a combat zone (as deter- mined for purposes of section 112) and if such individual remains in such status until the date referred to in subparagraph (A) or (B), then, for purposes of paragraph (1)(A), the date on which such individual died shall be treated as the earlier of the date determined under subparagraph (A) or the date deter- mined under subparagraph (B): (A) the date on which the determination is made under section 556 of title 37 of the United States Code or under section 5566 of title 5 of such Code (whichever is applica- ble) that such individual died while in such missing status, or (B) the date which is- (1) January 2, 1978, in the case of service in the combat zone designated for pur- poses of the Vietnam conflict, or (ii) 2 years after the date designated under section 112 as the date of termina- tion of combatant activities in that zone, in the case of any combat zone other than that referred to in clause (I). (W) Definition of head of household (1) In general For purposes of this subtitle, an individual shall be considered a head of a household if, and only if, such individual is not married at the close of his taxable year, is not a surviv- ing spouse (as defined in subsection (a)), and either- (A) maintains as his home a household which constitutes for such taxable year the principal place of abode, as a member of such household, of- (i) a son, stepson, daughter, or step- daughter of the taxpayer, or a descendant of a son or daughter of the taxpayer, but if such son, stepson, daughter, stepdaugh- ter, or descendant is married at the close of the taxpayer's taxable year, only if the taxpayer is entitled to a deduction for the taxable year for such person under sec- tion 151, or (ii) any other person who is a dependent of the taxpayer, if the taxpayer is entitled to a deduction for the taxable year for such person under section 151, or (B) maintains a household which consti- tutes for such taxable year the principal place of abode of the father or mother of the taxpayer, if the taxpayer is entitled to a deduction for the taxable year for such father or mother under section 151. For purposes of this paragraph, an individual shall be considered as maintaining a house- hold only if over half of the cost of maintain- ing the household during the taxable year is furnished by such individual. (2) Determination of status For purposes of this subsection- (A) a legally adopted child of a person shall be considered a child of such person by blood; (B) an individual who is legally separated from his spouse under a decree of divorce or of separate maintenance shall not be con- sidered as married; (C) a taxpayer shall be considered as not married at the close of his taxable year if at any time during the taxable year his spouse is a nonresident alien; and (D) a taxpayer shall be considered as mar- ried at the close of his taxable year if his spouse (other than a spouse described in subparagraph (C)) died during the taxable year. Page 33
TITLE 26-INTERNAL REVENUE CODE (3) Limitations Notwithstanding paragraph (1), for pur- poses of this subtitle a taxpayer shall not be considered to be a head of a household- (A) if at any time during the taxable year he is a nonresident alien; or (B) by reason of an individual who would not be a dependent for the taxable year but for- (i) paragraph (9) of section 152(a), or (ii) subsection (c) of section 152. (c) Certain married individuals living apart For purposes of this part, an individual shall be treated as not married at the close of the taxable year if such individual is so treated under the provisions of section 143(b). (d) Nonresident aliens In the case of a nonresident alien individual, the tax imposed by section 1 shall apply only as provided by section 871 or 877. (e) Cross reference For definition of taxable income, see section 63. (Aug. 16, 1954, ch. 736, 68A Stat. 8; Feb. 26, 1964, Pub. L. 88-272, title I, § 112(b), 78 Stat. 24; Dec. 30, 1969, Pub. L. 91-172, title VIII, § 803(b), 83 Stat. 682; Jan. 2, 1975, Pub. L. 93-597, § 3(b), 88 Stat. 1951; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(a)(1), (b)(9), 90 Stat. 1764, 1795; Oct. 20, 1976, Pub. L. 94-569, § 3(a), 90 Stat. 2699.) AMENDMEENrS 1976-Subsec. (a)(3)(B). Pub. L. 94-569 substituted "the date which is" for "the date which is 2 years after" in the provisions preceding cl. (i), substituted "January 2, 1978" for "the date of the enactment of this paragraph" in cl. (i), and substituted "2 years after the dats" for "the date" in cl. (ii). Subsec. (b)(3)(B)(ii). Pub. L. 94-455,§ 1901(b)(9), re- designated fonner subsec. (b)(3)(B)(iii) as subsec. (b)(3)(B)(ii) and struck out former subsec. (b)(3)(B)(ii) which provided that an individual who was a depen- dent solely by reason of (par)(10) of section 152(a) would not be considered as a head of a household. Subsec. (c). Pub. L. 94-455, § 1901(a)(1), substituted "shall be treated as not married at the close of the taxable year" for "shall not be considered as married". 1975-Subsee. (a)(3). Pub. L. 93-597 added subsec. (a)(3). 1969-Subsec. (a). Pub. L. 91-172 redesignated the provisions of former subsec. (b) as subsec. (a). The pro- visions of former subsec. (a) are now covered by sec. l(a) of this title. Subsec. (b). Pub. L. 91-172 redesignated the provi- sions of former section 1(b)(2) to (4) of this title as subsec. (b). Former subsec. (b) was redesignated, with minor changes, as subsec. (a). Subsec. (c). Pub. L. 91-172 added subsec. (c). Subsec. (d). Pub. L. 91-172 redesignated as subsec. (d) the provisions of former section l(d) in this subsec. with minor changes. Subsec. (e). Pub. L. 91-172 redesignated as subsec. (e) the provisions of former section l(e). 1964-Subsec. (a). Pub. L. 88-272 inserted the refer- ence to section 141. EFFECTIVE DATE OF 1976 AMENDMENT. Section 1901(d) of Pub. L. 94-455 provided that: "Except as otherwise expressly provided in this sec- tion, the amendments made by this section [see Tables Volume for distribution of section 1901 of Pub. L. 94- 4551 shall apply with respect to taxable years begin- ning after December 31, 1976. The amendments made by subsections (a)(29) and (b)(10) shall apply with re- spect to taxable years ending after the date of the en- actment of this Act [Oct. 4, 1976]." EFFECTIVE DATE OF 1975 AMENDMENT Amendment by Pub. L. 93-597 applicable to taxable years ending on or after Feb. 28, 1961, see section 3(c) of Pub. L. 93-597, set out as an Effective Date of 1975 Amendment note under section 6013 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Amendment by Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1970. except that subsec. (c) is applicable to taxable years beginning after Dec. 31, 1969, see section 803(f) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 1 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272, except for purposes of section 21 of this title, effective with respect to tax- able years beginning after Dec. 31, 1963, see section 131 of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 1 of this title. CROSS REFERENCES Joint returns of income tax by husband and wife, see section 6013 of this title. Rate of tax on individuals, see section 1 of this title. SECTION REmuim TO IN OTHER SECTIONS This section is referred to in sections 1, 141, 1304, 3402, 6012, 6013, 6015 of this title. § 3. Tax tables for individuals having taxable income of less than $20,000 (a) General rule In lieu of the tax imposed by section 1, there is hereby imposed for each taxable year on the taxable income of every individual whose tax- able income for such year does not exceed $20,000, a tax determined under tables, applica- ble to such taxable year, which shall be pre- scribed by the Secretary. In the tables so pre- scribed, the amounts of tax shall be computed on the basis of the rates prescribed by section 1. (b) Tax treated as Imposed by section 1 For purposes of this title, the tax imposed by this section shall be treated as tax imposed by section 1. (Aug. 16, 1954, ch. 736, 68A Stat. 8; Feb. 26, 1964, Pub. L. 88-272, title III,§ 301(a), 78 Stat. 129; Dec. 30, 1969, Pub. L. 91-172, title VIII, § 803(c), 83 Stat. 684; Mar. 29, 1975, Pub. L. 94- 12, title II, § 201(c), 89 Stat. 29; Oct. 4, 1976, Pub. L. 94-455, title V, § 501(a), 90 Stat. 1558.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455 designated existing provisions as subsec. (a), and as so designated, substi- tuted provision relating to taxable income for such year does not exceed $20,000 for provision relating to adjusted gross income for such year is less than $15,000 and who has elected for such year to pay the tax imposed by this section and struck out "or his del- egate" following "Secretary", "beginning after Dec. 31, 1969" following "each taxable year", and the provision requiring computation of taxable income by using standard deduction. Subsec. (b). Pub. L. 94-455 added subsec. (b). 1975-Pub. L. 94-12 substituted "$15,000" for "$10,000". 1969-Pub. L. 91-172 raised the individual gross income limit of $5,000 to $10,000 for exercising the option and substituted provision that the tax has to be determined under tables to be prescribed by the Secre- Page 34
TITLE 26-INTERNAL REVENUE CODE tary or his delegate for tables of tax rates for single persons, heads of household, married persons filing joint returns, married persons filing separate returns with 10 per cent standard deduction and married per- sons filing separate returns with minimum standard deduction. 1964-Pub. L. 88-272 substituted optional tax tables covering five categories for taxable years beginning on or after Jan. 1, 1964, and before Jan. 1. 1965, and for years beginning after Dec. 31, 1964, for a single gener- al table. EFFECTIVE DATE OF 1976 AMENDMENT Section 508 of Pub. L. 94-455 provided that: "Except as otherwise provided, the amendments made by this title [enacting section 44A, amending sections 3, 36, 37, 41(b)(2), 42(b)(2), 46(a)(3)(C), 5OA(a)(3)(C), 104(b), (c), 105(d), 144(a), (c), 213(f), 217(g), (h), 904(g), (h), 1211(b)(3), 1304(b), 3402(m), 6014(a), (b), and 6096(b), enacting notes set out under sections 105, 8022, and re- pealing sections 4, 144(d), and 214 of this title] shall apply to taxable years beginning after December 31, 1975." EFFECTIVE AN TERMINATION DATES OF 1975 AMENDMENT Amendment by Pub. L. 94-12 applicable to taxable years ending after Dec. 31, 1974, and to cease to apply to taxable years ending after Dec. 31, 1976, see section 209(a) of Pub. L. 94-12, set out as an Effective and Termination Dates of 1975 Amendment note under section 42 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Amendment by Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1969, see section 803(f) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 1 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Section 301(c) of Pub. L. 88-272 provided that: "Except for purposes of section 21 of the Internal Revenue Code of 1954 [section 21 of this title] (relat- ing to effect of changes in rates during a taxable year), the amendments made by this section [to sec- tions 3, 4 and 6014 of this title] shall apply to taxable years beginning after December 31, 1963." CROSS REFERENCES Credits not allowed to individuals paying optional tax, see section 36 of this title. Election of standard deduction, see section 144 of this title. Income tax return, tax not computed by taxpayer, see section 6014 of this title. Personal exemptions, see section 151 et seq. of this title. Rate of tax on individuals, see section 1 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 891 of this title. [§ 4. Repealed. Pub. L. 94-455, title V, § 50l(b)(1), Oct. 4, 1976, 90 Stat. 15581 Section, Acts Aug. 16, 1954, ch. 736, 68A Stat. 10; Feb. 26, 1964, Pub. L. 88-272, title II, § 232(f)(1), title III, §301(b)(1). (3). 78 Stat. 111, 140; Dec. 30, 1969, Pub. L. 91-172, title VIII, § 802(c)(1)-(3), 83 Stat. 677, 678; Dec. 10, 1971, Pub. L. 92-178, title III, § 301(b), 85 Stat. 520, related to rules for optional tax. EFFECTIVE DATE OF REPEAL. Repeal applicable to taxable years beginning after Dec. 31, 1975, see section 508 of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 3 of this title. § 5. Cross references relating to tax on individuals (a) Other rates of tax on individuals, etc. (1) For rates of tax on nonresident aliens, see section 871. (2) For doubling of tax on citizens of certain foreign countries, see section 891. (3) For alternative tax In case of capital gain, see sec. tion 1201(b). (4) For rate of withholding in the case of nonresident aliens, see section 1441. (5) For minimum tax for tax preferences, see section 56. (b) Special limitations on tax (1) For limitation on tax in case of Income of members of Armed Forces on death, see section 692. (2) For limitation on tax where an Individual chooses the benefits of income averaging, see section 1301. (3) For computation of tax where taxpayer restores substantial amount held under claim of right, see section 1341. (Aug. 16, 1954, ch. 736, 68A Stat. 10; Feb. 26, 1964, Pub. L. 88-272, title II, § 232(f)(2), 78 Stat. 111; Dec. 30, 1969, Pub. L. 91-172, title III, § 301(b)(2), title VIII, § 803(d)(6), 83 Stat. 585, 684; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(b)(22)(B), 1951(c)(3)(A), 90 Stat. 1798, 1841.) AMENDMENTS 1976-Subsec. (b). Pub. L. 94-455 redesignated former pars. (2), (3), and (4), as (1), (2). (3), respective- ly, and struck out former par. (1) which referred to section 632 for limitation on tax attributable to sales of oil or gas properties and former par. (5) which re- ferred to section 1347 for limitation on tax attribut- able to claims against the U.S. involving acquisition of property. 1969-Subsec. (a)(5). Pub. L. 91-172, §301(b)(2), added par. (5). Subsec. (b). Pub. L. 91-172, § 803(d)(6), substituted "tax" for "surtax" in pars. (1) and (5). 1964-Subsec. (b). Pub. L. 88-272 redesignated pars. (2), (3). (4), (7) and (8) as pars. (1) to (5), substituted "where an individual chooses the benefits of income averaging" for "with respect to compensation for long- term services" In par. (3), and eliminated former pars. (1), (5) and (6) which referred to tax attributable to receipt of lump sum under annuity, endowment, or life insurance contract, to income from artistic work or in- ventions, and to back pay, respectively. EFFECTIVE DATE OF 1969 AMENDMENT Subsec. (a)(5) of this section applicable to taxable years ending after Dec. 31, 1969, see section 301(c) of Pub. L. 91-172, set out as an Effective Date note under section 56 of this title. Amendment of subsecs. (b)(1), (5) by section 803(d)(6) of Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1970, see section 803(f) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 1 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment of section by Pub. L. 88-272 applicable to taxable years beginning after Dec. 31, 1963, see sec- tion 232(g) of Pub. L. 88-272, set out as an Effective Date note under section 1301 of this title. PART II-TAX ON CORPORATIONS Sec. 11. Tax imposed. 12. Cross references relating to tax on corporations. Page 35
TITLE 26-INTERNAL REVENUE CODE § I1. Tax Imposed (a) Corporations in general A tax is hereby imposed for each taxable year on the taxable income of every corporation. The tax shall consist of a normal tax computed under subsection (b) and a surtax computed under subsection (c). (b) Normal tax The normal tax is equal to- (1) in the case of a taxable year ending after December 31, 1977, 22 percent of the taxable income, and (2) in the case of a taxable year ending after December 31, 1974, and before January 1, 1978, the sum of- (A) 20 percent of so much of the taxable income as does not exceed $25,000, plus (B) 22 percent of so much of the taxable income as exceeds $25,000. (c) Surtax The surtax is 26 percent of the amount by which the taxable income exceeds the surtax exemption for the taxable year. (d) Surtax exemption For purposes of this subtitle, the surtax ex- emption for any taxable year is- (1) $25,000 in the case of a taxable year ending after December 31, 1977, or (2) $50,000 in the case of a taxable year ending after December 31, 1974, and before January 1, 1978, except that, with respect to a corporation to which section 1561 (relating to certain multiple tax benefits in the case of certain controlled corporations) applies for the taxable year, the surtax exemption for the taxable year is the amount determined under such section. (e) Exceptions Subsection (a) shall not apply to a corpora- tion subject to a tax imposed by- (1) section 594 (relating to mutual savings banks conducting life insurance business), (2) subchapter L (see. 801 and following, re- lating to insurance companies), or (3) subchapter M (sec. 851 and following, re- lating to regulated investment companies and real estate investment trusts). (f) Foreign corporations In the case of a foreign corporation, the tax imposed by subsection (a) shall apply only as provided by section 882. (Aug. 16, 1954, ch. 736, 68A Stat. 11; Mar. 30, 1955, ch. 18, § 2, 69 Stat. 14; Mar. 29, 1956, ch. 115, § 2, 70 Stat. 66; Mar. 29, 1957, Pub. L. 85-12, § 2, 71 Stat. 9; June 30, 1958, Pub. L. 85-475, § 2, 72 Stat. 259; June 30, 1959, Pub. L. 86-75, § 2, 73 Stat. 157; June 30, 1960, Pub. L. 86-564, title II, § 201, 74 Stat. 290; Sept. 14, 1960, Pub. L. 86- 779, § 10(d), 74 Stat. 1009; June 30, 1961, Pub. L. 87-72, § 2, 75 Stat. 193; June 28, 1962, Pub. L. 87-508, § 2, 76 Stat. 114; June 29, 1963, Pub. L. 88-52, § 2, 77 Stat. 72; Feb. 26, 1964, Pub. L. 88- 272, title I, § 121, 78 Stat. 25; Nov. 13, 1966, Pub. L. 89-809, title I, § 104(b)(2), 80 Stat. 1557; Dec. 30, 1969, Pub. L. 91-172, title IV, § 401(b)(2)(B), 83 Stat. 602; Mar. 29, 1975, Pub. L. 94-12, title III, § 303(a), (b), 89 Stat. 44; Dec. 23, 1975, Pub. L. 94-164, § 4(a)-(c), 89 Stat. 973, 974; Oct. 4, 1976, Pub. L. 94-455, title IX, § 901(a), 90 Stat. 1606.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455 reenacted subsec. without change. Subsec. (b). Pub. L. 94-455, among other changes, substituted "December 31, 1977, 22 percent" for "De- cember 31, 1976, 22 percent" and "after December 31, 1974 and before January 1, 1978" for "after December 31, 1974 and before January 1, 1977" and struck out provisions relating to the six-month application of the general rule. Subsec. (c). Pub. L. 94-455 struck out provisions re- lating to the special rule for 1976 for calendar year taxpayers. Subsec. (d). Pub. L. 94-455, among other changes, substituted provisions relating to surtax exemption of $25,000 for a taxable year ending Dec. 31, 1977, or $50,000 for a taxable year ending after Dec. 31, 1974, and before Jan. 1, 1978, for provisions relating to surtax exemption of $50,000 for any taxable year and struck out provisions relating to six-month application of the general rule. 1975-Subsec. (b). Pub. L. 94-164 redesignated exist- ing pars. (1) and (2) as pars. (1)(A) and (1)(B), and in par. (1)(A) as so redesignated substituted "after De- cember 31, 1976" for "before January 1, 1975 or after December 31, 1975", and in par. (1)(B) as so redesig- nated substituted "January 1, 1977" for "January 1, 1976", and added par. (2). Pub. L. 94-12, § 303(a), reduced the normal tax for a taxable year ending after Dec. 31, 1974, and before Jan. 1, 1976, to 20 percent of so much of the taxable income as does not exceed $25,000 plus 22 percent of so much of the taxable income as exceeds $25,000. Subsec. (c). Pub. L. 94-164 designated existing provi- .ions as par. (1) and in par. (1) as so designated struck out special percentages for taxable years beginning before Jan. 1, 1,64, and after Dec. 31, 1963 and before Jan. 1, 1965,' ad added par. (2). Subsec. ',,j. Pub. L. 94-164 designated existing provi- sions as r,&r. (1), and in par. (1) as so designated, sub- stitute'1 "$50,000" for "$25,000", added reference to section 1564 of this title, and added par. (2). Pu'j. L. 94-12, § 303(b), substituted "$50,000" for "$25,000". 1969-Subsec. (d). Pub. L. 91-172 substituted "sec- tion 1561 or 1564" for "section 1561". 1966-Subsec. (e. Pub. L. 89-809, § 104(b)(2)(A), struck out par. (4) which made reference to section 881(a) (relating to foreign corporations not engaged in business in United States). Subsec. (f). Pub. L. 89-809, § 104(b)(2)(B), added subsec. (f). 1964-Subsec. (b). Pub. L. 88-272 applied the 30 per- cent tax to years beginning before Jan. 1, 1964 instead of July 1, 1964 in par. (1), and in par. (2), reduced the rate from 25 percent to 22 percent, and applied it to years beginning after Dec. 31, 1963, Instead of June 30, 1964. Subsec. (c). Pub. L. 88-272 increased the percentage from 22 to 28 for taxable years beginning after Dec. 31, 1963, and before Jan. 1, 1965, and to 26 percent for taxable years beginning after Dec. 31, 1964. The surtax exemption previously carried in subsec. (c), is now stated in subsec. (d). Subsec. (d). Pub. L. 88-272 added subsec. (d). Former subsec. (d) redesignated (e). Subsec. (e). Pub. L. 88-272 redesignated former subsec. (d) as (e). 1963-Subsec. (b). Pub. L. 88-52 substituted "July 1, 1964" for "July 1, 1963" and "June 30, 1964" for "June 30, 1963", wherever appearing. 1962-Subsec. (b). Pub. L. 87-508 substituted "July 1, 1963" for "July 1, 1962" and "June 30, 1963" for "June 30, 1962", wherever appearing. 1961-Subsec. (b). Pub. L. 87-72 substituted "July 1, 1962" for "July 1, 1961" and "June 30, 1962". for "June 30, 1961", wherever appearing. Page 36
TITLE 26-INTERNAL REVENUE CODE 1960-Subsec. (b). Pub. L. 86-564 substituted "July 1, 1961" for "July 1, 1960" and "June 30, 1961" for "June 30, 1960" wherever appearing. Subsec. (d)(3). Pub. L. 86-779 inserted "and real estate investment trusts" following "regulated invest- ment companies". 1959-Subsee. (b). Pub. L. 86-75 substituted "July 1, 1960" for "July 1, 1959" and "June 30, 1960" for "June 30, 1959" wherever appearing. 1958-Subsec. (b). Pub. L. 85-475 substituted "July 1, 1959" for "July 1, 1958" and "June 30, 1959" for "June 30, 1958" wherever appearing. 1957-Subsec. (b). Pub. L. 85-12 substituted "July 1, 1958" for "April 1. 1957" and "June 30, 1958" for "March 31, 1957" wherever appearing. 1956-Subsee. (b). Act Mar. 29, 1956, substituted "April 1, 1957" for "April 1, 1956" and "March 31, 1957" for "March 31, 1956" wherever appearing. 1955-Subsec. (b). Act Mar. 30, 1955, substituted "April 1, 1956" for "April 1, 1955" and "March 31, 1956" for "March 31, 1955" wherever appearing. EFFECTIVE DATE OF 1976 AMENDMENT Section 901(d) of Pub. L. 94-455 provided that: "The amendment made by subsection (a) [amending sub- sees. (a) to (d) of this section] shall take effect on De- cember 23, 1975. The amendments made by subsection (b) [amending section 821(a)(1), (c)(1)(4) of this title] shall apply to taxable years ending after December 31, 1974. The amendments made by subsection (c) (amending sections 21(f) and 1561(a) of this title and repealing section 6154(h) of this title] shall apply to taxable years ending after December 31, 1975." EFFECTIVE AND TERMINATION DATES OF 1975 AMENDMENT Section 4(e) of Pub. L. 94-164 provided that: "The amendments made by subsections (b), (c), and (d) [amending subsecs. (c) and d) of this section and sec- tions 21, 962, and 1561 of this title] apply to taxable years beginning after December 31, 1975. The amend- ment made by subsection (c) [amending subsec. (d) of this section] ceases to apply for taxable years begin- ning after December 31, 1976." Section 305(b)(1) of Pub. L. 94-12 provided that: "the amendments made by section 303 [amending sec- tions 11(b), (d), 12(7), 962(c), and 1561(a)(1) of this title and enacting provisions set out as a note under this section] shall apply to taxable years ending after December 31, 1974. The amendments made by subsec- tions (b) and (c) of such section [amending sections 11(d), 12(7), 962(c), and 1561(a)(1) of this title and en- acting provisions set out as a note under this section] shall cease to apply for taxable years ending after De- cember 31, 1975." EFFECTIVE DATE OF 1969 AMENDMENT Amendment of subsec. (d) by Pub. L. 91-172 applica- ble with respect to taxable years beginning after Dec. 31, 1969, see section 401(h)(2) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 1561 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Section 104(n) of Pub. L. 89-809 provided that: "The amendments made by this section (other than subsec- tion (k) [adding section 6683 to this title and amend- ing sections 11, 245, 301. 512, 542, 543, 545, 819, 821, 822, 831, 832, 841, 842, 881, 882, 884, 952, 953, 1249, 1442, and 6016 of this title] shall apply with respect to taxable years beginning after December 31, 1966. The amendment made by subsection (k) [amending section 1248(d)(4) of this title] shall apply with respect to sales or exchanges occurring after December 31, 1966." EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272, except for purposes of section 21 of this title, effective with respect to tax- able years beginning after Dec. 31, 1963, see section 131 of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 1 of this title. EFFECTIVE DATE OF 1960 AMENDMENT Amendment by Pub. L. 86-779 applicable with re- spect to taxable years of real estate investment trusts beginning after Dec. 31, 1960, see section 10(k) of Pub. L. 86-779, set out as an Effective Date note under sec- tion 856 of this title. ALLOCATION OF 1975 TAXABLE INCOME AMONG COMPO- NENT MEMBERS OF CONTROLLED GROUP OF CORPORA- TIONS Section 303(c)(1) of Pub. L. 94-12 provided in part that: "in applying subsection (b)(2) of section 11 Esubsec. (b)(2) of this section], the first $25,000 of tax- able income and the second $25,000 of taxable income shall each be allocated among the component mem- bers of a controlled group of corporations in the same manner as the surtax exemption is allocated." CROSS REFERENCES Computation of taxable income, see section 61 et seq. of this title. Corporate distributions and adjustments, see section 301 et seq. of this title. Deduction for dividends paid, see section 561 et seq. of this title. Definitions- Corporation, see section 7701 of this title. Taxable income, see section 63 of this title. Effect of change of rate of tax, see section 21 of this title. Exempt corporations, see section 501 of this title. Imposition of net income taxes by State on income derived from interstate commerce, see section 381 et seq. of Title 15, Commerce and Trade. Special deductions for corporations, see section 241 et seq. of this title. Tax on- Foreign corporations not engaged in business in United States, see section 881 of this title. Resident foreign corporations as provided in this section, see section 882 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to In sections 21, 57, 80, 244, 511. 527, 528, 594, 802, 804, 821, 826, 831. 852, 857, 882, 891, 907, 922, 941, 962, 1201, 1351, 1378, 1381, 1551, 1561, 4942, 6154, 6425, 6655 of this title. § 12. Cross references relating to tax on corporations (1) Vor tax on the unrelated business income of certain charitable and other corporations exempt from tax under this chapter, see section 511. (2) For accumulated earnings tax and personal holding company tax, see parts I and 11 of subchapter G (sec. 531 and following). (3) For doubling of tax on corporations of certain for- eign countries, see section 891. (4) For alternative tax in case of capital gains, see sec. tion 1201(a). (5) For rate of withholding in case of foreign corpora- tions, see section 1442. (6) For withholding of tax on tax-free covenant bonds, see section 1451. (7) For limitation on the $25,000 exemption from surtax provided in section 11(c) see section 1551. (8) For minimum tax for tax preferences, see section 56. (Aug. 16, 1954, ch. 736, 68A Stat. 11; Feb. 26, 1964, Pub. L. 88-272, title II, § 234(b)(4), 78 Stat. 115; Dec, 30, 1969, Pub. L. 91-172, title III, § 301(b)(3), 83 Stat. 585; Mar. 29, 1975, Pub. L. 94-12, title III, § 303(c)(2), 89 Stat. 44.) AMENDMENTS 1975-Par. (7). Pub. L. 94-12 substituted "$50,000" for "$25,000" for a limited period. See Effective and 71-999 0 - 78 - 5 (Vol. 7) Page 37
TITLE 26-INTERNAL REVENUE CODE Termination Dates of 1975 Amendments note set out below. 1969-Par. (8). Pub. L. 91-172 added par. (8). 1964-Par. (8). Pub. L. 88-272 deleted par. (8) which referred to section 1503 for additional tax for corpora- tions filing consolidated returns. EFFECTIVE AND TERMINATION DATES OF 1975 AMENDMENT Amendment by Pub. L. 94-12 applicable to taxsble years ending after Dec. 31, 1974, but to cease to apply for taxable years ending after Dec. 31, 1975, see sec- tion 305(b)(1) of Pub. L. 94-12, set out as an Effective and Termination Dates of 1975 Amendments note under section 11 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Par. (8) of this section applicable to taxable years ending after Dec. 31, 1969, see section 301(c) of Pub. L. 91-172, set out as an Effective Date note under section 56 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272 applicable to taxable years beginning after Dec. 31, 1963, see section 234(c) of Pub. L. 88-272, set out as an Effect've Date of 1964 Amendment note under section 1503 of this title. PART III-CHANGES IN RATES DURING A TAXABLE YEAR Sec. 21. Effect of changes. § 21. Effect of changes (a) General rule If any rate of tax imposed by this chapter changes, and if the taxable year includes the ef- fective date of the change (unless that date is the first day of the taxable year), then- (1) tentative taxes shall be computed by ap- plying the rate for the period before the ef- fective date of the change, and the rate for the period on and after such date, to the tax- able income for the entire taxable year; and (2) the tax for such taxable year shall be the sum of that proportion of each tentative tax which the number of days in each period bears to the number of days in the entire tax- able year. (b) Repeal of tax For purposes of subsection (a)- (1) if a tax is repealed, the repeal shall be considered a change of rate; and (2) the rate for the period after the repeal shall be zero. (c) Effective date of change For purposes of subsections (a) and (b)-- (1) if the rate changes for taxable years "beginning after" or "ending after" a certain date, the following day shall be considered the effective date of the change; and (2) if a rate changes for taxable years "be- ginning on or after" a certain date, that date shall be considered the effective date of the change. (d) Changes made by Tax Reform Act of 1969 in case of individuals In applying subsection (a) to a taxable year of an individual which is not a calendar year, each change made by the Tax Reform Act of 1969 in part I or in the application of part IV or V of subehapter B for purposes of the determination of taxable income shall be treated as a change in a rate of tax. (e) Changes made by Revenue Act of 1971 In applying subsection (a) to a taxable year of an individual which is not a calendar year, each change made by the Revenue Act of 1971 in se- tion 141 (relating to the standard deduction) and section 151 (relating to personal exemp- tions) shall be treated as a change in a rate of tax. (f) Change in surtax exemption In applying subsection (a) to a taxable year of a taxpayer which is not a calendar year, the change made by section 303(b) of the Tax Re- duction Act of 1975 in the surtax exemption and any change under section 11(d) in the surtax exemption shall be treated as a change in a rate of tax. (Aug. 16, 1954, ch. 736, 68A Stat. 12; Feb. 26, 1964, Pub. L. 88-272, title I, § 132, 78 Stat. 30; Dec. 30, 1969, Pub. L. 91-172, title VIII, § 803(e), 83 Stat. 685; Dec. 10, 1971, Pub. L. 92-178, title II, § 205, 85 Stat. 511; Mar. 29, 1975, Pub. L. 94- 12, title III, § 305(b)(2), 89 Stat. 45; Dec. 23, 1975, Pub. L. 94-164, § 4(d)(2), 89 Stat. 975; Oct. 4, 1976, Pub. L. 94-455, title IX, § 901(c)(2), 90 Stat. 1607.) REFERENCES IN TEXT The Tax Reform Act of 1969, referred to in subsec. (d), is Pub. L. 91-172, Dec. 30, 1969, 83 Stat. 487. For complete classification of this Act to the Code, see Short Title of 1969 Amendment note set out under section 1 of this title and Tables volume. The Revenue Act of 1971, referred to in subsec. (e), is Pub. L. 92-178, Dec. 10, 1971, 85 Stat. 497. For com- plete classification of this Act to the Code, see Short Title of 1971 Amendment note set out under section 1 of this title and Tables volume. The Tax Reduction Act of 1975, referred to in subsec. (f), is Pub. L. 94-12, Mar. 29, 1975, 89 Stat. 26. Section 303(b) of the Tax Reduction Act of 1975 is classified to section 11 of this title. For complete clas- sification of this Act to the Code, see Short Title of 1975 Amendment note set out under section 1 of this title and Tables volume. AMENDMENTS 1976-Subsec. (f). ub. L. 94-455 substituted "in the surtax exemption and any change under section 11(d) in the surtax exemption" for "and the change made by section 3(c) of the Revenue Adjustment Act of 1975 in section 11(d) (relating to corporate surtax exemp- tion)". 1975-Subsec. (f). Pub. L. 94-164 added reference to change made by section 3(c) of the Revenue Adjust- ment Act of 1975. Pub. L. 94-12 added subsec. (f). 1971-Subsec. (e). Pub. L. 92-178 added subsec. (e). 1969-Subsec, (d). Pub. L. 91-172 substituted provi- sions covering changes made by the Tax Reform Act of 1969 in case of individuals for provisions covering changes made by Revenue Act of 1964. 1964-Subsec. (d). Pub. L. 88-272 amended subsec- tion generally by substituting provisions relating to changes made by the Revenue Act of 1964, for provi- sions relating to taxable years beginning before Jan. 1, 1954, and ending after Dec. 31, 1953. EFFECTIVE DATE OF 1976 AMENDMENT Amendment by Pub. L. 94-455 applicable with re- spect to taxable years ending after Dec. 31, 1975, see section 901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 11 of this title. Page 38
TITLE 26-INTERNAL REVENUE CODE EFFECTIVE DATE OF 1975 AMENDMENT Amendment by Pub. L. 94-164 applicable to taxable years beginning after Dec. 31, 1975, see section 4(e) of Pub. L. 94-164, set out as an Effective and Termina. tion Dates of 1975 Amendments nobe under section 11 of this title, EFFECTIVE DATE OF 1964 AMENDMENT Section 132 of Pub. L. 88-272 provided in part that the amendment to subsec. (d) of this section was effec- tive with respect to taxable years ending after Dec. 31, 1963. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 6013 of this title. PART IV-CREDITS AGAINST TAX Subpart A. Credits allowable. B. Rules for computing credit for investment in cer- tain depreciable property. C. Rules for computing credit for expenses of work incentive programs. AMENDMENTS 1971-Pub. L. 92-178, title VI, §601(c)(1), Dec. 10, 1971, 85 Stat. 557, added subpart C. PART REFERRED TO IN OTHER SECTIONS This part is referred to in sections 1378, 6015, 6154, 6362, 6425, 6654, 6655, 6682 of this title. SUBPART A-CREDITS ALLOWABLE Sec. 31. Tax withheld on wages. 32. Tax withheld at source on nonresident aliens and foreign corporations and on tax-free covenant bonds. 33. Taxes of foreign countries and possessions of the United States; possession tax credit. (34, 35. Repealed.] 36. Credits not allowed to individuals taking stan- dard deduction. 37. Credit for the elderly. 38. Investment in certain depreciable property. 39. Certain uses of gasoline, special fuels, and lubri- cating oil. 40. Expenses of work incentive programs. 41. Contributions to candidates for public office. 42. General tax credit. 43. Credit for certain earned Income.' 44. Credit for purchase of new principal residence. 44A. Expenses for household and dependent care ser- vices necessary for gainful employment. 45. Overpayments of tax. AMENDMENTS 1976-Pub. L. 94-455, title IV, § 401(a)(2)(D), title V, §§ 501(c)(2), 503(b)(5), 504(a)(2), title XIX, § 1901(b)(1)(Z), Oct. 4, 1976, 90 Stat. 1555, 1559, 1562, 1565, 1792, substituted in item 42 "General tax credit" for "Taxable income credit", struck out in item 36 "pay optional tax or", added in item 33 "possession tax credit", substituted in item 37 "Credit of the elderly for Retirement income", added item 44A, and deleted item 35 "Partially tax-exempt interest received by in- dividuals". 1975-Pub. L. 94-164, § 3(a)(2), Dec. 23, 1975, 89 Stat. 973, substituted "Taxable income credit" for "Credit for personal exemptions" in item 42. Pub. L. 94-12, title II, §§ 203(b)(1), 204(c), 208(d)(1), Mar. 29, 1975, 89 Stat. 30, 32, 35, renumbered item 42 as 45 and added item 42 applicable to taxable years ending after Dec. 31, 1974 but to cease to apply to tax- able years ending after Dec. 31, 1975, item 43 applica- 'So in original. Does not conform to section catch- line. ble to taxable years beginning after Dec. 31, 1974 but before Jan. 1, 1976, and item 44. 1971-Pub, L. 92-178, title VI, §601(c)(2), Dec. 10, 1971, 85 Stat. 557, added items 40 and 41, and redesig- nated former item 40 as 42. 1970-Pub. L. 91-258, title II, § 207(d)(10), May 21, 1970, 84 Stat. 249, inserted ". special fuels," after "gas- oline" in item 39. 1965-Pub. L. 89-44, title VIIi, § 809(d)(1), June 21, 1965, 79 Stat. 167, added item 39 and redesignated former item 39 as 40. 1964-Pub. L. 88-272, title II, § 201(d)(1), Feb. 26, 1964, 78 Stat. 32, deleted item 34. 1962-Pub. L. 87-834, § 2(g)(1), (2), Oct. 16, 1962, 76 Stat. 972, 973, added the headings cf subparts A and B and item 38, and redesignated forn er item 38 as 39. SUBPART REFERRED TO IN OrHEF SECTIONS This subpart is referred to in .ections 47, 50A of this title. § 31. Tax withheld on wages (a) Wage withholding for income tax purposes (1) In general The amount withheld under section 3402 as tax on the wages of any individual shall be al- lowed to the recipient of the income as a credit against the tax imposed by this subti. tle. (2) Year of credit The amount so withheld during any calen- dar year shall be allowed as a credit for the taxable year beginning in such calendar year. If more than one taxable year begins in a cal- endar year, such amount shall be allowed as a credit for the last taxable year so beginning. (b) Credit for special refunds of social security tax (1) In general The Secretary may prescribe regulations providing for the crediting against the tax im- posed by this subtitle of the amount deter- mined by the taxpayer or the Secretary to be allowable under section 6413(c) as a special refund of tax imposed on wages. The amount allowed as a credit under such regulations shall, for purposes of this subtitle, be consid- ered an amount withheld at source as tax under section 3402. (2) Year of credit Any amount to which paragraph (1) applies shall be allowed as a credit for the taxable year beginning in the calendar year during which the wages were received. If more than one taxable year begins in the calendar year, such amount shall be allowed as a credit for the last taxable year so beginning. (Aug. 16, 1954, ch. 736, 68A Stat. 12; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(D), 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (b)(1). Pub, L. 94-455 struck out "or his delegate" following "The Secretary" and "(or his delegate)" following "taxpayer or the Secretary". CROSS REFERENCES Amount allowable as credit under this section ex- ceeding taxes imposed by chapter 1 considered as over- payment, see section 6401 of this title. Time tax collected at source deemed paid, see sec- tion 6513 of this title. Page 39
TITLE 26-INTERNAL REVENUE CODE SECTION REaRRED TO IN OTHEm SECTIONS This section is referred to in sections 874, 6211, 6362, 6401, 6413, 6513, 6654 of this title. § 32. Tax withheld at source on nonresident aliens and foreign corporations and on tax-free cov. enant bonds There shall be allowed as credits against the tax imposed by this chapter- (1) the amount of tax withheld at source under subchapter A of chapter 3 (relating to withholding of tax on nonresident aliens and on foreign corporations), and (2) the amount of tax withheld at source under subchapter B of chapter 3 (relating to interest on tax-free covenant bonds). (Aug. 16, 1954, ch. 736, 68A Stat. 13.) SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 36, 874, 882, 6211 of this title. § 33. Taxes of foreign countries and possessions of the United States; possession tax credit (a) Foreign tax credit The amount of taxes imposed by foreign countries and possessions of the United States shall be allowed as a credit against the tax im- posed by this chapter to the extent provided in section 901. (b) Section 936 credit In the case of a domestic corporation, the amount provided by section 936 (relating to Puerto Rico and possession tax credit) shall be allowed as a credit against the tax imposed by this chapter. (Aug. 16, 1954, ch. 736, 68A Stat. 13; Oct. 4, 1976, Pub. L. 94-455, title X, § 1051(a), 90 Stat. 1643.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455 designated existing provisions as subsec. (a). Subsec. (b). Pub. L. 94-455 added subsec. b). EFFECTIVE DATE OF 1976 AMENDMENT Section 1051(i) of Pub. L. 94-455 provided that: "(I) Except as provided by paragraph (2), the amendments made by this section [enacting section 936 of this title, and amending sections 33, 48(a)(2)(B), 116(b)(2), 243(b)(1), (5). 246(a), 861(a)(2)(A). 901(d), (g), (h), 904(b)(4), 931(a), (c) to (f), 1504(b)(4) and 6091(b)(2)(B) of this title] shall apply to taxable years beginning after December 31, 1975, except that 'quali- fied possession source investment income' as defined in section 936(d)(2) of the Internal Revenue Code of 1954 [section 936(d)(2) of this title] shall include income from any source outside the United States if the taxpayer establishes to the satisfaction of the Sec- retary of the Treasury or his delegate that the income from such sources was earned before October 1, 1976. "(2) The amendment made by subsection (d)(2) [en- acting section 901(g) of this title] shall not apply to any tax imposed by a po:'session of the United States with respect to the cormplete liquidation occurring before January 1, 1979, of a corporation to the extent that such tax is attributable to earnings and profits accumulated by such corporation during periods ending before January 1, 1976." CROSS REFERENCES Foreign tax credit, see section 901 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 41, 42, 44, 46, 50A, 56, 691, 1351, 6096, 6428 of this title. [§ 34. Repealed. Pub. L. 88-272, title II, § 201(b), Feb. 26, 1964, 78 Stat. 31] Section, Acts Aug. 16, 1954, ch. 736, 68A Stat. 13; June 25, 1959, Pub. L. 86-69. §3(a)(1), 73 Stat. 139; Sept. 14, 1960, Pub. L. 86-779, § 10(e), 74 Stat. 1009; Feb. 26, 1964, Pub. L. 88-272, title II, § 201(a), 78 Stat. 31, related to dividends received by individuals. EFFECTIVE DATE OF REPEAL Section 201(b) of Pub. L. 88-272 provided in part that this section is repealed effective with respect to dividends received after Dec. 31, 1964. [§ 35. Repealed. Pub. L. 94-455, title XIX, § 1901(a)(2), Oct. 4, 1976, 90 Stat. 1764] Section, Acts Aug. 16, 1954, ch. 736, 68A Stat. 14; Sept. 2, 1958, Pub. L. 85-866, title I, § 41(b), 72 Stat. 1639; Feb. 26, 1964, Pub. L. 88-272, title II, § 201(d)(2), 78 Stat. 32, related to partially tax-exempt interest re- ceived by individuals. EFFECTIVE DATE OF REPEAL Repeal of section effective with respect to taxable years beginning after Dec. 31, 1976, see Effective Date of 1976 Amendment note set out under section 2 of this title. § 36. Credits not allowed to individuals taking stan. dard deduction If an individual elects under section 144 to take the standard deduction, the credits pro- vided by section 32 shall not be allowed. (Aug. 16, 1954, ch. 736, 68A Stat. 15; Oct. 4, 1976, Pub. L. 94-455, title V, § 501(b)(2), title X, § 1011(c), title XIX, § 1901(b)(1)(A), 90 Stat. 1558, 1611, 1790.) AMENDMENTS 1976-Pub. L. 94-455, § 501(b)(2) struck out "paying optional tax or" in the section catchline and "elects to pay the optional tax imposed by section 3, or if he" following "If an individual"; § 1011(c) substituted "sec. tions 32 and" for "sections 32, 33 and"; and § 1901(b)(1)(A) substituted "section 32" for "sections 32 and 35". EFFECTIVE DATE OF 1976 AMENDMENT Amendment by sections 501(b)(2) and 1011(c) of Pub. L. 94-455 applicable to taxable years beginning after Dec. 31, 1975, see sections 508 and 1011(d) set out as Effective Date of 1976 Amendment notes under sec- tions 3 and 911, respectively. Amendment by section 1901(b)(1)(A) of Pub. L. 94- 455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amnendmei,t note under section 2 of this title. § 37. Credit for the elderly (a) General rule In the case of an individual who has attained age 65 before the close of the taxable year, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to 15 percent of such in- dividual's section 37 amount for such taxable year. (b) Section 37 amount For purposes of subsection (a)- Page 40
TITLE 26-INTERNAL REVENUE CODE (1) In general An individual's section 37 amount for the taxable year is the applicable initial amount determined under paragraph (2), reduced as provided in paragraph (3) and in subsection (c). (2) Initial amount The initial amount is- (A) $2,500 in the case of a single individ- ual, (B) $2,500 in the case of a joint return where only one spouse is eligible for the credit under subsection (a), (C) $3,750 in the case of a Joint return where both spouses are eligible for the credit under subsection (a), or (D) $1,875 in the case of a married Individ- ual filing a separate return. (3) Reduction The reduction under this paragraph is an amount equal to the sum of the amounts re- ceived by the individual (or, in the case of a joint return, by either spouse) as a pension or annuity-- (A) under title II of the Social Security Act, (B) under the Railroad Retirement Act of 1935 or 1937, or (C) otherwise excluded from gross income. No reduction shall be made under this para- graph for any amount excluded from gross income under section 72 (relating to annu- ities), 101 (relating to life insurance pro- ceeds), 104 (relating to compensation for in- juries or sickness), 105 (relating to amounts received under accident and health plans), 120 (relating to amounts received under quali- fied group legal services plans), 402 (relating to taxability of beneficiary of employees' trust), 403 (relating to taxation of employee annuities), or 405 (relating to qualified bond purchase plans). (c) Limitations (1) Adjusted gross income limitation If the adjusted gross income of the taxpay- er exceeds- (A) $7,500 in the case of a single individ- ual, (B) $10,000 in the case of a joint return, or (C) $5,000 in the case of a married individ- ual filing a separate return, the section 37 amount shall be reduced by one-half of the excess of the adjusted gross income over $7,500, $10,000, or $5,000, as the case may be. (2) Limitation based on amount of tax The amount of the credit allowed by this section for the taxable year shall not exceed the amount of the tax imposed by this chap- ter for such taxable year. (d) Definitions and special rules For purposes of this section- (1) Married couple must file joint return Except in the case of a husband and wife who live apart at all times during the taxable year, if the taxpayer is married at the close of the taxable year. the credit provided by this section shall be allowed only if the taxpayer and his spouse file a joint return for the tax. able year. (2) Marital status Marital status shall be determined under section 143. (3) Joint return The term "Joint return" means the joint return of a husband and wife made under sec- tion 6013. (e) Election of prior law with respect to public retire- ment system income (I) In general In the case of a taxpayer who has not at- tained age 65 before the close of the taxable year (other than a married individual whose spouse has attained age 65 before the close of the taxable year), his credit (if any) under this section shall be determined under this subsection. (2) One spouse age 65 or over In the case of a married individual who has not attained age 65 before the close of the taxable year but whose spouse has attained such age, this paragraph shall apply for the taxable year only if both spouses elect, at such time and in such manner as the Secre- tary shall by regulations prescribe, to have this paragraph apply. If this paragraph ap- plies for the taxable year, the credit (if any) of each spouse under this section shall be de- termined under this subsection. (3) Computation of credit In the case of an individual whose credit under this section for the taxable year is de- termined under this subsection, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to 15 percent of the amount received by such individual as retirement income (as de- fined in paragraph (4) and as limited by para- graph (5)). (4) Retirement income For purposes of this subsection, the term "retirement income" means- (A) in the case of an individual who has attained age 65 before the close of the tax- able year, income from- (i) pensions and annuities (including, in the case of an individual who is, or has been, an employee within the meaning of section 401(c)(1), distributions by a trust described in section 401(a) which is exempt from tax under section 501(a)), (ii) interest, (iii) rents, (iv) dividends, (v) bonds described in section 405(b)(1) which are received under a qualified bond purchase plan described in section 405(a) or in a distribution from a trust described in section 401(a) which is exempt from tax under section 501(a), or retirement bonds described in section 409, and (vi) an individual retirement account de- scribed in section 408(a) or an individual retirement annuity described in section 408(b), or Page 41
TITLE 26-INTERNAL REVENUE CODE (B) in the case of an individual who has not attained age 65 before the close of the taxable year, income from pensions and an- nuities under a public retirement system (as defined in paragraph (8)(A)), to the extent included in gross income with- out reference to this subsection, but only to the extent such income does not represent compensation for personal services rendered during the taxable year. (5) Limitation on retirement income For purposes of this subsection, the amount of retirement income shall not exceed $2,500 less- (A) the reduction provided by subsection (b)(3), and (B) in the case of any individual who has not attained age 72 before the close of the taxable year- (i) if such individual has not attained age 62 before the close of the taxable year, any amount of earned income (as de- fined in paragraph (8)(B)) in excess of $900 received by such individual in the taxable year, or (ii) if such individual has attained age 62 before the close of the taxable year, the sum of one-half the amount of earned income received by such individual in the taxable year in excess of $1,200 but not in excess of $1,700, and the amount of earned income so received in excess of $1,700. (6) Limitation in case of married individuals In the case of a Joint return, paragraph (5) shall be applied by substituting "$3,750" for "$2,500". The $3,750 provided by the preced- ing sentence shall be divided between the spouses in such amounts as may be agreed on by them, except that not more tl,'n $2,500 may be assigned to either spouse. (7) Limitation in the case of separate returns In the case of a married individual filing a separate return, paragraph (5) shall be ap- plied by substituting "$1,875" for "$2,500". (8) Definitions For purposes of this subsection- (A) Public retirement system defined The term "public retirement system" means a pension, annuity, retirement, or similar fund or system established by the United States, a State, a possession of the United States, any political subdivision of any of the foregoing, or the District of Co- lumbia. (B) Earned income The term "earned income" has the mean. ing assigned to such term by section 911(b), except that such term does not include any amount received as a pension or annuity. (f) Nonresident alien ineligible for cedit No credit shall be allowed under this section to any nonresident alien. (Aug. 16, 1954, ch. 736, 68A Stat. 15; Aug. 9, 1955, ch. 659, § 1, 69 Stat. 591; Jan. 28, 1956, ch. 17, § 1, 70 Stat. 8; Oct. 10, 1962, Pub. L. 87-792; § 7(a), 76 Stat. 828; Oct. 24, 1962, Pub. L. 87-876, § 1, 76 Stat. 1199; Feb. 26, 1964, Pub. L. 88-272, title I, § 113(a), title II, §§ 201(d)(3), 202(a), 78 Stat. 24, 32, 33; Sept. 2, 1974, Pub. L. 93-406, title II, § 2002(g)(1), 88 Stat. 968; Oct. 4, 1976, Pub. L. 94-455, title V, § 503(a), 90 Stat. 1559.) REFERENCES IN TEXT The Social Security Act, referred to in subsec. (b)(3), is act Aug. 14, 1935, ch. 531, 49 Stat. 620, as amended. Title II of the Social Security Act is classified general- ly to subchapter II (§ 401 et seq.) of chapter 7 of Title 42, The Public Health and Welfare. For complete clas- sification of this Act to the Code, see section 1305 of Title 42 and Tables volume. The Railroad Retirement Act of 1935 or 1937, re- ferred to in subsec. (b)(3)(B), is act Aug. 29, 1935, ch. 812, 49 Stat. 867, as amended generally by acts June 24, 1937, ch. 382, part I, 50 Stat. 307: Oct. 16, 1974, Pub. L. 93-444, title I, 88 Stat. 1305, now known as the Railroad Retirement Act of 1974, which is classified generally to subchapter IV (§ 231 et seq.) of chapter 9 of Title 45, Railroads. For complete classification of this Act to the Code, see Tables volume. CODIFICATION Section 1901(c)(1) of Pub. L. 94-455 purported to amend subsec. (f) of section 37 of this title by striking out "a Territory". The amendment could not be ex- ecuted in view of the prior general amendment of sec- tion 37 of this title by section 503(a) of Pub. L. 94-455. AMENDMENTS 1976-Pub. L. 94-455, among other changes, substi- tuted "Credits for the elderly" for "Retirement income" in the section catchline and provisions per- mitting taxpayers who have all types of income to be eligible for the tax credit for provisions permitting taxpayers who have only retirement income to be eli- gible for the tax credit, eliminated provisions requir- ing taxpayers to earn $600 for the previous ten years for tax credit eligibility and provisions relating vari- ations in treatment of married couples, and added pro- visions broadening coverage of the tax credit relief to low and middle Income taxpayers. 1974-Subsec. (c)(1). Pub. L. 93-406 inserted refer- ence in subpar. (E) to retirement bonds described in section 409 and added subpar (F). 1964-Subsec. (a). Pub. L. 88-272, §§ 113(a), 201(d)(3), substituted "an amount equal to 17 percent, in the case of a taxable year beginning in 1964, or 15 percent, in the case of a taxable year beginning after December 31, 1964, of the amount received by such individual as retirement income (as defined in subsection (c) and as limited by subsection (d));" for "an amount equal to the amount received by such individual as retirement income (as defined In subsection (c) and as limited by subsection (d)), multiplied by the rate provided in sec- tion 1 for the first $2,000 of taxable Income;", and eliminated "section 34 (relating to credit for dividends received by individuals)", preceding "and section 35". Subsec. (I). Pub. L. 88-272, § 202(a), added subsec. (I). Former subsec. (I) redesignated (M1). Subsec. (J). Pub. L. 88-272, § 202(a), redesignated former subsec. (I) as (j). 1962-Subsec. (c)(l). Pub. L. 87-792 inserted provi- sions in subpar. (A) requiring inclusion, in the case of an individual who is, or has been, an employee within the meaning of section 401(c)(1), distributions by a trust described in section 401(a) which Is exempt from tax under section 501(a), and added subpar. (E). Subsec. (d). Pub. L. 87-876 increased the limit on re- tirement income from $1,200 to $1,524, lowered the age requirement in par. (2)(A) from 65 to 62, and sub- stituted provisions in par. (2)(B) which reduce the amount of retirement income ior individuals who reach age 62, by one-half the amount of earned income in excess of $1,200 but not in excess of $1,700, and by the amount received over $1,700, for provisions which reduced such income by the amount earned over $1,200 by persons having reached age 65, and which defined income as in subsec. (g) of this section. Page 42
TITLE 26-INTERNAL REVENUE CODE 1956-Subsec. (d)(2). Act Jan. 28, 1956, reduced from 75 to 72 the age at which there will be no limitation on earned income and increased from $900 to $1,200 the amount that an individual over 65 can earn without reducing the $1,200 on which the retirement credit is computed. 1955-Subsec. (f). Act Aug. 9, 1955, extended the re- tirement income tax credit to members of the Armed Forces. EFFECTIVE DATE OF 1976 AMENDMENT Amendment by Pub. L. 94-455 applicable with re- spect to taxable years beginning after Dec. 31, 1975, see section 508 of Pub. L. 94-455, set out as an Effec- tive Date of 1976 Amendment note under section 3 of this title. EFFECTIVE DATE OF 1974 AMENDMENT Amendment by Pub. L. 93-406 effective Jan. 1, 1974, see section 2002(i)(2) of Pub. L. 93-406. set out as an Effective Date note under section 4973 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment of subsec. (a) by section 113(a) of Pub. L. 88-272, except for purposes of section 21 of this title, effective with respect to taxable years beginning after Dec. 31, 1963, see section 131 of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 1 of this title. Amendment of subsec. (a) by section 201(d)(3) of Pub. L. 88-272 applicable with respect to dividends re- ceived after Dec. 31, 1964, in taxable years ending after such date, see section 201(e) of Pub. L. 88-272 set out below. Section 201(e) of Pub. L. 88-272 provided that: "The amendments made by subsection (a) [to section 34 of this title] shall apply with respect to taxable years ending after December 31, 1963. The amendment made by subsection (b) [repealing section 34 of this title] shall apply with respect to taxable years ending after December 31, 1964. The amendment made by subsection (c) [to section 116(a) of this title] shall apply with respect to taxable years beginning after December 31, 1963. The amendments made by subsec- tion (d) [to the analysis preceding section 31 and sec- tions 35, 37, 46, 116(c)(3), 584, 642, 702, 854, 857, 871, 1375, and 6014 of this title] shall apply with respect to dividends received after December 31, 1964, in taxable years ending after such date". Section 202(b) of Pub. L. 88-272 provided that: "The amendments made by subsection (a) [to this section] shall apply to taxable years beginning after December 31, 1963." EFFECTIVE DATE OF 1962 AMENDMENT Section 2 of Pub. L. 87-876 provided that: "The amendment made by the first section of this Act [to subsec. (d) of this section] shall apply only to taxable years ending after the date of the enactment of this Act [Oct. 24, 1962)." Section 8 of Pub. L. 87-792 provided that: "The amendments made by this Act [enacting sections 405 and 6047 of this title, and amending sections 37, 62, 72, 101, 104, 105, 172, 401 to 404, 503, 805, 1361, 2039, 2517, 3306, 3401 and 7207 of this title] shall apply to taxable years beginning after December 31, 1962." EFFECTIVE DATE OF 1956 AMENDMENT Section 2 of act Jan. 28, 1956, provided that: "The amendment made by the first section of this Act [to subsec. (d)(2)] shall apply only with respect to taxable years beginning after December 31, 1955." EFFECTIVE DATE OF 1955 AMENDMENT Section 2 of act Aug. 9, 1955, provided that: "The amendment made by this Act [to subsec. Mf)) shall be applicable to taxable years beginning after December 31, 1954." CROSS REFZRENCES Dividends received credit not allowed on distribu- tions of electing small business corporations, see sec- tion 1375 of this title. Disallowance of credit where tax is computed by Secretary or his delegate, see section 6014 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 41, 42, 44, 44A, 46, 50A, 56, 904, 1375, 6014, 6096, 6428 of this title. § 38. Investment in certain depreciable property (a) General rule There shall be allowed, as a credit against the tax imposed by this chapter, the amount deter. mined under subpart B of this part. (b) Regulations The Secretary shall prescribe such regula- tions as may be necessary to carry out the pur- poses of this section and subpart B. (Added Pub. L. 87-834, § 2(a), Oct. 16, 1962, 76 Stat. 962, and amended Pub. L. 94-455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) PRIOR PROVISIONS A prior section 38 was renumbered section 45 of this title. AMENDMENTS 1976-Subsec. (b). Pub. L. 94-455 struck out "or his delegate" following "Secretary". EFFECTIVE DATE Section 2(h) of Pub. L. 87-834 provided that: "The amendments made by this section [adding sections 38, 46 to 48 and 181 of this title, amending sections 381, 1016, 6501, 6511, 6601 and 6611 of this title, and re- numbering former section 38 as section 39 of this title] shall apply with respect to taxable years ending after December 31, 1961." ACCOUNTING FOR INVESTMENT CREDIT IN CERTAIN FINANCIAL REPORTS AND REPORTS TO FEDERAL AGENCIES Pub. L. 92-178, title I, § 101(c), Dec. 10, 1971, 85 Stat. 499, provided that: "(1) In genera--It was the intent of Congress in enacting, in the Revenue Act of 1962 [see Short Title of 1962 Amendment note set out under section 1 of this title), the investment credit allowed by sec- tion 38 of the Internal Revenue Code of 1954 (this section), and it is the intent of the Congress in re- storing that credit in this Act [section 50 of this title), to provide an incentive for modernization and growth of private industry. Accordingly, notwith- standing any other provision of law, on and after the date of the enactment of this Act [Dec. 10, 1971- "(A) no taxpayer shall be required to use, for purposes of financial reports subject to the Juris- diction of any Federal agency or reports made to any Federal agency, any particular method of ac- counting for the credit allowed by such section 38 [this section), "(B) a taxpayer shall disclose, in any such report, the method of accounting for such credit used by him for purposes of such report, and "(C) a taxpayer shall use the same method of ac- counting for such credit in all such reports made by him, unless the Secretary of the Treasury or his delegate consents to a change to another method. "(2) Exceptions.-Paragraph (1) shall not r ply to taxpayers who are subject to the provisionm of sec- tion 46(e) of the Internal Revenue Code of 1954 (as added by section 105(c) of this Act) [section 46(e) of Page 43
TITLE 26-INTERNAL REVENUE CODE this title] or to section 203(e) of the Revenue Act of 1964 (as modified by section 105(e) of this Act) [set out as note below]." TREATMENT OF INVESTMENT CREDIT BY FEDERAL REGULATORY AGENCIES Pub. L. 88-272, title II, § 203(e), Feb. 26, 1964, 78 Stat. 35, provided that: "It was the intent of the Congress in providing an investment credit under section 38 of the Internal Revenue Code of 1954 [this section] and it is the intent of the Congress in repealing the reduction in basis required by section 48(g) of such Code [section 48(g) of this title] to provide an incentive for modern- ization and growth of private industry (including that portion thereof which is regulated). Accordingly, Con- gress does not intend that any agency or instrumental- ity of the United States having jurisdiction with re- spect to a taxpayer shall, without the consent of the taxpayer, use- "(1) in the case of public utility property (as de- fined In section 46(c)(3)(B) of the Internal Revenue Code of 1954) [section 46(c)(3)(B) of this title], more than a proportionate part (determined with refer- ence to the average useful life of the property with respect to which the credit was allowed) of the credit against tax allowed for any taxable year by section 38 of such Code, or "(2) in the case of any other property, any credit against tax allowed by section 38 of such Code, to reduce such taxpayer's Federal income taxes for the purpose of establishing the cost of service of the taxpayer or to accomplish a similar result by any other method." Section 203(e) of Pub. L. 88-272, not applicable to public utility property to which section 46(e) of this title applies, see section 105(e) of Pub. L. 92-178, set out as a note under section 46 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 41, 42, 44, 44A, 46 to 49, 50A, 56, 167, 185, 381, 861, 1351, 6096, 6428, 6601 of this title. § 39. Certain uses of gasoline, special fuels, and lubri- cating oil (a) General rule There shall be allowed as a credit against the tax imposed by this subtitle for the taxable year an amount equal to the sum of the amounts payable to the taxpayer- (1) under section 6420 with respect to gaso- line used during the taxable year on a farm for farming purposes (determined without regard to section 6420(g)), (2) under section 6421 with respect to gaso- line used during the taxable year (A) other- wise than as a fuel in a highway vehicle or (B) in vehicles while engaged in furnishing certain public passenger land transportation service (determined without regard to section 6421(i)), (3) under section 6424 with respect to lubri- cating oil used during the taxable year other- wise than in a highway motor vehicle (deter- mined without regard to section 6424(f)), and (4) under section 6427 with respect to fuels used for nontaxable purposes or resold during the taxable year (determined without regard to section 6427(g)). (b) Exception Credit shall not be allowed under subsection (a) for any amount payable under section 6421, 6424, or 6427, if a claim for such amount is timely filed and, under section 6421(i), 6424(f), or 6427(g), is payable under such section. (Added Pub. L. 89-44, title VIII, 809(c), June 21, 1965, 79 Stat, 167, and amended Pub. L. 91-258, title II, § 207(c), May 21, 1970, 84 Stat. 248; Pub. L. 94-455, title XIX, §§ 1901(a)(3), 1906(b)(8), (9), Oct. 4, 1976, 90 Stat. 1764, 1834; Pub. L. 94- 530, § 1(c)(1), Oct. 17, 1976, 90 Stat. 2487.) CODIFICATION Amendment by Pub. L. 94-530 has been executed to subsec. (b). in light of redesignation of subsec. (c) as subsec. (b) by Pub. L. 94-455. PRIOR PROVISIONS A prior section 39 was renumbered section 45 of this title. AMENDMENTS 1976-Subsec. (a)(1). Pub. L. 94-455, § 1906(b)(8), substituted "section 6420(g)" for "section 6420(h)". Subsec. (a)(3). Pub. L. 94-455, § 1906(b)(9), substitut- ed "section 6424(f)" for "section 6424(g)". Subsec. (a)(4). Pub. L. 94-530 substituted "section 6427(g)" for "section 6427(f)". Subsec. (b). Pub. L. 94-530 substituted "or 6427(g)" for "or 6427(f)". See Codification note above. Pub. L. 94-455, § 1901(a)(3), redesignated former subsec. (c) as (b), and in subsec. (b) as so redesignated, substituted "section 6421(i), 6424(f), or 6427(f), is pay- able" for "section 6421(1), 6424(g) or 6427(f) is pay- able," and struck out former subsec, (b) relating to de- termination of taxpayers first taxable year with re- spect to tax credit for certain uses of gasoline and lu- bricating oil. Subsec. (c). Pub. L. 94-455, § 1901(a)(3), redesignated subsec. (c) as subsec. (b). 1970-Pub. L. 91-258, §207(c)(1), inserted reference to special fuels in the catchline. Subsec. (a). Pub. L. 91-258, § 207(c)(2), added par. (4). Subsec. (c). Pub. L. 91-258, § 207(c)(3), (4), inserted references to sections 6427 and 6427(f), respectively. EFFECTIVE DATE OF 1976 AMENDMENT Amendment by Pub. L. 94-530 effective on Oct. 1, 1976, see section l(d) of Pub. L. 94-530, set out as an Effective Date of 1976 Amendment note under section 4041 of this title. Amendment of subsec (b) by section 1901(a)(3) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Amendment of subsec. (a)(1), (3), by section 1906(b)(8), (9) of Pub. L. 94-455, to take effect on Feb. 1, 1977, see section 1906(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under sec- tion 6013 of this title. EFFECTIVE DATE OF 1970 AMENDMENT Amendment by Pub. L. 91-258 applicable with re- spect to taxable years ending after June 30, 1970, see section 211(b) of Pub. L. 91-258, set out as an Effective Date of 1970 Amendment note under section 4041 of this title. EFFECTIVE DATE Section applicable to taxable years beginning on or after July 1, 1965, see section 809(f) of Pub. L. 89-44, set out as an Effective Date of 1965 Amendment note under section 6420 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 874, 882, 1378, 6201, 6211, 6213, 6362, 6401, 6420, 6421, 6424, 6427 of this title; title 49 section 4742. Page 44
TITLE 26-INTERNAL REVENUE CODE § 40. Expenses of work incentive programs (a) General rule There shall be allowed, as a credit against the tax imposed by this chapter, the amount deter- mined under subpart C of this part. (b) Regulations The Secretary shall prescribe such regula- tions as may be necessary to carry out the pur- poses of this section and subpart C. (Added Pub. L. 92-178, title VI, § 601(a), Dec. 10, 1971, 85 Stat. 553, and amended Pub. L. 94- 455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) PRIOR PROVISIONS A prior section 40 was renumbered section 45 of this title. AMENDMENTS 1976-Subsec. (b). Pub. L. 94-455 struck out "or his delegate" following "Secretary". EFFECTIVE DATE Section applicable to taxable years beginning after Dec. 31, 1971, see section 601(f) of Pub. L. 92-178, set out as an Effective Date note under section 50A of this title. SECTION REFERRED TO IN OTHER SECTIONS This section Is referred to in sections 42, 44, 44A, 50A, 56, 381, 6096, 6428, 6601 of this title. § 41. Contributions to candidates for public office (a) General rule In the case of an individual, there shall be al- lowed, subject to the limitations of subsection (b), as a credit against the tax imposed by this chapter for the taxable year, an amount equal to one-half of all political contributions and all newsletter fund contributions, payment of which is made by the taxpayer within the tax- able year. (b) Limitations (I) Maximum credit The credit allowed by subsection (a) for a taxable year shall not exceed $25 ($50 in the case of a joint return under section 6013). (2) Application with other credits The credit allowed by subsection (a) shall not exceed the amount of the tax imposed by this chapter for the taxable year reduced by the sum of the credits allowable under section 33 (relating to foreign tax credit), section 37 (relating to credit for the elderly), and section 38 (relating t,. investment in certain deprecia- ble property). (3) Verification The credit allowed by subsection (a) shall be allowed, with respect to any political con- tribution or newsletter fund contribution, only if such contribution is verified in such manner as the Secretary shall prescribe by regulations. (c) Definitions For purposes of this section- (1) Political contribution The term "political contribution" means a contribution or gift of money to- (A) an individual who is a candidate for nomination or election to any Federal, State, or local elective public office in any primary, general, or special election, for use by such individual to further his candidacy for nomination or election to such office; (B) any committee, association, or organi- zation (whether or not incorporated) orga- nized and operated exclusively for the pur- pose of influencing, or attempting to influ- ence, the nomination or election of one or more individuals who are candidates for nomination or election to any Federal, State, or local elective public office, for use by such committee, association, or organiza- tion to further the candidacy of such indi- vidual or individuals for nomination or elec- tion to such office; (C) the national committee of a national political party; (D) the State committee of a national po- litical party as designated by the national committee of such party; or (E) a local committee of a national politi- cal party as designated by the State com- mittee of such party designated under sub- paragraph (D). (2) Candidate The term "candidate" means, with respect to any Federal, State, or local elective public office, an individual who- (A) publicly announces before the close of the calendar year following the calendar year in which the contribution or gift is made that he is a candidate for nomination or election to such office; and (B) meets the qualifications prescribed by law to hold such office. (3) National political party The term "national political party" means- (A) in the case of contributions made during a taxable year of the taxpayer in which the electors of President and Vice President are chosen, a political party pre- senting candidates or electors for such of- fices on the official election ballot of ten or more States, or (B) in the case of contributions made during any other taxable year of the tax- payer, a political party which met the quali- fications described in subparagraph (A) in the last preceding election of a President and Vice President. (4) State and local The term "State" means the various States and the District of Columbia; and the term "local" means a political subdivision or part thereof, or two or more political subdivisions or parts thereof, of a State. (5) Newsletter fund contribution The term "newsletter fund contribution" means a contribution or gift of money to a fund established and maintained by an indi- vidual who holds, has been elected to, or is a candidate for nomination or election to, any Federal, State, or local elective public office for use by such individual exclusively for the preparation and circulation of a newsletter. Page 45
TITLE 26-INTERNAL REVENUE CODE (d) Cross references For disallowance of credits to estates and trusts, see section 642(a)(2). (Added Pub. L. 92-178, title VII, § 701(a), Dec. 10, 1971, 85 Stat. 560, and amended Pub. L. 93- 625, §§ 11(a)-(c), (e), 12(a), Jan. 3, 1975, 88 Stat. 2119, 2120; Pub. L. 94-455, title V, § 503(b)(4), title XIX, §§ 1901(b)(1)(B), (H)(ii), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1562, 1790, 1791, 1834.) AMENDMENTS 1976-Subsec. (b)(2). Pub. L. 94-455, § 503(b)(4), sub- stituted "credit for the elderly" for "retirement income", and § 1901(b)(1)(B) struck out "section 35 (re- lating to partially tax-exempt interest)," following "(relating to foreign tax credit),". Subsec. (b)(3). Pub. L. 94-455, § l906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (d). Pub. L. 94-455, § 1901(b)(1)(H)(ii), substi- tuted "section 642(a)(2)" for "section 642(a)(3)". 1975-Subsec. (a). Pub. L. 93-625, § 11(a), included in the tax credit an amount equal to one half of all news- letter fund contributious. Subsec. (b)(1). Pub. L. 93-625, § 12(a), doubled amount of maximum credit. Subsec. (b)(3). Pub. L. 93-625, § I1(b), inserted "or newsletter fund contribution" following "political con- tribution" where first appearing and deleted "politi- cal" preceding "contribution" appearing thereafter. Subsec. (c)(2)(A). Pub. L. 93-625, § 11(e), substituted "publicly announces before the close of the calendar year following the calendar year in which the contri- bution or gift is made" for "has publicly announced". Subsec. (c)(5). Pub. L. 93-625, § 11(c), added par. (5). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (b)(2), (d) by section 1901(b)(1)(B), (H)(ii) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 2 of this title. Amendment of subsec. (b)(2) by section 503(b)(4) of Pub. L. 94-455 applicable to taxable years beginning after Dec. 31, 1975, see section 508 of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 3 of this title. EFFECTIVE DATE OF 1975 AMENDMENT Section 11(f) of Pub. L. 93-625 provided that: "The amendments made by this section [to this section and section 218 of this title] shall apply to any contribu- tion payment of which is made after December 31, 1974, in taxable years beginning after such date." Section 12(c) of Pub. L. 93-625 provided that: "The amendments made by subsections (a) and (b) [to this section and section 218 of this title] shall apply with respect to any contribution the payment of which is made after December 31, 1974, in taxable years begin- ninig after such date." EFFECTIVE DATE Section 703 of Pub. L. 92-178 provided that: "The amendments made by this title [enacting sections 41, 218, and 642(a)(3), (i) of this title] shall apply to tax- able years ending after December 31, 1971, but only with respect to political contributions, payment of which is made after such date." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 42, 44, 44A, 50A, 56, 218, 527, 642, 6096, 6428 of this title. § 42. General tax credit (a) Allowance of credit In the case of an individual, there shall be al- lowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to the greater of- (1) 2 percent of so much of the taxpayer's taxable income for the taxable year as does not exceed $9,000; or (2) $35 multiplied by each exemption for which the taxpayer is entitled to a deduction for the taxable year under subsection (b) or (e) of section 151. (b) Application with other credits The credit allowed by subsection (a) shall not exceed the amount of the tax imposed by this chapter for the taxable year. In determining the credits allowed under- (1) section 33 (relating to foreign tax credit), (2) section 37 (relating to credit for the el- derly credit), (3) section 38 (relating to investment in cer- tain depreciable property), (4) section 40 (relating to expenses of work incentive programs), and (5) section 41 (relating to contributions to candidates for public office), the tax imposed by this chapter shall (before any other reductions) be reduced by the credit allowed by this section. (c) Special rule for married individuals iling sepa. rate returns (1) In general Notwithstanding subsection (a), in the case of a married individual who files a separate return for the taxable year, the amount of the credit allowable under subsection (a) for the taxable year shall be equal to either- (A) the amount determined under para- graph (1) of subsection (a); or (B) if this subparagraph applies to the in- dividual for the taxable year, the amount determined under paragraph (2) of subsec- tion (a). For purposes of the preceding sentence, para- graph (1) of subsection (a) shall be applied by substituting "$4,500" for "$9,000". (2) Application of paragraph (1)(B) Subparagraph (B) of paragraph (1) shall apply to any taxpayer for any taxable year if- (A) such taxpayer elects to have such sub- paragraph apply for such taxable year, and (B) the spouse of such taxpayer elects to have such subparagraph apply for any tax. able year corresponding, for purposes of section 142(a), to the taxable year of the taxpayer. Any such election shall be made at such time, and in such manner, as the Secretary shall by regulations prescribe. (3) Marital status For purposes of this subsection, the deter- mination of marital status shall be made under section 143. Page 46
TITLE 26-INTERNAL REVENUE CODE (d) Certain persons not eligible This section shall not apply to any estate or trust, nor shall it apply to any nonresident alien individual. (Added Pub. L. 94-12, title II, § 203(a), Mar. 29, 1975, 89 Stat. 29, and amended Pub. L. 94-164, § 3(a)(1), Dec. 23, 1975, 89 Stat. 972; Pub. L. 94- 455, title IV, § 401(a)(2)(A), (B), title V, §503(b)(4), title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1555, 1562, 1834.) PRIOR PROVISIONS A prior section 42 was renumbered section 45 of this title. AMENDMENTS 1976-Pub. L. 94-455, §401(a)(2)(A), substituted "General tax" for "Taxable income" in section catch- line. Subsec. (a). Pub. L. 94-455, §401(a)(2)(A), among other changes, eliminated provisions relating to the application of the six-month rule. Subsec. (b)(2). Pub, L. 94-455, § 503(b)(4), substituted "credit for the elderly" for "retirement income". Subsee. (c)(1). Pub. L. 94-455, § 401(a)(2)(B), substi- tuted "paragraph (1)" for "paragraph (1)(A)" in subpar. (A) and "paragraph (2)" for "paragraph (1)(B)" in subpar. (B). Subsec. (c)(2). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". 1975-Subsec. (a). Pub. L. 94-164 redesignated exist- ing provisions as par. (1), and in par. (1) as so redesig- nated substituted provisions for determination of amount allowable as credit as the greater of 2 percent of so much of the taxpayer's taxable income for the taxable year as does not exceed $9,000 or the product obtained by multiplying $35 by the number of exemp- tions for provisions for determination of the amount of such credit as the product obtained by multiplying $30 by the number of exemptions, and added par. (2). Subsecs. (c), d). Pub. L. 94-164 added subsecs. (c) and (d). EFFECTIVE DATE OF 1976 AMENDMENT Section 401(e) of Pub. L. 94-455 provided that: "The amendments made by subsections (a) and (c) (to sub- sees, (a) and (c)(1) of this section, sections 43(a) to (c)(1)(A) and 6096(b) of this title, and to notes under this section and section 43 of this title] shall apply to taxable years ending after December 31, 1975, and shall cease to apply to taxable years ending after De- cember 31, 1977. The amendments made by subsection (b) [to sections 141(b), (c) and 6012(a) of this title] shall apply to taxable years ending after December 31, 1975. The amendments made by subsection (d) [to sec- tion 3402(a), (c), (m) of this title] shall apply to wages paid after September 14, 1976." Amendment of subsec. (b)(2) by section 503(b)(4) of Pub. L. 94-455 applicable to taxable years beginning after Dec. 31, 1975, see section 508 of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 3 of this title. EFFECTIVE AND TERMINATION DATES OF 1975 AMENDMENT Section 3(b) of Pub. L. 94-164 as amended by Pub. L. 94-455 §401(a)(1), provided that: "The amendments made by subsection (a) [amending this section] shall apply to taxable years ending after December 31, 1975. Such amendments shall cease to apply to taxable years ending after December 31, 1977." Section 209(a) of Pub. L. 94-12 as amended by Pub. L. 94-164 § 2(e), provided that: "The amendments made by sections 201, 202(a), and 203 [enacting this section and amending sections 3, 56, 141, 6012, and 6096 of this title] shall apply to taxable years ending after December 31, 1974. The amendments made by section 201(a) and 202(a) [amending section 141 of this title] shall cease to apply to taxable years ending after December 31, 1975; those made by sections 201(b), 201(c), and 203 [enacting this section and amending sections 3, 56, 6012, and 6096 of this title] shall cease to apply to taxable years ending after December 31, 1976." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 44, 44A, 56, 6096, 6153 of this title. § 43. Earned income (a) Allowance of credit In the case of an eligible individual, there is allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to 10 percent of so much of the earned income for the taxable year as does not exceed $4,000. (b) Limitation The amount of the credit allowable to a tax- payer under subsection (a) for any taxable year shall be reduced (but not below zero) by an amount equal to 10 percent of so much of the adjusted gross income (or, if greater, the earned income) of the taxpayer for the taxable year as exceeds $4,000. (c) Definitions For purposes of this section- (1) Eligible individual The term "eligible individual" means an in- dividual who, for the taxable year- (A) maintains a household (within the meaning of section 44A(f) (1)) in the United States which is the principal place of abode of that individual and- (i) a child of that individual if such child meets the requirements of section 151(e)(1)(B) (relating to additional ex- emptions for dependents), or (ii) a child of that individual who is dis- abled (within the meaning of section 72(m)(7)) and with respect to whom that individual is entitled to claim a deduction under section 151; and (B) is not entitled to exclude any amount from gross income under section 911 (relat- ing to earned Income from sources without the United States) or section 931 (relating to income from sources within the posses- sions of the United States). (2) Earned income (A) The term "earned income" means- (I) wages, salaries, tips, and other em- ployee compensation, plus (ii) the amount of the taxpayer's net earnings from self-employment for the taxable year (within the meaning of sec- tion 1402(a)). (B) For purposes of subparagraph A)- (I) except as provided in clause (ii), any amount shall be taken into account only if such amount is includible in the gross income of the taxpayer for the taxable year, (ii) the earned income of an individual shall be computed without regard to any community property laws, (iII) no amount received as a pension or annuity shall be taken into account, and Page 47
TITLE 26-INTERNAL REVENUE CODE (iv) no amount to which section 871(a) applies (relating to income of nonresident alien individuals not connected with United States business) shall be taken into account. (d) Married individuals In the case of an individual who is married (within the meaning of section 143), this sec- tion shall apply only if a joint return is filed for the taxable year under section 6013. (e) Taxable year must be full taxable year Except in the case of a taxable year closed by reason of the death of the taxpayer, no credit shall be allowable under this section in the case of a taxable year covering a period of less than 12 months. (Added Pub. L. 94-12, title II, § 204(a), Mar. 29, 1975, 89 Stat. 30, and amended Pub. L. 94-164, § 2(c), Dec. 23, 1975, 89 Stat. 971; Pub. L. 94-455, title IV, § 401(c)(1)(B), (2), Oct. 4. 1976, 90 Stat. 1557.) PRIOR PROvISoNS A prior section 43 was renumbered section 45 of this title. AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, § 401(c)(1)(B), sub- stituted "is allowed" for "shall be allowed" and elimi- nated provisions relating to the application of the six- month rule. Subsec. (b). Pub. L. 94-455, § 401(c)(1)(B), eliminated provisions relating to the application of the six-month rule. Subsec. (c)(1)(A). Pub. L. 94-455, § 401(c)(2), among other changes, substituted "section 44A(f)(1)" for "section 214(b)(3)" and "if such child meets the re- quirements of section 151(e)(1)(B)" for "with respect to whom he is entitled to claim a deduction under sec- tion 151(e)(1)(B)" and added reference to a child of that individual who is disabled (within the meaning of section 72(m)(7)) and with respect to whom that indi- vidual is entitled to claim a deduction under section 151. 1975-Subsec. (a). Pub. L. 94-164 designated existing provisions as par. (1), and added par. (2). Subsec. (b) Pub. L. 94-164 designated existing provi- sions as par. (1), and added par. (2). EFFECTIVE DATE OF 1976 AMENDMENT Amendment by Pub. L. 94-455 applicable to taxable years ending after Dec. 31, 1975, and shall cease to apply to taxable years ending after Dec. 31, 1977, see section 401(e) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 42 of this title. EFFECTIVE AND TERMINATION DATES OF 1975 AMENDMENT Section 2(g) of Pub. L. 94-164 as amended by Pub. L. 94-455, § 402(b), provided that: "The amendments made by this section [amending sections 43, 141, 3402, and 6012 of this title and provisions set out as notes under sections 42g and 43 of this title) (other than by subsection (d) [enacting provisions set out as a note under this section)) apply to taxable years ending after December 31, 1975, and before January 1, 1978. Subsection (d) applies to taxable years ending after December 31, 1975." Section 209(b) of Pub. L. 94-12, as amended by Pub. L. 94-164, § 2(f), and Pub. L. 94-455, § 401(c)(1)(A), pro- vided that: "The amendments made by section 204 [enacting this section and amending sections 6201 and 6401 of this title] shall apply to taxable years begin- ning after December 31, 1974, and before January 1, 1978." DISREGARD OF REFUND FOR DETERMINATION OF ELIGIBILITY FOR FEDERAL BENEFITS OR ASSISTANCE Section 2(d) of Pub. L. 94-164 as amended by Pub. L. 94-455, § 402(a), provided that: "Any refund of Federal income taxes made to any individual by reason of sec- tion 43 of the Internal Revenue Code of 1954 (relating to earned income credit) [this section] shall not be taken into account as income or receipts for purposes of determining the eligibility, for the month in which such refund is made or any month thereafter of such individual or any other individual for benefits or assis- tance, or the amount or extent of benefits or assis- tance, under any Federal program or under any State or local program financed in whole or in part with Federal funds, but only if such individual (or the family unit of which he is a member) is a recipient of benefits or assistance under such a program for the month before the month in which such refund is made." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 6153, 6201, 6401 of this title. § 44. Purchase of new principal residence (a) General rule In the case of an individual there is allowed, as a credit against the tax imposed by this chapter for the taxable year, an amount equal to 5 percent of the purchase price of a new principal residence purchased or constructed by the taxpayer. (h) Limitations (1) Maximum credit The credit allowed under subsection (a) may not exceed $2,000. (2) Limitation to one residence The credit under this section shall be al- lowed with respect to only one residence of the taxpayer. (3) Married individuals In the case of a husband and wife who file a joint return under section 6013, the amount specified under paragraph (1) shall apply to the joint return. In the case of a married indi- vidual filing a separate return, paragraph (1) shall be applied by substituting "$1,000" for "$2,000". (4) Certain other taxpayers In the case of individuals to whom para- graph (3) does not apply who together pur- chase the same new principal residence for use as their principal residence, the amount of the credit allowed under subsection (a) shall be allocated among such individuals as prescribed by the Secretary, but the sum of the amounts allowed to such individuals shall not exceed $2,000 with respect to that resi- dence. (5) Application with other credits The credit allowed by subsection (a) shall not exceed the amount of the tax imposed by this chapter for the taxable year, reduced by the sum of the credits allowable under sec- tions 33, 37, 38, 40, 41, and 42. (c) Definitions For purposes of this section- (1) New principal residence The term "new principal residence" means a principal residence (within the meaning of Page 48
TITLE 26-INTERNAL REVENUE CODE section 1034), the original use of which com- mences with the taxpayer, and includes, with- out being limited to, a single family structure, a residential unit in a condominium or coop- erative housing project, and a mobile home. (2) Purchase price The term "purchase price" means the ad- justed basis of the new principal residence on the date of the acquisition thereof. (3) Purchase The term "purchase" means any acquisition of property, but only if- (A) the property is not acquired from a person whose relationship to the person ac- quiring it would result in the disallowance of losses under section 267 or 707(b) (but, in applying section 267(b) and (c) for purposes of this section, paragraph (4) of section 267(c) shall be treated as providing that the family of an individual shall include only his spouse, ancestors, and lineal descen- dants), and (B) the basis of the property in the hands of the person acquiring it is not deter- mined- (I) in whole or in part by reference to the adjusted basis of such property in the hands of the person from whom acquired, or (it) under section 1014(a) (relating to property acquired from a decedent). (d) Recapture for certain dispositions (1) In general Except as provided in paragraphs (2) and (3), if the taxpayer disposes of property with respect to the purchase of which a credit was allowed under subsection (a) at any time within 36 months after the date on which he acquired it (or, in the case of construction by the taxpayer, on the day on which he first oc- cupied it) as his principal residence, then the tax imposed under this chapter for the tax- able year in which terminates the replace- ment period under paragraph (2) with respect to the disposition is increased by an amount equal to the amount allowed as a credit for the purchase of such property. (2) Acquisition of new residence If, in connection with a disposition de- scribed in paragraph (1) and within the appli- cable period prescribed in section 1034, the taxpayer purchases or constructs a new prin- cipal residence, then the provisions of para- graph (1) shall not apply and the tax imposed by this chapter for the taxable year following the taxable year during which disposition occurs is increased by an amount which bears the same ratio to the amount allowed as a credit for the purchase of the old residence as (A) the adjusted sales price of the old resi- dence (within the meaning of section 1034), reduced (but not below zero) by the taxpay- er's cost of purchasing the new residence (within the meaning of such section) bears to (B) the adjusted sales price of the old resi- dence. (3) Death of owner; casualty loss; involuntary con- version; etc. The provisions of paragraph (1) do not apply to- (A) a disposition of a residence made on account of the death of any individual having a legal or equitable interest therein occurring during the 36 month period to which reference is made under such para- graph, (B) a disposition of the old residence if it is substantially or completely destroyed by a casualty described in section 165(c)(3) or compulsorily and involuntary converted (within the meaning of section 1033(a)), or (C) a disposition pursuant to a settlement in a divorce or legal separation proceeding where the other spouse retains the resi- dence as principal residence. (e) Property to which section applies (1) In general The provisions of this section apply to a new principal residence- (A) the construction of which began before March 26, 1975, (B) which is acquired and occupied by the taxpayer after March 12, 1975, and before January 1, 1977, and (C) if not constructed by the taxpayer, which was acquired by the taxpayer under a binding contract entered into by the tax- payer before January 1, 1976. (2) Self-constructed property begun before March 13, 1975 In the case of property the construction of which was begun by the taxpayer before March 13, 1975, only that portion of the basis of such property properly allocable to con- struction after March 12, 1975, shall be taken into account in determining the amount of the credit allowable under subsection (a). (3) Binding contract For purposes of this subsection, a contract for the purchase of a residence which is con- ditioned upon the purchaser's obtaining a loan for the purchase of the residence (in- cluding conditions as to the amount or inter- est rate of such loan) is not considered non- binding on account of that condition. (4) Certification must be attached to return This section does not apply to any residence (other than a residence constructed by the taxpayer) unless there is attached to the return of tax on which the credit is claimed a written certification (which may be in any form) signed by the seller of such residence that- (A) construction of the residence began before March 26, 1975, and (B) the purchase price of the residence is the lowest price at which the residence was offered for sale after February 28, 1975. For purposes of this paragraph, a written cer- tification filed by a taxpayer is sufficient whether or not it is on a form prescribed by the Secretary so long as such certification is signed by the seller and contains the informa- tion required under this paragraph. (Added Pub. L. 94-12, title II, § 208(a), Mar. 29, 1975, 89 Stat. 32; and amended Pub. L. 94-45, title IV, § 401(a), June 30, 1975, 89 Stat. 243; Pub. L. 94-455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) Page 49
TITLE 26-INTERNAL REVENUE CODE PRIOR PROVISIONS A prior section 44 was renumbered section 45 of this title. AMENDMENTS 1976-Pub. L. 94-455 struck out "or his delegate" fol. lowing "Secretary" wherever appearing. 1975-Subsec. (e)(4). Pub. L. 94-45 substituted "does not apply" for "shall not apply" and "a written certifi- cation (which may be in any form) signed by the seller of such residence that 1-1" for "a certification by the seller, in accordance with regulations prescribed by the Secretary or his delegate, that the purchase price is the lowest price at which the residence was ever of- fered for sale" in the existing provisions and added subpars. (A) and (B) and the provisions following subpar. (B). SUITS TO RECOVER AMOUNTS OF PRICE INCREASES Section 208(b) of Pub. L. 94-12, as amended by Pub. L. 94-45, title IV, § 401(b), June 30, 1975, 89 Stat. 244, provided that: "If- "(1) any person certificates under section 44(e)(4) of the Internal Revenue Code of 1954 [subsec. (e)(4) of this section] that the price for which a residence was sold is the lowest price at which the residence was offered for sale after February 28. 1975, and "(2) the price for which the residence was sold ex- ceeded the lowest price at which the residence was offered for sale after February 28, 1975, such person shall be liable to the purchaser of such residence in an amount equal to three times the amount of such excess. The United States district courts shall have jurisdiction of suits to recover such amounts without regard to any other provision of law. In any suit brought under this subsection in which judgment is entered for the purchaser, he shall also be entitled to recover a reasonable attorney's fee." DENIAL OF DEDUCTION FOR AMOUNTS PAID OR INCURRED ON JUDGMENTS IN SUITS BROUGHT TO RECOVER PRICE INCREASES Section 208(c) of Pub. L. 94-12 provided that: "Not- withstanding the provisions of section 162 or 212 of the Internal Revenue Code of 1954 [sections 162 or 212 of this title], no deduction shall be allowed in com- puting taxable income for two-thirds of any amount paid or incurred on a Judgment entered against any person in a suit brought under subsection (b) [set out as a note above]." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 44A, 56, 6096 of this title. §44A. Expenses for household and dependent care services necessary for gainful employment (a) Allowance of credit In the case of an individual who maintains a household which includes as a member one or more qualifying individuals (as defined in sub- section (c)(1)), there shall be allowed as a credit against the tax imposed by this chapter for the taxable year an amount equal to 20 percent of the employment-related expenses (as defined in subsection (c)(2)) paid by such individual during the taxable year. (b) Application with other credits The credit allowed by subsection (a) shall not exceed the amount of the tax imposed by this chapter for the taxable year reduced by the sum of the credits allowable under- (1) section 33 (relating to foreign tax credit), (2) section 37 (relating to credit for the el- derly), (3) section 38 (relating to investment in cer- tain depreciable property), (4) section 40 (relating to expenses of work incentive programs), (5) section 41 (relating to contributions to candidates for public office), (6) section 42 (relating to general tax credit), and (7) section 44 (relating to purchase of new principal residence). (c) Definitions of qualifying individual and employ. ment-related expenses For purposes of this section- (1) Qualifying individual The term "qualifying individual" means- (A) a dependent of the taxpayer who is under the age of 15 and with respect to whom the taxpayer is entitled to a deduc- tion under section 151(e), (B) a dependent of the taxpayer who is physically or mentally incapable of caring for himself, or (C) the spouse of the taxpayer, if he is physically or mentally incapable of caring for himself. (2) Employment-related expenses (A) In general The term "employment-related expenses" means amounts paid for the following ex- penses, but only if such expenses are in- curred to enable the taxpayer to be gainful- ly employed for any period for which there are 1 or more qualifying individuals with re- spect to the taxpayer: (I) expenses for household services, and (1i) expenses for the care of a qualifying individual. (B) Exception Employment-related expenses described in subparagraph (A) which are incurred for services outside the taxpayer's household shall be taken into account only if incurred for the care of a qualifying individual de- scribed in paragraph (1)(A). (d) Dollar limit on amount creditable The amount of the employment-related ex- penses incurred during any taxable year which may be taken into account under subsection (a) shall not exceed- (1) $2,000 if there is 1 qualifying Individual with respect to the taxpayer for such taxable year, or (2) $4,000 if there are 2 or more qualifying individuals with respect to the taxpayer for such taxable year. (e) Earned income limitation (1) In general Except as otherwise provided in this subsec- tion, the amount of the employment-related expenses incurred during any taxable year which may be taken into account under sub- section (a) shall not exceed- (A) in the case of an individual who is not married at the close of such year, such indi- vidual's earned income for such year, or (B) in the case of an individual who is married at the close of such year, the lesser of such individual's earned income or the earned income of his spouse for such year. § 44A Page 50
TITLE 26-INTERNAL REVENUE CODE (2) Special rule for spouse who is a student or in- capable of caring for himself In the case of a spouse who is a student or a qualifying individual described in subsection (c)(1)(C), for purposes of paragraph (1), such spouse shall be deemed for each month during which such spouse is a full-time stu- dent at an educational institution, or is such a qualifying individual, to be gainfully em- ployed and to have earned income of not less than- (A) $166 if subsection (d)(1) applies for the taxable year, or (B) $333 if subsection (d)(2) applies for the taxable year. In the case of any husband and wife, this paragraph shall apply with respect to only one spouse for any one month. (f) Special rules For purposes of this section- (1) Maintaining household An individual shall be treated as maintain- ing a household for any period only if over half the cost of maintaining the household for such period is furnished by such individ- ual (or, if such individual is married during such period, is furnished by such individual and his spouse). (2) Married couples must file joint return If the taxpayer is married at the close of the taxable year, the credit shall be allowed under subsection (a) only if the taxpayer and his spouse file a joint return for the taxable year. (3) Marital status An individual legally separated from his spouse under a decree of divorce or of sepa- rate maintenance shall not be considered as married. (4) Certain mnaried individuals living apart If- (A) an individual who is married and who files a separate return- (i) maintains as his home a househc~d which constitutes for more than one-half of the taxable year the principal place of abode of a qualifying individual, and (ii) furnishes over half of the cost of maintaining such household during the taxable year, and (B) during the last 6 months of such tax- able year such individual's spouse is not a member of such household, such individual shall not be considered as married. (5) Special dependency test in case of divorced par- ents, etc. If- (A) a child (as defined in section 151(e)(3)) who is under the age of 15 or who is physically or mentally incapable of caring for himself receives over half of his support during the calendar year from his parents who are divorced or legally separated under a decree of divorce or separate maintenance or who are separated under a written sepa- ration agreement, and (B) such child is in the custody of one or both of his parents for more than one-half of the calendar year, in the case of any taxable year beginning in such calendar year such child shall be treated as being a qualifying individual described in subparagraph (A) or (B) of subsection (c)(1), as the case may be, with respect to that parent who has custody for a longer period during such calendar year than the other parent, and shall not be treated as being a qualifying individual with respect to such other parent. (6) Payments to related individuals (A) In general Except as provided in subparagraph (B), no credit shall be allowed under subsection (a) for any amount paid by the taxpayer to an individual bearing a relationship to the taxpayer described in paragraphs (1) through (8) of section 152(a) (relating to definition of dependent) or to a dependent described in paragraph (9) of such s. -tion. (B) Exception Subparagraph (A) shall not apply to any amount paid by the taxpayer to an individ- ual with respect to whom, for the taxable year of the taxpayer in which the service is performed, neither the taxpayer nor his spouse is entitled to a deduction under sec- tion 151(e) (relating to deduction for per- sonal exemptions for dependents), but only if the service with respect to which such amount is paid constitutes employment within the meaning of section 3121(b). (7) Student The term "student" means an individual who during each of 5 calendar months during the taxable year is a full-time student at an educational organization. (8) Educational organization The term "educational organization" means an educational organization described in sec- tion 170(b)(1)(A)(ii). (g) Regulations The Secretary shall prescribe such regula- tions as may be necessary to carry out the pur- poses of this section. (Added Pub. L. 94-455, title V, § 504(a)(1), Oct. 4, 1976, 90 Stat. 1563.) EFFECTIVE DATE Section applicable to taxable years beginning after Dec. 31, 1975, see section 508 of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 3 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 56, 6096 of this title. § 45. Overpayments of tax For credit against the tax imposed by this subtitle for overpayments of tax, see section 6401. (Aug. 16, 1954, ch. 736, 68A Stat. 16, § 38, re- numbered § 39, Oct. 16, 1962, Pub. L. 87-834, § 2(a), 76 Stat. 962; renumbered § 40, June 21, 1965, Pub. L. 89-44, title VIII, § 809(c), 79 Stat. 167; renumbered § 42, Dec. 10, 1971, Pub. L. 92- Page 51
TITLE 26-INTERNAL REVENUE CODE 178, title VI, § 601(a), 85 Stat. 553; renumbered § 43, Mar. 29, 1975, Pub. L. 94-12, title II, § 203(a), 89 Stat. 29; renumbered § 44, Mar. 29, 1975, Pub. L. 94-12, title II, § 204(a), 89 Stat. 30; renumbered § 45, Mar. 29, 1975, Pub. L. 94-12, title II, § 208(a), 89 Stat. 32.) SUBPART B-RULES FOR COMPUTING CREDIT FOR INVESTMENT IN CERTAIN DEPRECIABLE PROPERTY Sec. 46. Amount of credit. 47. Certain dispositions, etc., of section 38 property. 48. Definitions: special rules. 49. Termination for period beginning April 19, 1969, and ending during 1971. 50. Restoration of credit. SUBPART REFERRED TO IN OTHER SECTIONS This subpart is referred to in section 38 of this title. AMENDMENTS 1971-Pub. L. 92-178, title I, § 101(b)(5), Dec. 10, 1971, 85 Stat. 499, substituted "Termination for period beginning April 19, 1969, and ending during 1971" for "Termination of credit" in item 49 and added item 50. 1969-Pub. L. 91-172, title VII, § 703(d), Dec. 30, 1969, 83 Stat. 667, added item 49. 1962-Pub. L. 87-834, § 2(b), Oct. 16, 1962, 76 Stat. 963, added subpart B. § 46. Amount of credit (a) General rule (1) First-in-first.out rule The amount of the credit allowed by section 38 for the taxable year shall be an amount equal to the sum of- (A) the investment credit carryovers car- ried to such taxable year, (B) the amount of the credit determined under paragraph (2) for such taxable year, plus (C) the investment credit carrybacks car- ried to such taxable year. (2) Amount of credit for current taxable year (A) 10 percent credit Except as otherwise provided in subpara- graph (B), in the case of a property de- scribed in subparagraph (D), the amount of the credit determined under this paragraph for 'he taxable year shall be an amount equal to 10 percent of the qualified invest- ment (as determined under subsections (c) and (d)). (B) Additional credit In the case of a corporation which elects (at such time, in such form, and in such manner as the Secretary prescribes) to have the provisions of this subparagraph apply, the amount of the credit determined under this paragraph shall be an amount equal to- (i) 11 percent of the qualified invest- ment (as determined under subsections (c) and (d)), plus (ii) an additional percent (not in excess of one-half percent) of the qualified in- vestment (as determined.under such sub- sections) equal in amount to the amount determined under section 301(e) of the Tax Reduction Act of 1975. An election may not be made to have the provisions of this subparagraph apply unless the corporation meets the require- ments of section 301(d) of the Tax Reduc- tion Act of 1975. (C) 7 percent credit In case of property not described in sub. paragraph (D), the amount of credit deter- mined under this paragraph for the taxable year shall be an amount equal to 7 percent of the qualified investment (as determined under subsections (c) and (d)). (D) Transitional rules The provisions of subparagraphs (A) and (B) shall apply only to- (i) property to which subsection (d) does not apply, the construction, reconstruc- tion, or erection of which is completed by the taxpayer after January 21, 1975, but only to the extent of the basis thereof at- tributable to the construction, reconstruc- tion, or erection after January 21, 1975, and before January 1, 1981, (ii) property to which subsection (d) does not apply, acquired by the taxpayer after January 21, 1975, and before Janu- ary 1, 1981, and placed in service by the taxpayer before January 1, 1981, and (iii) property to which subsection (d) ap- plies, but only to the extent of the quali- fied investment (as determined under sub- sections (c) and (d)) with respect to quali- fied progress expenditures made after January 21, 1975, and before January 1, 1981. For purposes of applying clause (ii) of sub- paragraph (B), the date "December 31, 1976," shall be substituted for the date "January 21, 1975," each place it appears in this subparagraph. (3) Limitation based on amount of tax Notwithstanding paragraph (1), the credit allowed by section 38 for the taxable year shall not exceed- (A) so much of the liability for tax for the taxable year as does not exceed $25,000, plus (B) for taxable years ending on or before the last day of the suspension period (as de- fined in section 48(j)), 25 percent of so much of the liability for tax for the taxable year as exceeds $25,000, or (C) for taxable years ending after the last day of such suspension period, 50 percent of so much of the liability for tax for the tax- able year as exceeds $25,000. In applying subparagraph (C) to a taxable year beginning on or before the last day of such suspension period and ending after the last day of such suspension period, the per- cent referred to in such subparagraph shall be the sum of 25 percent plus the percent which bears the same ratio to 25 percent as the number of days in such year after the last day of the suspension period bears to the total number of days in such year. The amount otherwise determined under this paragraph shall be reduced (but not below zero) by the credit which would have been al- lowable under paragraph (1) for such taxable year with respect to suspension period prop- Page 52
TITLE 26-INTERNAL REVENUE CODE erty but for the application of section 48(h)(1). (4) Liability for tax For purposes of paragraph (3), the liability for tax for the taxable year shall be the tax imposed by this chapter for such year, re- duced by the sum of the credits allowable under- (A) section 33 (relating to foreign tax credit), and (B) section 37 (relating to credit for the elderly). For purposes of this paragraph, any tax im- posed for the taxable year by section 56 (re- lating to minimum tax for tax preferences), section 72(m)(5)(B) (relating to 10 percent tax on premature distributions to owner-employ- ees), section 4Wf) (relating to additional tax on income from certain retirement accounts), section 402(e) (relating to tax on lump sum distributions), section 531 (relating to accu- mulated earnings tax), section 541 (relating to personal holding company tax) and any addi- tional tax imposed for the taxable year by section 1351(d)(1) (relating to recoveries of foreign expropriation losses), or section 1378 (relating to tax on certain capital gains of subchapter S corporations), and shall not be considered tax imposed by this chapter for such year. (5) Married individuals In the case of a husband or wife who files a separate return, the amount specified under subparagraphs (A) and (B) of paragraph (3) shall be $12,500 in lieu of $25,000. This para- graph shall not apply if the spouse of the tax- payer has no qualified investment for, and no unused credit carryback or carryover to, the taxable year of such spouse which ends within or with the taxpayer's taxable year. (6) Controlled groups In the case of a controlled group, the $25,000 amount specified under paragraph (3) shall be reduced for each component member of such group by apportioning $25,000 among the component members of such group in such manner as the Secretary shall by regula- tions prescribe. For purposes of the preceding sentence, the term "controlled group" has the meaning assigned to such term by section 1563(a). (7) Alternative limitation in the case of certain util. ities (A) In general If, for a taxable year ending after calen- dar year 1974 and before calendar year 1981, the amount of the qualified invest- ment of the taxpayer which is attributable to public utility property is 25 percent or more of his aggregate qualified investment, then subparagraph (C) of paragraph (3) of this subsection shall be applied by substi- tuting for 50 percent his applicable percent- age for such year. (B) Applicable percentage The applicable percentage of any taxpay- er for any taxable year is- (1) 50 percent, plus (ii) that portion of the tentative per- centage for the taxable year which the taxpayer's amount of qualified invest- ment which is public utility property bears to his aggregate qualified invest- ment. If the proportion referred to in clause (it) is 7F percent or more, the applicable percent- hge of the taxpayer for the year shall be 50 percent plus the tentative percentage for such year. (C) Tentative percentage For purposes of subparagraph (B), the tentative percentage shall be determined under the following table: If the taxable year ends in: The tentative percentage is: 1975 or 1976 ............................... 50 1977 ..................................... 40 1978 ..................................... 30 1979 ..................................... 20 1980 ..................................... 10 (D) Public utility property defined For purposes of this paragraph, the term "public utility property" has the meaning given to such term by the first sentence of subsection (c)(3)(B). (8) Alternative limitation in the case of certain rail. roads (A) In general If, for a taxable year ending after calen- dar year 1976, and before calendar year 1983, the amount of the qualified invest- ment of the taxpayer which is attributable to railroad property is 25 percent or more of his aggregate qualified investment, then subparagraph (C) of paragraph (3) of this subsection shall be applied by substituting for 50 percent his applicable percentage for such year. (B) Applicable percentage The applicable percentage of any taxpay- er for any taxable year under this para- graph is- (i) 50 percent, plus (ii) that portion of the tentative per- centage for the taxable year which the taxpayer's amount of qualified invest- ment which is railroad property bears to his aggregate qualified investment. If the proportion referred to in clause (ii) is 75 percent or more, the applicable percent- age of the taxpayer for the year shall be 50 percent plus the tentative percentage for such year. (C) Tentative percentage For purposes of subparagraph (B), the tentative percentage shall be determined under the following table: lithe taxable year ends in: The tentative percentage is: 1977 or 1978 ............................... 50 1979 ..................................... 40 1980 ..................................... 30 1981 ..................................... 20 1982 ..................................... 10 71 71-999 0 - 78 - 6 (Vol. 7) Page 53
TITLE 26-INTERNAL REVENUE CODE (D) Railroad property defined For purposes of this paragraph, the term "railroad property" means section 38 prop- erty used by the taxpayer directly in con- nection with the trade or business carried on by the taxpayer of operating a railroad (including a railroad switching or terminal company). (9) Alternative limitation in the case of certain air- lines (A) In general If, for a taxable year ending after calen- dar year 1976 and before calendar year 1983, the amount of the qualified invest- ment of the taxpayer which is attributable to airline property is 25 percent or more of his aggregate qualified investment, then subparagraph (C) of paragraph (3) of this subsection shall be applied by substituting for 50 percent his applicable percentage for such year. (B) Applicable percentage The applicable percentage of any taxpay- er for any taxable year under this para- graph is- (1) 50 percent, plus (ii) that portion of the tentative per- centage for the taxable year which the taxpayer's amount of qualified invest- ment which is airline property bears to his aggregate qualified investment. If the proportion referred to in clause (ii) is 75 percent or more, the applicable percent- age of the taxpayer for the year shall be 50 percent plus the tentative percentage for such year. (C) Tentative percentage For purposes of subparagraph (B), the tentative percentage shall be determined under the following table: If the taxable The tentative year ends in: percentage is: 1977 or 1978 ................................................ 50 1979 .............................................................. 4 0 1980 .............................................................. 30 1981 ............................ 20 1982 .............................................................. 10 (D) Airline property defined For purposes of this paragraph, the term "airline property" means section 38 proper- ty used by the taxpayer directly in connec- tion with the trade or business carried on by the Taxpayer of the furnishing or sale of transportation as a common carrier by air subject to the jurisdiction of the Civil Aero- nautics Board or the Federal Aviation Ad- ministration. (b) Carryback and carryover of unused credits (1) In general If the sum of the amount of the investment credit carryovers to the taxable year under subsection (a)(1)(A) plus the amount deter- mined under subsection (a)(1)(B) for the tax- able year exceeds the amount of the limita- tion imposed by subsection (a)(3) for such taxable year (hereinafter in this subsection referred to as the "unused credit year"), such excess attributable to the amount determined under subsection (a)(1)(B) shall be- (A) an investment credit carryback to each of the 3 taxable years preceding the unused credit year, and (B) an investment credit carryover to each of the 7 taxable years following the unused credit year, and, subject to the limitations imposed by paragraphs (2) and (3), shall be taken Into ac- count under the provisions of subsection (a)(1) in the manner provided In such subsec- tion. The entire amount of the unused credit for an unused credit year shall be carried to the earliest of the 10 taxable years to which (by reason of subparagraphs (A) and (B)) such credit may be carried and then to each of the other 9 taxable years to the extent, be- cause of the limitations imposed by para- graphs (2) and (3), such unused credit may not be taken Into account under subsection (a)(1) for a prior taxable year to which such unused credit may be carried. In the case of an unused credit for an unused credit year ending before January 1, 1971, which is an in- vestment credit carryover to a taxable year beginning after December 31, 1970 (deter- mined without regard to this sentence), this paragraph shall be applied- (C) by substituting "10 taxable years" for "7 taxable years" in subparagraph (D), and by substituting "13 taxable years" for "10 taxable years", and "12 taxable years" for "9 taxable years" in the preceding sentence, and (D) by carrying such an investment credit carryover to a later taxable year (than the taxable year to which it would, but for this subparagraph, be carried) to which it may be carried if, because of the amendments made by section 802(b)(2) of the Tax Reform Act of 1976, carrying such car- ryover to the taxable year to which it would, but for this subparagraph, be carried would cause a portion of an unused credit from an unused credit year ending after De- cember 31, 1970 to expire, (2) Limitation on carrybacks The amount of the unused credit which may be taken into account under subsection (a)(1) for any preceding taxable year shall not exceed the amount by which the limita- tion imposed by subsection (a)(3) for such taxable year exceeds the sum of- (A) the amounts determined under sub- paragraphs (A) and (B) of subsection (a)(1) for such taxable year, plus (B) the amounts which (by reascn of this subsection) are carried back to such taxable year and are attributable to taxable years preceding the unused credit year. (3) Limitation on carryovers The amount of the unused credit which may be taken into account under subsection (a)(1)(A) for any succeeding taxable year shall not exceed the amount by which the limitation imposed by subsection (a)(3) for such taxable year exceeds the sum of the amounts which, by reason of this subsection, are carried to such taxable year and are at- tributable to taxable years preceding the unused credit year. Page 54
TITLE 26-INTERNAL REVENUE CODE (c) Qualified investment (1) In general For purposes of this subpart, the term "qualified investment" means, with respect to any taxable year, the aggregate of- (A) the applicable percentage of the basis of each new section 38 property (as defined in section 48(b)) placed in service by the taxpayer during such taxable year, plus (B) the applicable percentage of the cost of each used section 38 property (as defined in section 48(c)(1)) placed in service by the taxpayer during such taxable year. (2) Applicable percentage For purposes of paragraph (1), the applica- ble percentage for any property shall be de- termined under the following table: The applic- If the useful life is- able percent- age is- 3 years or more but less than 5 years ............................... 33 Va 5 years or more but less than 7 years ................................. 66% 7 years or m ore ....................................................................... 100 For purposes of this subpart, the useful life of any property shall be the useful life used in computing the allowance for depreciation under section 167 for the taxable year in which the property is placed in service. (3) Public utility property (A) To the extent that subsection (a)(2)(C) applies to property which is public utility property, the amount of the quali- fied investment shall be 4 of the amount determined under paragraph (1). (B) For purposes of subparagraph (A), the term "public utility property" means prop- erty used predominantly in the trade or business of the furnishing or sale of- (I) electrical energy, water, or sewage disposal services, (ii) gas through a local distribution system, or (iii) telephone service, telegraph service by means of domestic telegraph oper- ations (as defined in section 222(a)(5) of the Communications Act of 1934, as amended; 47 U.S.C. 222(a)(5)), or other communication services (other than inter- national telegraph service), if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivision thereof, by an agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof. Such term also means communica- tion property of the type used by persons engaged in providing telephone or micro- wave communication services to which clause (ii) applies, if such property is used predominantly for communication pur- poses. (C) In the case of any interest in a subma- rine cable circuit used to furnish telegraph service between the United States and a point outside the United States of a taxpay- er engaged in furnishing international tele- graph service (if the rates for such furnish- ing have been established or approved by a governmental unit, agency, instrumentality, commission, or similar body described in subparagraph (B)), the qualified investment shall not exceed the qualified investment attributable to so much of the interest of the taxpayer in the circuit as does not exceed 50 percent of all interests in the cir- cuit. (4) Coordination with subsection (d) The amount which would (but for this para- graph) be treated as qualified investment under this subsection with respect to any property shall be reduced (but not below zero) by any amount treated by the taxpayer or a predecessor of the taxpayer (or, in the case of a sale and leaseback described in sec- tion 47(a)(3)(C), by the lessee) as qualified in- vestment with respect to such property under subsection (d), to the extent the amount so treated has not been required to be recap- tured by reason of section 47(a)(3). (5) Applicable percentage in the case of certain pol- lution control facilities Notwithstanding subsection (c)(2), in the case of property- (A) with respect to which an election under section 169 applies, and (B) the useful life of which (determined without regard to section 169) is not less than 5 years, 50 percent shall be the applicable percentage for purposes of applying paragraph (1) with respect to so much of the adjusted basis of the property as (after the application of sec- tion 169f)) constitutes the amortizable basis for purposes of section 169. (d) Qualified progress expenditures (1) In general In the case of any taxpayer who has made an election under paragraph (6), the amount of his qualified investment for the taxable year (determined under subsection (c) with- out regard to this subsection) shall be in- creased by an amount equal to his aggregate qualified progress expenditures for the tax- able year with respect to progress expendi- ture property. (2) Progress expenditure property defined (A) In general For purposes of this subsection, the term "progress expenditure property" means any property which is being constructed by or for the taxpayer and which- (I) has a normal construction period of two years or more, and (ii) it is reasonable to believe will be new section 38 property having a useful life of 7 years or more in the hands of the tax- payer when it is placed i service. Clauses (1) and (ii) of the preceding sen- tence shall be applied on the basis of facts known at the close of the taxable year of the taxpayer In which construction begins (or, if later, at the close of the first taxable Page 55
TITLE 26-INTERNAL REVENUE CODE year to which an election under this subsec- tion applies). (B) Normal construction period For purposes of subparagraph (A), the term "normal construction period" means the period reasonably expected to be re- quired for the construction of the proper- ty- (I) beginning with the date on which physical work on the construction begins (or, if later, the first day of the first tax- able year to which an election under this subsection applies), and (ii) ending on the date on which it is ex- pected that the property will be available for placing in service. (3) Qualified progress expenditures defined For purposes of this subsection- (A) Self-constructed property In the case of any self-constructed proper- ty, the term "qualified progress expendi- tures" means the amount which, for pur- poses of this so'bpart, is, properly charge- able (during such taxable year) to capital account with respect to such property. (B) Non-self-constructed property In the case of non-self-constructed prop- erty, the term "qualified progress expendi- tures" means the lesser of- (I) the amount paid during the taxable year to another person for the construc- tion of such property, or (it) the amount which represents that proportion of the overall cost to the tax- payer of the construction by such other person which is properly attributable to that portion of such construction which is completed during such taxable year. (4) Special rules for applying paragraph (3) For purposes of paragraph (3)- (A) Component parts, etc. Property which is to be a component part of, or is otherwise to be included in, any progress expenditure property shall be taken into account- (1) at a time not earlier than the time at which it becomes irrevocably devoted to use in the progress expenditure property, and (ii) as if (at the time referred to in clause (I)) the taxpayer had expended an amount equal to that portion of the cost to the taxpayer of such component or other property which, for purposes of this subpart, is properly chargeable (during such taxable year) to capital account with respect to such property. (B) Certain borrowings disregarded Any amount borrowed directly or indirect- ly by the taxpayer from the person con- structing the property for him shall not be treated as an amount expended for such construction. (C) Certain unused expenditures carried over In the case of non-self-constructed prop- erty, if for the taxable year- (I) the amount under clause (I) of para- graph (3)(B) exceeds the amount under clause (ii) of paragraph (3)(B), then the amount of such excess shall be taken into account under such clause (I) for the suc- ceeding taxable year, or (ii) the amount under clause (ii) of para- graph (3)(B) exceeds the amount under clause (I) of paragraph (3)(B), then the amount of such excess shall be taken into account under such clause (ii) for the suc- ceeding taxable year. (D) Determination of percentage of completion In the case of non-self-constructed prop- erty, the determination under paragraph (3)(B)(ii) of the proportion of the overall cost to the taxpayer of the construction of any property which is properly attributable to construction completed during any tax- able year shall be made, under regulations prescribed by the Secretary, on the basis of engineering or architectural estimates or on the basis of cost accounting records. Unless the taxpayer establishes otherwise by clear and convincing evidence, the construction shall be deemed to be completed not more rapidly than ratably over the normal con- struction period. (E) No qualified progress expenditures for cer- tain prior periods In the case of any property, no qualified progress expenditures shall be taken into account under this subsection for any period before January 22, 1975 (or, if later, before the first day of the first taxable year to which an election under this subsection applies). (F) No qualified progress expenditures for prop- erty for year it is placed in service, etc. In the case of any property, no qualified progress expenditures shall be taken into account under this subsection for the earli- er of- (I) the taxable year in which the proper- ty is placed in service, or (ii) the first taxable year for which re- capture is required under section 47(a)(3) with respect to such property, or for any taxable year thereafter. (5) Other definitions For purposes of this subsection- (A) Self-constructed property The term "self-constructed property" means property more than half of the con- struction expenditures for which is it rea- sonable to believe will be made directly by the taxpayer. (B) Non-self-constructed property The term "non-self-constructed property" means property which is not self-construct- ed property. (C) Construction, etc. The term "construction" includes recon- struction and erection, and the term "con- structed" includes reconstructed and erect- ed. (D) Only construction of section 38 property to be taken into account Construction shall be taken into account only if, for purposes of this subpart, expen- Page 56
TITLE 26-INTERNAL REVENUE CODE ditures therefor are properly chargeable to capital account with respect to the proper- ty. (6) Election An election under this subsection may be made at such time and in such manner as the Secretary may by regulations prescribe. Such an election shall apply to the taxable year for which made and to all subsequent taxable years. Such an election, once made, may not be revoked except with the consent of the Secretary. (7) Transitional rules The qualified investment taken into ac- count under this subsection for any taxable year beginning before January 1, 1980, with respect to any property shall be (in lieu of the full amount) an amount equal to the sum of- (A) the applicable percentage of the full amount determined under the following table: For a taxable year The applicable beginning in: percentage is: 1974 or 1975 .................................................... 20 1976 ................................................................. 40 1977 ................................................................. 60 1978 ................................................................. 80 1979 .................................................................. 100; plus (B) in the case of any property to which this subsection applied for one or more pre- ceding taxable years, 20 percent of the full amount for each such preceding taxable year. For purposes of this paragraph, the term "full amount", when used with respect to any property for any taxable year, means the amount of the qualified investment for such property for such year determined under this subsection without regard to this paragraph. (e) Limitations with respect to certain persons (1) In general In the case of- (A) an organization to which section 593 applies, (B) a regulated investment company or a real estate investment trust subject to tax- ation under subchapter M (see. 851 and fol- lowing), and (C) a cooperative organization described in section 1381(a), the qualified investment and the $25,000 amount specified under subparagraphs (A) and (B) of subsection (a)(3) shall equal such person's ratable share of such items. (2) Ratable share For purposes of paragraph (1), the ratable share of any person for any taxable year of the items described therein shall be- (A) in the case of an organization referred to in paragraph (1)(A), 50 percent thereof, (B) in the case of a regulated investment company or a real estate Investment trust, the ratio (i) the numerator of which is its taxable income and (ii) the denominator of which is its taxable income computed with- out regard to the deduction for dividends paid provided by section 852(b)(2)(D) or 857(b)(2)(B), as the case may be, and (C) in the case of a cooperative organiza- tion, the ratio (I) the numerator of which is its taxable income and (ii) the denominator of which Is its taxable income increascd by amounts to which section 1382(b) or (c) ap- plies and similar amounts the tax treatment of which is determined without regard to subchapter T (sec. 1381 and following). For purposes of subparagraph (B) of the pre- ceding sentence, the term "taxable income" means in the case of a regulated investment company its investment company taxable income (within the meaning of section 852(b)(2)), and in the case of a real estate in- vestment trust its real estate investment trust taxable income (within the meaning of sec- tion 857(b)(2)) determined without regard to any deduction for capital gains dividends (as defined in section 857(b)(3)(C) and by exclud- ing any net capital gain. (3) Noneorporate lessors A credit shall be allowed by section 38 to a person which is not a corporation with re- spect to property of which such person is the lessor only if- (A) the property subject to the lease has been manufactured or produced by the lessor, or (B) the term of the lease (taking into ac- count options to renew) is less than 50 per- cent of the useful life of the property, and for the period consisting of the first 12 months after the date on which the proper- ty is transferred to the lessee the sum of the deductions with respect to such proper- ty which are allowable to the lessor solely by reascn of section 162 (other than rents and reimbursed amounts with respect to such property) exceeds 15 percent of the rental income produced by such property. In the case of property of which a partner- ship is the lessor, the credit otherwise al- lowable under section 38 with respect to such property to any partner which is a cor- poration shall be allowed notwithstanding the first sentence of this paragraph. For purposes of this paragraph, an electing small business corporation (as defined in section 1371) shall be treated as a person which is not a corporation. (f) Limitation in case of certain regulated companies (1) General rule Except as otherwise provided in this subsec- tion, no credit shall be allowed by section 38 with respect to any property described in sec- tion 50 which is public utility property (as de- fined In paragraph (5)) of the taxpayer- (A) Cost of service reduction If the taxpayer's cost of service for rate- making purposes is reduced by reason of any portion of the credit allowable by sec- tion 38 (determined without regard to this subsection); or (B) Rate base reduction If the base to which the taxpayer's rate of return for ratemaking purposes is applied is reduced by reason of any portion of the Page 57
TITLE 26-INTERNAL REVENUE CODE credit allowable by section 38 (determined without regard to this subsection). Subparagraph (B) shall not apply If the re- duction in the rate base is restored not less rapidly than ratably. If the taxpayer makes an election under this sentence within 90 days after the date of the enactment of this paragraph in the manner prescribed by the Secretary, the immediately preceding sen- tence shall not apply to property described in paragraph (5)(B) if any agency or instrumen. tality of the United States having jurisdiction for ratemaking purposes with respect to such taxpayer's trade or business referred to in paragraph (5)(B) determines that the natural domestic supply of the product furnished by the taxpayer in the course of such trade or business is insufficient to meet the present and future requirements of the domestic economy. (2) Special rule for ratable flow-through If the taxpayer makes an election under this paragraph within 90 days after the date of the enactment of this paragraph in the manner prescribed by the Secretary, para- graph (1) shall not apply, but no credit shall be allowed by section 38 with respect to any property described in section 50 which is public utility property (as defined in para- graph (5)) of the taxpayer- (A) Cost of service reduction If the taxpayer's cost of service for rate- making purposes or in its regulated books of account is reduced by more than a ratable portion of the credit allowable by section 38 (determined without regard to this subsec- tion), or (B) Rate base reduction If the base to which the taxpayer's rate of return for ratemaking purposes is applied is reduced by reason of any portion of the credit allowable by section 38 (determined without regard to this subsection). (3) Special rule for immediate flow-through in cer- tain cases In the case of property to which section 167(l)(2)(C) applies, if the taxpayer makes an election under this paragraph within 90 days after the date of the enactment of this para- graph in the manner prescribed by the Secre- tary, paragraphs (1) and (2) shall not apply to such property. (4) Limitation (A) In general The requirements of paragraphs (1), (2), and (9) regarding cost of service and rate base adjustments shall not be applied to public utility property of the taxpayer to disallow the credit with respect to such property before the first final determina- tion which is inconsistent with paragraph (1), (2), or (9) (as the case may be) is put into effect with respect to public utility property (to which this subsection applies) of the taxpayer. Thereupon, paragraph (1), (2), or (9) shall apply to disallow the credit with respect to public utility property (to which this subsection applies) placed in ser- vice by the taxpayer- (i) before the date that the first final determination, or a subsequent determi- nation, which is inconsistent with para- graph (1), (2), or (9) (as the case may be) is put into effect, and (ii) on or after the date that a determi- nation referred to in clause (I) is put into effect and before the date that a subse- quent determination thereafter which is consistent with paragraph (1), (2), or (9) (as the case may be) is put into effect. (B) Determinations For purposes of this paragraph, a deter- mination is a determination made with re- spect to public utility property (to which this subsection applies) by a governmental unit, agency, instrumentality, or commis- sion or similar body described in subsection (c)(3)(B) which determines the effect of the credit allowed by section 38 (determined without regard to this subsection)- (i) on the taxpayer's cost of service or rate base for ratemaking purposes, or (ii) in the case of a taxpayer which made an election under paragraph (2) or the election described in paragraph (9), on the taxpayer's cost of setvice for ratemak- ing purposes or in its regulated books of account or rate base for ratemaking pur- poses. (C) Special rules For purposes of this paragraph- (i) a determination is final if all rights to appeal or to request a review, a rehear- ing, or a redetermination, have been ex- hausted or have lapsed. (ii) the first final determination is the first final determination made after the date of the enactment of this subsection, and (fii) a subsequent determinaion is a de- termination subsequent to a final determi- nation. (5) Public utility property For purposes of this subsection, the term "public utility property" means- (A) property which is public utility prop- erty within the meaning of subsection (c)(3)(B), and (B) property used predominantly in the trade or business of the furnishing or sale of (I) steam through a local distribution system or (ii) the transportation of gas or steam by pipeline, if the rates for such fur- nishing or sale are established or approved by a governmental unit, agency, instrumen- tality, or commission described in subsec- tion (c)(3)(B). (6) Ratable portion For purposes of determining ratable resto- rations to base under paragraph (1) and for purposes of determining ratable portions under paragraph (2)(A), the period of time used in computing depreciation expense for purposes of reflecting operating results in the taxpayer's regulated books of account shall be used. (7) Reorganizations, assets acquisitions, etc. If by reason of a corporate reorganization, by reason of any other acquisition of the Page 58
TITLE 26-INTERNAL REVENUE CODE assets of ona taxpayer by another taxpayer, by reason of the fact that any trade or busi- ness of the taxpayer is subject to ratemaking by more than one body, or by reason of other circumstances, the application of any provi- sions of this subsection to any public utility property does not carry out the purposes of this subsection, the Secretary shall provide by regulations for the application of such pro- visions in a manner consistent with the pur- poses of this subsection. (8) Prohibition of immediate flowthrough An election made under paragraph (3) shall apply only to the amount of the credit al- lowable under section 38 with respect to public utility property (within the meaning of subsection (a)(6)(D)) determined as if the Tax Reduction Act of 1975 and the Tax Reform Act of 1976 had not been enacted. Any tax- payer who had timely made an election under paragraph (3) may, at his own option and without regard to any requirement imposed by an agency described in subsection (c)(3)(B), elect within 90 days after the date of the enactment of the Tax Reduction Act of 1975 (in such manner as the Secretary shall prescribe) to have the provisions of para- graph (3) apply with respect to the amount of the credit allowable under section 38 with re- spect to such property which is in excess of the amount determined under the preceding sentence. If such taxpayer does not make such an election, paragraph (1) or (2) (which- ever paragraph is applicable without regard to this paragraph) shall apply to such excess credit, except that if neither paragraph (1) nor (2) is applicable (without regard to this paragraph), paragraph (1; shall apply unless the taxpayer elects (in such manner as the Secretary shall prescribe) within 90 days after the date of the enactment of the Tax Reduction Act of 1975 to have the provisions of paragraph (2) apply. The provisions of this paragraph shall not be applied to disallow such excess credit before the first final deter- mination which is inconsistent with such re- quirements is made, determined in the same manner as under paragraph (4). (9) Special rule for additional credit If the taxpayer makes an election under subparagraph (B) of subsection (a)(2), for a taxable year beginning after December 31, 1975, then, notwithstanding the prior para- graphs of this subsection, no credit shall be allowed by section 38 in excess of the amount which would be allowed without regard to the provisions of subparagraph (B) of subsection (a)(2) if- (A) the taxpayer's cost of service for rate- making purposes or in its regulated books of account is reduced by reason of any portion of such credit which results from the trans- fer of employer securities or cash to an em- ployee stock ownership plan which meets the requirements of section 301(d) of the Tax Reduction Act of 1975; (B) the base to which the taxpayer's rate of return for ratemaking purposes is ap- plied is reduced by reason of any portion of such credit which results from a transfer described in subparagraph (A) to such em- ployee stock ownership plan; or (C) any portion of the amount of such credit which results from a transfer de- scribed in subparagraph (A) to such em- ployee stock ownership plan is treated for ratemaking purposes in any way other than as though it had been contributed by the taxpayer's common shareholders. (g) 50 percent credit in the case of certain vessels (1) In general In the case of a qualified withdrawal out of the untaxed portion of a capital gain account or out of an ordinary income account in a capital construction fund established under section 607 of the Merchant Marine Act, 1936 (46 U.S.C. 1177), for- (A) the acquisition, construction, or recon- struction of a qualified vessel, or (B) the acquisition, construction, or recon- struction of barges or containers which are part of the complement of a qualified vessel and to which subsection (f)(1)(B) of such section 607 applies, for purposes of section 38 there shall be deemed to have been made (at the time of such withdrawal) a qualified investment (within the meaning of subsection (c)) or qualified progress expenditures (within the meaning of subsection (d)), whichever is ap- propriate, with respect to property which is section 38 property. (2) Amount of credit For purposes of paragraph (1), the amount of the qualified investment shall be 50 per- cent of the applicable percentage of the quali- fied withdrawal referred to in paragraph (1), or the amount of the qualified progress ex- penditures shall be 50 percent of such with- drawal, as the case may be. For purposes of determining the amount of the credit allowa- ble by reason of this subsection for any tax- able year, the limitation of subsection (a)(3) shall be determined without regard to subsec- tion (d)(1)(A) of such section 607. (3) Coordination with section 38 The amount of the credit allowable by reason of this subsection with respect to any property shall be the minimum amount al- lowable under section 38 with respect to such property. If, without regard to this subsec- tion, a greater amount is allowable under sec- tion 38 with respect to such property, then such greater amount shall apply and this sub- section shall not apply. (4) Coordination with section 47 Section 47 shall be applied- (A) to any property to which this subsec- tion applies, and (B) to the payment (out of the untaxed portion of a capital gain account or out of the ordinary income account of a capital construction fund established under section 607 of the Merchant Marine Act, 1936) of the principal of any indebtedness incurred in connection with property with respect to which a credit was allowed under section 38. For purposes of section 47, any payment de- scribed in subparagraph (B) of the preceding Page 59
TITLE 26-INTERNAL REVENUE CODE sentence shall be treated as a disposition oc- curring less than 3 years after the property was placed in service; but, in the case of a credit allowable without regard to this sub- section, the aggregate amount which may be recaptured by reason of this sentence shall not exceed 50 percent of such credit. (5) Definitions Any term used in section 607 of the Mer- chant Marine Act, 1970, shall have the same meaning when used in this subsection. (6) No inference Nothing in this subsection shall be con- strued to infer that any property described in this subsection is or is not section 38 proper- ty, and any determination of such issue shall be made as If this subsection had not been en- acted. (Added Pub. L. 87-834, § 2(b), Oct. 16, 1962, 76 Stat. 963, and amended Pub. L. 88-272, title II, § 201(d)(4), Feb. 26, 1964, 78 Stat. 32; Pub. L, 89- 384, § 1(c)(1), Apr. 8, 1966, 80 Stat. 102; Pub. L. 89-389, § 2(b)(5), Apr. 14, 1966, 80 Stat. 114; Pub. L. 89-800, § 3, Nov. 8, 1966, 80 Stat. 1514; Pub. L. 90-225, § 2(a), Dec. 27, 1967, 81 Stat. 731; Pub. L. 91-172, title III, § 301(b)(4), title IV, § 401(e)(1), title VII, § 703(b), Dec. 30, 1969, 83 Stat. 585, 603, 666; Pub. L. 92-178, title I, §§ 102(a)(1), (b), 105(aj-(c), 106(a)-(c), 107(a)(1), 108(a), Dec. 10, 1971, 85 Stat. 499, 503, 506, 507; Pub. L. 93-406, title II, §§ 2001(g)(2)(B), 2002(g)(2), 2005(c)(4), Sept. 2, 1974, 88 Stat. 957, 968, 991; Pub. L. 94-12, title III, § 301(a), (b)(1)- (3), 302(a), (b)(1), Mar. 29, 1975, 89 Stat. 36, 37, 40, 43; Pub. L. 94-455, title V, § 503(b)(4), title VIII, §§ 802(a), (b)(1)-(5), 803(a), (b)(1), 805(a), title XVI, § 1607(b)(1)(B), title XVII, §§ 1701(b), 1703, title XIX, §§ 1901(a)(4), (b)(1)(C), 1906(b)(13)(A), title XXI, § 2112(a)(2), Oct. 4, 1976, 90 Stat. 1562, 1580-1584, 1596, 1756, 1759, 1761, 1764, 1790, 1834, 1905.) REFERENCES IN TEXT The Tax Reduction Act of 1975. referred to in sub- sees. (a)(2)(B), (f)(8), (9), is Pub. L. 94-12, Mar. 29, 1975, 89 Stat. 26. Sections 301(d) and (e) of the Tax Reduction Act of 1975 are set out as a note below. For complete classification of this Act to the Code, see Short Title of 1975 Amendment note set out under section 1 of this title and Tables volume, The date of enactment of this paragraph, referred to in subsec. (f)(3), is Dec. 10, 1971, the date of approval of Pub. L. 92-178, which enacted subsec. (e) of this sec- tion, later redesignated subsec. (f). The date of the enactment of the Tax Reduction Act of 1975, referred to in subsec. (f)(8), is the date of en- actment of Pub. L. 94-12, which was approved Mar. 29, 1975. The Tax Reform Act of 1976, referred to in subsec. (f)(8), is Pub. L. 94-455, Oct. 4, 1976, 90 Stat. 1520. Sec- tion 802(b)(2) of the Tax Reform Act of 1976 amended subsec. (b) of this section. For complete classification of this Act to the Code, see Tables volume. The Merchant Marine Act, 1970, referred to in subsec. (g)(5), is Pub. L. 91-469, Oct. 21, 1970, 84 Stat. 1018, as amended. Section 607 of the Merchant Marine Act of 1970 probably means section 607 of the Mer- chant Marine Act of 1936 which is classified to section 1177 of Title 46, Shipping. For complete classification of this Act to the Code, see Short Title of 1970 Amendment note under section 1101 of title 46, and Tables volume. AMENDMENTS 1976-Subsec. (a)(1). Pub. L. 94-455, § 802(a)(2), added subsec. (a)(1) and struck out formee- subsee. (a)(1) which related to the percentage of allowable credit under section 38. Subsec. (a)(2). Pub. L. 94-455, § 802(a)(2), added subsec. (a)(2). Former subsee. (a)(2) redesignated (a)(3). Subsec. (a)(3). Pub. L. 94-455, § 802(a)(1), redesignat- ed former subsec. (a)(2) as (a)(3). Former subsec. (a)(3) redesignated (a)(4). Subsec. (a)(4). Pub. L. 94-455, §§ 503(b)(4), 802(a)(1), (b)(1), 1901(a)(4)(A), (b)(1)(C). redesignated former subsec. (a)(3) as (a)(4), and in subsec. (a)(4) as so rede- signated, redesignated former subpar. (C) as (B) and substituted in provisions preceding subpar. (A) "para- graph (3)" for "piragraph (2)", in subpar. (B) as so re- designated "credit for the elderly" for "retirement income", and in provisions following subpar. (B) "sec- tion 408(f)" for "section 408(e)". Former subsec. (a)(4) redesignated (a)(5). Subsec. (a)(5). Pub. L. 94-455, §802(a)(1), (b)(1), re- designated former subsec. (a)(4) as (a)(5), and in subsec. (a)(5) as so redesignated, substituted "para- graph (3)" for "paragraph (2)". Former subsec. (a)(5) redesignated (a)(6). Subsec. (a)(6). Pub, L. 94-455, §§802(a)(1), (b)(1), 1906(b)(13)(A), redesignated former subsec. (a)(5) as (a)(6), and in subsec. (a)(6) as so redesignated, substi- tuted "paragraph (3)" for "paragraph (2)" and struck out "or his delegate" following "Secretary". Former subsec. (a)(6) redesignated (a)(7). Subsec. (a)(7). Pub. L. 94-455, § 802(a)(1), (b)(1), re- designated former subsec. (a)(6) as (a)(7), and in subsec. (a)(7) as so redesignated, substituted "para- graph (3)" for "paragraph (2)". Subsec. (a)(8). Pub. L. 94-455, § 1701(b), added subsec. (a)(8). Subsec. (a)(9). Pub. L. 94-455, § 1703, added subsec. (a)(9). Subsec. (b). Pub. L. 94-455, § 802(b)(2), among other changes, added requirement that tax credits carried over are applied first to the tax liability for that year, after which tax credits earned currently are then ap- plied. Subsec. (c)(3)(A). Pub. L. 94-455, § 802(b)(3). substi- tuted "subsection (a)(2)(C)" for "subsection (a)(1)(C)". Subsec. (c)(3)(B)(iii). Pub. L. 94-455, § 1901(a)(4)(B), substituted "47 U.S.C. 222(a)(5)" for "47 U.S.C., sec. 222(a)(5)". Subsec. (c)(5). Pub. L. 94-455, § 2112(a)(2), added subsec. (c)(5). Subsec. (d)(4)(D), (6). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (e)(1)(C). Pub. L. 94-455, § 802(b)(4). substi- tuted "subsection (a)(3)" for "subsection (a)(2)". Subsec. (e)(2). Pub. L. 94-455, § 1607(b)(1)(B), substi- tuted In subpar. (B) "857(b)(2)(B)" for "857(b)(2)(C)" and added in provisions following subpar. (C) refer- ence to determine without regard to any deduction for capital gains dividends (as defined in section 857(b)(3)(C)) and by excluding any net capital gain. Subsec. (f)(1)(B). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (f)(2). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (f)(3). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec, (f)(4)(A). Pub. L. 94-455, §803(b)(1)(A), (B), substituted "paragraphs (1), (2), and (9)" for "para- graphs (1) and (2)" and "paragraph (1), (2), or (9)" for "paragraph (1) or (2)" wherever appearing. Subsec. (f)(4)(B)(ii). Pub. L. 94-455, §803(b)(1)(C), substituted "paragraph (2) or the election described in paragraph (9)," for "paragraph (2),". Subsec. (f)(7). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (f)(8). Pub. L. 94-455, §§ 802(b),5), 1906(b)(13)(A), inserted reference to the Tax Re'orm Page 60
TITLE 26-INTERNAL REVENUE CODE Act of 1976 and struck out "or his delegate" following "Secretary". Subsec. (f)(9). Pub. L. 94-455, § 803(a), added subsec. (f)(9). Subsec. (g). Pub. L. 94-455, § 805(a), added subsec. (g). 1975-Subsec. (a)(1). Pub. L. 94-12, § 301(a), designat- ed existing provisions as subpar. (A), substituted "Except as otherwise provided in this paragraph, in the case of a property described in subparagraph (D), the" for "The", "10 percent" for "7 percent", and "(as determined under subsections (c) and (d))" for "(as de- fined in subsection (c))" in subpar. (A) as so designat- ed, and added subpars. (B), (C), and (D). Subsec. (a)(6). Pub. L. 94-12, § 301(b)(2), added subsec. (a)(6). Subsec. (c)(3)(A). Pub. L. 94-12, §301(b)(1), substi- tuted "To the extent that subsection (a)(1)(C) applies to property which is public utility property, the" for "In the case of section 38 property which is public util- ity property, the". Subsec. (c)(4). Pub. L. 94-12, §302(b)(1), added subsec. (c)(4). Subsec. Cd). Pub. L. 94-12, § 302(a), added subsec. (d). Former subsec. (d) redesignated (e). Subsec. Ce). Pub. L. 94-12, § 302(a), redesignated subsec. d) as (e). Former subsec. (e) redesignated f) and amended. Subsec. f). Pub. L. 94-12, §§ 301(b)(3), 302(a), rede- signated subsec. (e) as f) and in subsec. f) as so rede- signated added par. (8). 1974-Subsec. (a)(3). Pub. L. 93-406 inserted refer- ence to section 402(e) (relating to tax on lump sum dis- tributions), section 72(m)(5)(B) (relating to 10 percent tax on premature distributions to owner-employees), and section 408(e) (relating to additional tax on Income from certain retirement accounts). 1971-Subsec. (b)(1). Pub. L. 92-178, § 106(b), added the concluding sentence "In the case of an unused credit for an unused credit year ending before January 1, 1971, which is an investment credit carryover to a taxable year beginning after December 31, 1970 (deter- mined without regard to this sentence), this para- graph shall be applied by substituting '10 taxable years' for '7 taxable years' in subparagraph (B) and by substituting '13 taxable years' for '10 taxable years' and '12 taxable years' for '9 taxable years' in the pre- ceding sentence." Subsec. (b)(3). Pub. L. 92-178, § 106(a), added par.(3). Subsec. (b)(5). Pub. L. 92-178, § 106(c)(1), substituted "Certain taxable years ending in 1969, 1970, or 1971" for "Taxable years beginning after December 31, 1968, and ending after April 18, 1969" as the par. heading; substituted "ending after April 18, 1969, and before January 1, 1972," for "ending after April 18, 1969,"; and provided that "In the case of a taxable year ending after August 15, 1971, and before January 1, 1972, the percentage contained in the preceding sen- tence shall be increased by 6 percentage points for each month (or portion thereof) in the taxable year after August 15, 1971". Subsec. (b)(6). Pub. L. 92-178, § 106(c)(2), substituted "ending after April 18, 1969, and before January 1, 1971," for "ending after April 18, 1969," and "follow- ing the 7th taxable year after the unused credit year" for "following the last taxable year for which such portion may be added under paragraph (1)", respec- tively. Subsec. (c)(2). Pub. L. 92-178, § 102(a)(1), (b), substi- tuted "3 years", "5 years", and "7 years" for "4 years" (once), "6 years" (twice), and "8 years" (twice), respec- tively in tables of first sentence and substituted in second sentence "subpart" for "paragraph" and "useful life of any property shall be the useful life used in computing the allowance for depreciation under section 167 for the taxable year in which the property is placed in service" for "useful life of any property shall be determined as of the time such prop- erty is placed in service by the taxpayer". Subsec. (c)(3)(A). Pub. L. 92-178, § 105(a), substitut- ed the fraction of "%" for "'. Subsec. (c)(3)(B). Pub. L. 92-178, § 105(b)(1) and (2), struck out cl. (Cii) provisions respecting telephone ser- vice, redesignated cl. (iv) as (iii), included in cl. (iii) provision of former cl. (iii) respecting telephone ser- vice, included other communication services (other than international telegraph service), and defined term "public utility property" to also mean communi- cation property of type used by persons engaged in providing telephone or microwave communication ser- vices to which el. (iii) applies, if such property is used predominantly for communication purposes, respec- tively. Subsec. (c)C3)(C). Pub. L. 92-178, § 105(b)(3), added subpar. (C). Subsec. (c)(4). Pub. L. 92-178, § 107(a)(1), struck out par. (4) provisions respecting reduction in basis or cost of certain replacement property. Subsec. (d)(3). Pub. L. 92-178, § 108(a), added par. (3). Subsec. (e). Pub. L. 92-178, § 105(c), added subsec. (e). 1969-Subsec. (a)(3). Pub. L. 91-172, § 301(b)(4), in- serted reference to "section 56 (relating to minimum tax for tax preference),". Subsec. (a)(5). Pub. L. 91-172, §401(e)(1), reenacted subsection with minor changes and substituted refer- ence to section 1563(a) for reference to section 1504. Subsec. (b). Pub. L. 91-172, § 703(b), added pars. (5) and (6). 1967-Subsec. (b). Pub. L. 90-225 struck out par. (3), which provided that to the extent that the excess de- scribed in par. (1) of this subsection arises by reason of net operating loss carryback, subpar. (A) of par. (1) of this subsection shall not apply. 1966-Subsec. (a)(2). Pub. L. 89-800, § 3(a), added "for taxable years ending on or before the last day of the suspension period (as defined in section 48(j))," at the beginning of subpar. (B), and added subpar. (C) and the provisions following subpar. (C) covering the application of subpar. (C) and the reduction of the amount otherwise determined under par. (2) by the credit allowable but for the application of section 48(h)(1). Subsec. (a)(3). Pub. L. 89-389 inserted reference to tax imposed for the taxable year by section 1378 (re- lating to tax on certain capital gains of subchapter S corporations) in the list of taxes not to be considered tax imposed by this chapter for purposes of par. (3). Pub. L, 89-384 added any additional tax imposed for the taxable year by section 1351 (relating to recoveries of foreign expropriation losses) to the list of taxes not to be considered a tax imposed by this chapter for pur- poses of par. (3). Subsec. (b)(1). Pub. L. 89-800, § 3(b), substituted "7 taxable years" for "5 taxable years" in subpar. (B) and "10 taxable years" and "other 9 taxable years" for "8 taxable years" and "other 7 taxable years" respective- ly in the material following subpar. (B). 1964-Subsec. (a)(3). Pub. L. 88-272 deleted subpar. (B) relating to section 34, and redesignated subpars. (C) and (D) as (B) and (C), respectively. EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (a)(3)(C) by section 503(b)(4) of Pub. L. 94-455 substituting "credit for the elderly" for "retirement income" applicable to taxable years beginning after Dec. 31, 1975, see section 508 of Pub. L. 94-455, set out as an Effective Date of 1976 Amend- ment note under section 3 of this title. Section 802(c) of Pub. L. 94-455 provided that: "The amendments made by this section [amending subsecs. (a)(1), (2), (4) to (7), (b), (c)(3)(A), (e)(1) and (f)(8) of this section, section 48(f) of this title, and note under this section, and renumbering former subsecs. (a)(2) to (6) as (a)(3) to (7)] shall apply to taxable years begin- ning after December 31, 1975." Section 803(j) of Pub. L. 94-455 provided that: "(1) General rule.-Except as provided in para- graph (2), the amendments made by this section [see Tables volume for distribution of section 803 of Pub. Page 61
TITLE 26-INTERNAL REVENUE CODE L. 94-455] shall apply for taxable years beginning after December 31, 1974. "(2) Exceptions.- "(A) Section 301(e) of the Tax Reduction Act of 1975 [set out as a note below], as added by subsec- tion (d), shall apply for taxable years beginning after December 31. 1976. "(B The amendments made by subsections (a) and (b)(1) shall apply for taxable years beginning after December 31, 1975. "(C) The amendments made by subsections (b)(4) and (f) shall apply for years beginning after Decem- ber 31, 1975." Section 805(b) of Pub. L. 94-455 provided that: "(1) In generaL.-Except as provided in subpara- graph (B), the amendment made by subsection (a) [enacting subsec. (g) of this section] shall apply to taxable years beginning after December 31, 1975, in the case of property placed in service after such date. "(2) Section 46(g)(4).-Section 46(g)(4) of the In- ternal Revenue Code of 1954 [subsec. (g)(4) of this section] (as added by subsection (a)) shall apply to taxable years beginning after December 31, 1975." Amendment of subsec. (e)(2) by section 1607(b)(1)(B) of Pub. L. 94-455 applicable to taxable years ending after Oct. 4, 1976, with certain excep- tions, see section 1608(c) of Pub, L. 94-455, set out as an Effective Date of 1976 Amendment note under sec- tion 857 of this title. Amendment of subsecs. (a)(4), (c)(3t(B)(iii), by sec- tion 1901(a)(4) (A), (B), (b)(1)(C), of Pub. L. 94-455 ap- plicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Section 2112(d)(1) of Pub. L. 94-455 provided that: "The amenainents made by subsection (a) [inserting subsec. (c)(5) of this section and amending section 48(al'(8) of this title] shall apply to- "(A) property acquired by the taxpayer after De- cember 31, 1976, and "(B) property the construction, reconstruction, or erection of which was completed by the taxpayer after December 31, 1976, (but only to the extent of the basis thereof attributable to construction, recon- struction, or erection after such date), in taxable years beginning after such date." EFFECTIVE DATE OF 1975 AMENDMENT Section 301(b)(4) of Pub. L. 94-12 provided that: "The amendment made by paragraph (1) of this sub- section [amending subsec. (c)(3)(A) of this section] shall apply to property placed in service after January 21, 1975, in taxable years ending after Januar-' 21, 1975. The amendments made by paragraphs (2 and (3) [adding subsecs. (a)(6) and (f)(8) of this section] shall apply to taxable years ending after December 31, 1974." Section 305(a) of Pub. L. 94-12 provided that: "The amendments made by section 302 [adding subsecs. (c)(4) and (d) of this section, adding subsec. (a)(3) and amending subsecs. (a)(4), (a)(5), and (a)(6)(B) of sec- tion 47 of this title, and amending sections 48(d)(1), (2)(A) and 50B(f)(3) of this title] shall apply to tax- able years ending after December 31, 1974." EFFECTIVE DATE OF 1974 AMENDMENT Amendment of subsec. (a)(3) of this section by sec- tion 2001(g)(2)(B) of Pub. L. 93-406, which inserted reference to section 72(m)(5)(B) (relating to 10 per- cent tax on premature distributions to owner-employ- ees), applicable to distributions made in taxable years beginning after Dec. 31, 1975, see section 2001i)(5) of Pub. L. 93-406, set out as an Effective Date of 1974 Amendment note under section 72 of this title. Amendment of subset. (a)(3) of this section by sec- tion 2002(g)(2) of Pub. L. 93-406, which inserted refer- ence to section 408(e) (relating to additional tax on income from certain retirement accounts), effective on Jan. 1, 1975, see section 2002(i)(2) of Pub. L. 93-406, set out as an Effective Date note under section 4973 of this title. Amendment of subsec. (a)(3) of this section by sec- tion 2005(c)(4) of Pub. L. 93-406, which inserted refer- ence to section 402(e) (relating to tax on lump sum dis- tributions), applicable only with respect to distribu- tions or payments made after Dec. 31, 1973, in taxable years beginning after Dec. 31, 1973, see section 2005(d) of Pub. L. 93-406, set out as an Effective Date of 1974 Amendment note under section 402 of this title. EFFECTIVE DATE OF 1971 AMENDMENT Section 102(d)(1) and (2) of Pub. L. 92-178 provided that: "(1) The amendments made by subsections (a) and (b) (to subsec. (c)(2) of this section and section 48(a)(1) of this title] shall apply to property described in section 50 of the Internal Revenue Code of 1954 [section 50 of this title]. "(2) In redetermining qualified investment for pur- poses of section 47(a) of the Internal Revenue Code of 1954 [section 47(a) of this title] in the case of any property which ceases to be section 38 property with respect to the taxpayer after August 15, 1971, or which becomes public utility property after such date, section 46(c)(2) of such Code [subsec. (c)(2) of this sec- tion] shall be applied is amended by subsection Ca)." Section 105(d) of Pub. L. 92-178 provided that: "The amendments made by this section [enacting subsecs. (c)(3)(C) and (e) and amending subsec. (c)(3)(A) and (B) of this section and enacting note hereunder re- specting public utility property] shall apply to proper- ty described in section 50 of the Internal Revenue Code of 1954 [section 50 of this title]." Section 106(d) of Pub. L. 92-178 provided that: "The amendments made by subsections (a), (b), and (c)(2) [enacting subsec. (b)(3) and amending subsec. (b)(1) and (6) of this section] shall apply to taxable years be- ginning after December 31, 1970. The amendments made by subsection (c)(1) [amending subsec.(b)(5) of this section] shall apply to taxable years ending after August 15, 1971." Section 107(a)(2) of Pub. L. 92-178 provided that: "The repeals made by paragraph (1) [to subsec. (c)(4) of this section and section 47(a)(4) of this title] shall apply to casualties and thefts occurring after August 15, 1971." Section 108(d) of Pub. L. 92-178 provided that: "The amendments made by subsections (a) and (bl [enact- ing subsec. (d)(3) of this section and substituting 'sec- tion 46(d)(1)' for 'section 46(d)' in introductory text of section 48(d) of this title] shall apply to leases entered into after September 22, 1971. The amendment made by subsection (c) [to section 48(d) of this title] shall apply to leases entered into after November 8. 1971." EFFECTIVE DATE OF 1969 AMENDMENT Amendment of subsec. (a)(3) of this section by sec- tion 301(b)(4) of Pub. L. 91-172 applicable to taxable years ending after Dec, 31, 1969, see section 301(c) of Pub. L. 91-172, set out as an Effective Date note under section 56 of this title. Amendment of subsec. (a)(5) of this section by sec- tion 401(e)(1) of Pub. L. 91-172 applicable with respect to taxable years ending on or after Dec. 31, 1970, see section 401(h)(3) of Pub. L. 91-172, set out as an Effec- tive Date of 1969 Amendment note under section 1561 of this title. EFFECTIVE DATE OF 1967 AMENDMENT Section 2(g) of Pub. L. 90-225 provided that: "The amendments made by this section [amending sections 46(b)(3), 6411(a), 6501(j), 6511(d)(4)(A), 6601(e)(2), and 6611(f)(2) of this title] shall apply with respect to in- vestment credit carrybacks attributable to net operat- ing loss carrybacks from taxable years ending after July 31, 1967." EFFECTIVE DATE OF 1966 AMENDMENT Section 4 of Pub. L. 89-800 provided that: "The amendments made by this Act [amending sections Page 62
TITLE 26-INTERNAL REVENUE CODE 46(a)(2), 48 and 167 of this title] shall apply to taxable years ending after October 9, 1966, except that the amendments made by section 3(b) [amending subsec. (b)(1) of this section] shall apply only if the fifth tax- able year following the unused credit year ends after December 31, 1966." Amendment of subsec. (a)(3) of this section by Pub. L. 89-389 applicable with respect to taxable years of electing small business corporations beginning after April 14, 1966, but not applicable with respect to sales or exchanges occurring before February 24, 1966, see section 2(c) of Pub. L, 89-389, set out as an Effective Date note under section 1378 of this title. Amendment of subsec. 1a)(3) by Pub. L. 89-384 appli- cable with respect to amounts received after December 31, 1964, in respect of foreign expropriation losss (as defined in section 1351(b) of this title) sustained after December 31, 1958, see section 2 of Pub. L. 89-384, set out as an Effective Date note under section 1351 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L, 88-272 applicable with re- spect to dividends received after Dec. 31, 1964, in tax- able years ending after such date, see section 201(e) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 37 of this title. EFFECTIVE DATE Section applicable with respect to taxable years ending after Dec. 31, 1961, see section 2(h) of Pub. L. 87-834, set out as an Effective Date note under section 38 of this title. PLAN REQUIREMENTS FOR TAXPAYERS ELECTING ADDITIONAL CREDITS Section 301(d), (e), f), of Pub. L. 94-12, as amended by Pub. L. 94-455, §§ 802(b)(7), 803(c), (d), (e), provided that: "(d) Plan Requirements for Taxpayers Electing Ad- ditional Credit.-In crder to meet the requirements of this subsection- "(1) Except as expressly provided in subsections (e) and (f), a corporation (hereinafter in this subjsec- tion referred to as the 'employer') must establish an employee stock ownership plan (described in para- Lraph (2)) which is funded by transfers of employer securities in accordance with the provisions of para- graph (0) and which meets all other requirements of this subsection. "(2) The plan referred to in paragraph (1) must be a defined contribution plan established in writing which- "(A) is a stock bonus plan, a stock bonus and a money purchase pension plan, or a profit-sharing plan, "(B) is designed to invest primarily in employer securities, and "(C) meets such other requirements (similar to requirements applicable to employee stock owner- ship plans as defined in section 4975(e)(7) of the Internal Revenue Code of 1954 [section 4975(e)(7) of this title]) as the Secretary of the Treasury or his delegate may prescribe. "(3) The plan must provide for the allocation of all employer securities transferred to it or purchased by it (because of the requirements of section 46(a)(1)(B) of the Internal Revenue Code of 1954 [subsec, (a)(1)(B) of this section]) to the account of each par- ticipant (who was a participant at any time during the plan year, whether or not he is a participant at the close of the plan year) as of the close of each plan year in an amount which bears substantially the same proportion to the amount of all such secu- rities allocated to all participants in the plan for that plan year as the amount of compensation paid to such participant (disregarding any compensation in excess of the first $100,000 per year) bears to the compensation paid to all such participants during that year (disregarding any compensation in excess of the first $100,000 with respect to any participant). Notwithstanding the first sentence of this para- graph, the allocation to participants' accounts may be extended over whatever period may be necessary to comply with the requirements of section 415 of the Internal Revenue Code of 1954 [section 415 of this title]. "For purposes of this paragraph, the amount of compensation paid to a participant for a year is the amount of such participant's compensation within the meaning of section 415(c)(3) of such Code [sec- tion 415(c)(3) of this title] for such year. "(4) The plan must provide that each participant has a nonforfeltable right to any stock allocated to his account unier paragraph (3), and that no stock allocated to a p.'rticipant's account may be distribut- ed from that acc, unt before the end of the eighty- fourth month beinning after the month in which the stock is allocated to the account except in the case of separation from the service, death, or disabil- ity. "(5) The plan must provide that each participant is entitled to direct the plan as to the manner in which any employer securities allocated to the ac- count of the participant are to be voted. "(6) On making a claim for credit, adjustment, or refund under section 38 of the Internal Revenue Code of 1954, (section 38 of this title] the employer states in such claim that it agrees, as a condition of receiving any such credit, adjustment, or refund- "(A) in the case of a taxable year beginning before January 1, 1977, to transfer employer secu- rities forthwith to the plan having an aggregate value at the time of the claim of 1 percent. of the amount of the qualified investment (as determined under section 46(c) and (d) of such Code [subsecs. (c) and (d) of this section]) of the taxpayer for the taxable year, and "(B) in the case of a taxable year beginning after December 31, 1976- "(i) to transfer employer securities to the plan having an aggregate value at the time of the claim of 1 percent of the amount of the qualified investment (as determined under section 46(c) and (d) of such Code [subsecs. (c) and (d) of this section]) of the employer for the taxable year, "(ii) except as provided in clause (iii), to effect the transfer not later than 30 days after the time (including extensions) for filing its income tax return for a taxable year, and "(iii) in the case of an employer whose credit (as determined under section 46(a)(2)(B) of such Code [subsec. (a)(2)(B) of this section]) for a tax- able year beginning after December 31, 1976, ex- ceeds the limitations of paragraph (3) of section 46(a) of such Code [subsec. (a) of this section]- "(I) to effect that portion of the transfer al- locable to investment credit carrybacks of such excess credit at the time required under clause (ii) for the unused credit year (within the meaning of section 46(b) of such Code [subsec. (b) of this section]), and "(II) to effect that portion of the transfer al- locable to investment credit carryovers of such excess credit at the time required under clause (ii) for the taxable year to which such portion is carried over. For purposes of meeting the requirements of this paragraph, a transfer of cash shall be treated as a transfer of employer securities if the cash is, under the plan, used to purchase employer securities. "(7) Notwithstanding any other provision of law to the contrary, if the plan does not meet the require- ments of section 401 of the Internal Revenue Code of 1954 [section 401 of this title]- "(A) stock transferred under paragraph (6) and allocated to the account of any participant under paragraph (3) and dividends thereon shall not be considered income of the participant or his benefi- ciary under the Internal Revenue Code of 1954 [this title] until actually distributed or made avail- able to the participant or his beneficiary and, at Page 63
TITLE 26-INTERNAL REVENUE CODE contract which is in the nature of a refund of the consideration paid for the contract; and (B) any amount received under a contract on its surrender, redemption, or maturity. In the case of any amount to which the pre- ceding sentence applies, the rule of paragraph (1)(B) shall apply (and the rule of paragraph (1)(A) shall not apply). (f) Special rules for computing employees' contribu- tions In computing, for purposes of subsection (c)(1)(A), the aggregate amount of premiums or other consideration paid for the contract, for purposes of subsection (d)(1), the consideration for the contract contributed by the employee, and for purposes of subsection (e)(1)(B), the ag- gregate premiums or other consideration paid, amounts contributed by the employer shall be included, but only to the extent that- (1) such amounts were includible in the gross income of the employee under this sub- title or prior income tax laws; or (2) if such amounts had been paid directly to the employee at the time they were con- tributed, they would not have been includible in the gross income of the employee under the law applicable at the time of such contri- bution. Paragraph (2) shall not apply to amounts which were contributed by the employer after December 31, 1962, and which would not have been includible in the gross income of the em- ployee by reason of the application of section 911 if such amounts had been paid directly to the employee at the time of contribution. The preceding sentence shall not apply to amounts which were contributed by the employer, as de- termined under regulations prescribed by the Secretary, to provide pension or annuity cred- its, to the extent such credits are attributable to services performed before January 1, 1963, and are provided pursuant to pension or annu- ity plan provisions in existence on March 12, 1962, and on that date applicable to such ser- vices. (g) Rules for transferee where transfer was for value Where any contract (or any interest therein) is transferred (by assignment or otherwise) for a valuable consideration, to the extent that the contract (or interest therein) does not, in the hands of the transferee, have a basis which is determined by reference to the basis in the hands of the transferor, then- (1) for purposes of this section, only the actual value of such consideration, plus the amount of the premiums and other consider- ation paid by the transferee after the trans- fer, shall be taken into account in computing the aggregate amount of the premiums or other consideration paid for the contract; (2) for purposes of subsection (c)(1)(B), there shall be taken into account only the ag- gregate amount received under the contract by the transferee before the annuity starting date, to the extent that such amount was ex- cludable from gross income under this subti- tle or prior income tax laws; and (3) the annuity starting date is January 1, 1954, or the first day of the first period for which the transferee received an amount under the contract as an annuity, whichever is the later. For purposes of this subsection, the term "transferee" includes a beneficiary of, or the estate of, the transferee. (h) Option to receive annuity in lieu of lump sum If- (1) a contract provides for payment of a lump sum in full discharge of an obligation under the contract, subject to an option to re- ceive an annuity in lieu of such lump sum; (2) the option is exercised within 60 days after the day on which such lump sum first became payable; and (3) part or all of such lump sum would (but for this subsection) be includible in gross income by reason of subsection (e)(1), then, for purposes of this subtitle, no part of such lump sum shall be considered as includible in gross income at the time such lump sum first became payable. [(I) Repealed. Pub. L. 94-455, title XIX, § 1951(b)(1)(A), Oct. 4, 1976, 90 Stat. 1836] ) Interest Notwithstanding any other provision of this section, if any amount is held under an agree- ment to pay interest thereon, the interest pay- ments shall be included in gross income. (k) Payments in discharge of alimony (1) In general This section shall not apply to so much of any payment under an annuity, endowment, or life insurance contract (or any interest therein) as is includible in the gross income of the wife under section 71 or section 682 (re- lating to income of an estate or trust in case of divorce, etc.). (2) Cross reference For definition of "wife", see section 7701(a)(17). (1) Face-amount certificates For purposes of this section, the term "en- dowment contract" includes a face-amount cer- tificate, as defined in section 2(a)(15) of the In- vestment Company Act of 1940 (15 U.S.C., sec. 80a-2), issued after December 31, 1954. (in) Special rules applicable to employee annuities and distributions under employee plans [(1) Repealed. Pub. L. 93-406, title 11, § 2001(h)(2), Sept. 2, 1974, 88 Stat. 957] (2) Computation of consideration paid by the em- ployee In computing- (A) the aggregate amount of premiums or other consideration paid for the contract for purposes of subsection (c)(1)(A) (relat- ing to the investment in the contract), (B) the consideration for the contract contributed by the employee for purposes of subsection (d)(1) (relating to employee's contributions recoverable in 3 years), and (C) the aggregate premiums or other con- sideration paid for purposes of subsection (e)(1)(B) (relating to certain amounts not received as an annuity), any amount allowed as a deduction with re- spect to the contract under section 404 which was paid while the employee was an employee Page 100
TITLE 26-INTERNAL REVENUE CODE within the -meaning of section 401(c)(1) shall be treated as consideration contributed by the employer, and there shall not be taken into account any portion of the premiums or other consideration for the contract paid whie the employee was an owner-employee which is properly allocable (as determined under regulations prescribed by the Secre- tary) to the cost of life, accident, health, or other insurance. (3) Life insurance contracts (A) This paragraph shall apply to any life insurance contract- (I) purchased as a part of a plan de- scribed in section 403(a), or (ii) purchased by a trust described in section 401(a) which is exempt from tax under section 501(a) if the proceeds of such contract are payable directly or indi- rectly to a participant in such trust or to a beneficiary of such participant. (B) Any contribution to a plan described in subparagraph (A)(i) or a trust described in subparagraph (A)(ii) which is allowed as a deduction under section 404, and any income of a trust described in subparagraph (A)(ii), which is determined in accordance with regulations prescribed by the Secre- tary to have been applied to purchase the life insurance protection under a contract described in subparagraph (A), is includible in the gross income of the participant for the taxable year when so applied. (C) In the case of the death of an individ- ual insured under a contract described in subparagraph (A), an amount equal to the cash surrender value of the contract imme- diately before the death of the insured shall be treated as a payment under such plan or a distribution by such trust, and the excess of the amount payable by reason of the death of the insured over such cash sur- render value shall not be includible in gross income under this section and shall be treated as provided in section 101. (4) Amounts constructively received (A) Assignments or pledges If during any taxable year an owner-em- ployee assigns (or agrees to assign) or pledges (or agrees to pledge) any portion of his interest in a trust described in section 401(a) which is exempt from tax under sec- tion 501(a), an individual retirement ac- count described in section 408(a), an individ- ual retirement annuity described in section 408(b) or any portion of the value of a con- tract purchased as part of a plan described in section 403(a), such portion shall be treated as having been received by such owner-employee as a distribution from such trust or as an amount received under the contract. (B) Loans on contracts If during any taxable year, an owner-em- ployee receives, directly or indirectly, any amount from any insurance company as a loan under a contract purchased by a trust described in section 401(a) which is exempt from tax under section 501(a) or purchased as part of a plan described in section 403(a), and issued by such insurance company, such amount shall be treated as an amount received under the contract. (5) Penalties applicable to certain amounts received by owner-employees (A) This paragraph shall apply- (I) to amounts (other than any amount received by an individual in his capacity as a policyholder of an annuity, endow- ment, or life insurance contract which is in the nature of a dividend or similar dis- tribution) which are received from a qualified trust described in section 401(a) or under a plan described in section 403(a) and which are received by an individual, who is, or has been, an owner-employee, before such individual attains the age of 59V2 years, for any reason other than the individual's becoming disabled (within the meaning of paragraph (7) of this subsec- tion), but only to the extent that such amounts are attributable to contributions paid on behalf of such individual (other than contributions made by him as an owner-employee) while he was an owner- employee, and (ii) to amounts which are received from a qualified trust described in section 401(a) or under a plan described in section 403(a) at any time by an individual who is, or has been, an owner-employee, or by the successor of such individual, but only to the extent that such amounts are deter- mined, under regulations prescribed by the Secretary, to exceed the bciieftts pro- vided for such individual under the plan formula. (B) If a person receives an amount to which this paragraph applies, his tax under this chapter for the taxable year in which such amount is received shall be increased by an amount equal to 10 percent of the portion of the amount so received which is includible in his gross income for such tax- able year. (6) Owner-employee defined For purposes of this subsection, the term "owner-employee" has the meaning assigned to it by section 401(c)(3) and includes an indi- vidual for whose benefit an indivi'ual retire- ment account or annuity described in section 408(a) or (b) is maintained. (7) Meaning of disabled For purposes of this section, an individual shall be considered to be disabled if he is unable to engage in any substantial gainful activity by reason of any medically determin- able physical or mental impairment which can be expected to result in death or to be of long-continued and indefinite duration. An in- dividual shall not be considered to be disabled unless he furnishes proof of the existence thereof in such form and manner as the Sec- retary may require. (n) Annuities under retired serviceman's family pro. tection plan or survivor benefit plan Subsections (b) and (d) shall not apply in the case of amounts received after December 31, 1965, as an annuity under chapter 73 of title 10 of the United States Code, but all such 71-999 0 - 78 - 9 (Vol. 7) Page 101
TITLE 26-INTERNAL REVENUE CODE amounts shall be excluded from gross income until there has been so excluded (under section 122(b)(1) or this section, including amounts ex- cluded before January 1, 1966) an amount equal to the consideration for the contract (as de- fined by section 122(b)(2)), plus any amount treated pursuant to section 101(b)(2)(D) as ad- ditional consideration paid by the employee. Thereafter all amounts so received shall be in- cluded in gross income. (o) Cross reference For limitation on adjustments to basis of annuity con- tracts sold, see section 1021. (Aug. 16, 1954, ch. 736, 68A Stat. 20; Oct. 10, 1962, Pub. L. 87-792, §4(a), (b), 76 Stat. 821: Oct. 16, 1962, Pub. L. 87-834, § 11(b), 76 Stat. 1005; Feb. 26, 1964, Pub. L. 88-272, title II, § 232(b), 78 Stat. 110; June 21, 1965, Pub. L. 89- 44, title VIII, § 809(d)(2), 79 Stat. 167; July 30, 1965, Pub. L. 89-97, title I, § 106(d)(2), 79 Stat. 337; Mar. 8, 1966, Pub. L. 89-365, § 1(b), 80 Stat. 32; Dec. 30, 1969, Pub. L. 91-172, title V, § 515(b), 83 Stat. 644; Sept. 2, 1974, Pub. L. 93- 406, title II, §§ 2001(e)(5), (g)(1), (2)(A), (h)(2), (3), 2002(g)(10), 2005(c)(3), 2008(b)(2), 88 Stat. 955, 957, 970, 991, 994; Oct. 4, 1976, Pub. L. 94- 455, title XIX, §§ 1901(a)(12), (13), 1906(b)(13)(A), 1951(b)(1)(A), 90 Stat. 1765, 1834, 1836.) AMENDMENTS 1976-Subsec. (c)(2). Pub. L. 94-455. § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c)(3)(A). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (d)(1). Pub. L. 94-455. § 1901(a)(12), struck out in subpar. (B) "(whether or not before January 1, 1954)" following "beginning on the date", and in provi- sions following subpar. (B) struck out "(under this paragraph and prior income tax laws)" following "until there has been so excluded". Subsec. (f). Pub. L. 94-455. § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (I). Pub. L. 94-455, § 1951(b)(1)(A), struck out subsec. (i) which related to Joint annuities where first annuitant died in 1951, 1952, or 1953. Subsec. (m)(2). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (m)(3). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (m)(4)(A). Pub. L. 94-455, § 1901(a)(13), sub- stituted "an individual retirement account" for "an in- dividual retirement amount". Subsec. (m)(5)(A)(ii). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate' following "Secretary". Subsec, (m)(7). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". 1974-Subsec. (m)(1). Pub. L. 93-406, § 2001(h)(2), struck out subsec. (m)(1) which related to certain amounts received before annuity starting date. Subsec. (m)(4)(A). Pub. L. 93-406, § 2002(g)(10)(A), inserted references to an individual retirement amount described in section 408(a) and an individual retirement annuity described in section 408(b). Subsec. (m)(5)(A). Pub. L. 93-406, § 2001(e)(5), (h)(3), substituted "(other than contributions made by him as an owner-employee)" for "(whether or not paid by him)" in cl. (I), and struck out cl. (iii) which had made reference to amounts which were received, by an indi- vidual who was or had been, an owner-employee, by reason of the distribution under the provisions of sec- tion 401(e)(2)(E) of his entire interest in all qualified trusts described in section 401(a) and in all plans de- scribed in section 403(a). Subsec. (m)(5)(B). Pub. L. 93-406, §2001(g)(1), sub- stituted provisions that if a person receives an amount to which subsec. (m)(5) applies, his tax under this chapter for the taxable year in which such amount Is received shall be increased by an amount equal to 10 percent of the portion of the amount so received which is includible in his gross income for such tax- able year for provisions that if the aggregate amounts to which subsec. (m)(5) applied received by any person in his taxable year equalled or exceeded $2,500, the in- crease In his tax for the taxable year in which such amounts were received and attributable to such amounts could not be less than 110 percent of the ag- gregate increase in taxes, for the taxable year and the 4 immediately preceding taxable years, which would have resulted if such amounts had been included in such person's gross income ratably over such taxable years, with provision for alternate computation if de- ductions had been allowed under section 404 for con- tributions paid for a number of prior taxable years less than 4. Subsec. (m)(5)(C) to (E). Pub. L. 93-406, § 2001(g)(2)(A), struck out subpars. (C), (D), and (E) which had laid down special rules for the application of subsec. (m)(5). Subsec. (m)(6). Pub. L. 93-406, § 2002(g)(10)(B), in- serted reference to an individual for whose benefit an individual retirement account or annuity described in section 408 (a) or (b) is maintained. Subsec. (n). Pub. L. 93-406, §§ 2005(c)(3), 2008(b)(2), redesignated former subsec. (o) as (n) and in the sub- section catchline of subsec. (n) as so redesignated in- serted reference to survivor benefit plan. Former subsec. (n). which had set out the provisions covering the treatment to be accorded total distributions, was stricken. Subsec. (W). Pub. L. 93-406, § 2005(c)(3), redesignated former subsec. (p) as (W). Former subsec. (o) redesig- nated (n) and amended. Subsec. (p). Pub. L. 93-406, § 2005(c)(3), redesignated former subsec. (p) as (W). 1969-Subsec. (n)(1). Pub. L. 91-172, § 515(b)(1). al- tered section to accommodate the insertion into sec- tions 402 and 403 of provisions under which employer contributions to qualified pension, profit sharing, stock bonus, and annuity plans for plan years begin- ning after 1969 are to be treated as ordinary income when received in a lump sum distribution, but with such amounts to be eligible for a special averaging pro- cedure. Subsec. (n)(4). Pub. L. 91-172, §515(b)(2), added subsec. (n)(4). 1966-Subsec. (W). Pub. L. 89-365 added subsec. (W). Former subsec. (o) redesignated (p). Subsec. (p). Pub. L. 89-365 redesignated former subsec. (o) as (p). 1965-Subsec. (m)(5)(A)(l). Pub. L. 89-97, § 106(d)(2)(A), substituted "paragraph (7) of this sub- section" for "section 213(g)(3)". Subsec. (m)(7). Pub. L. 89-97, § 106(d)(2)(B), added par. (7). Subsec. (n)(1). Pub. L. 89-97, § 106(d)(2)(C), substi- tuted in subpars. (A)(iii) and (B)(iii) "subsection (m)(7)" for "section 213(g)(3)". Subsec. (n)(3). Pub. L. 89-44 struck out "section 31" in the sentence following subpar. (B) and inserted in lieu thereof "sections 31 and 39". 1964-Subsec. (e)(3). Pub. L. 88-272 eliminated par. (3) which provided for a limit on the tax attributable to the receipt of a lump sum. 1962-Subsec. (d)(2). Pub. L. 87-792, § 4(a), designat- ed existing provisions as ci. (A) and added cl. (B). Subsec. (f). Pub. L. 87-834 inserted sentence provid- ing that par. (2) shall not apply to amounts which were contributed by the employer after Dec. 31, 1962, and which would not have been includible in the gross income of the employee by reason of the application of Section 911 if such amounts had been paid directly to the employee at the time of contribution, and making such sentence inapplicable to amounts which were contributed by the employer, as determined under regulations, to provide pension or annuity cred- its, to the extent such credits are attributable to ser- Page 102
TITLE 26-INTERNAL REVENUE CODE vices performed before Jan. 1, 1963, and are provided pursuant to pension or annuity plan provisions in exis- tence on Mar. 12, 1962, and on that date applicable to such services. Subsec. (m). Pub. L. 87-792, § 4(b), added subsec. (m) and redesignated former subsec. (m) as (o). Subsec. (n). Pub. L. 87-792, § 4(b), added subsec. (n). Subsec. (W). Pub. L. 87-792, §4(b). redesignated former subsec. (m) as o). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (d)(1), (m)(4)(A) by section 1901(a)(12), (13) of Pub. L. 94-455 applicable with re- spect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 2 of this title. Section 1951(d) of Pub. L. 94-455 provided that: "Except as otherwise expressly provided, the amend- ments made by this section [see Tables Volume for distribution of section 1951 of Pub. L. 94-455] shall apply with respect to taxable years beginning after December 31, 1976." EFFECTIVE DATE OF 1974 AMENDMENT Section 2001(i)(5), (6) of Pub. L. 93-406 provided that: "(5) The amendments made by subsection (g) [of section 2001 of Pub. L. 93-406, which amended sec- tions 46(a)(3), 50A(a)(3), 56(a)(2)(A), (c)(1), 72(m)(5)(B), 404(a)(2), (9)(B)(ii), and 901(a) of this title and repealed subsec. (m)(5)(C) to (E) of this sec- tion] apply to distributions made in taxable years beginning after December 31, 1975. "(6) The amendments made by subsection (h) [of section 2001 of Pub. L. 93-406, which amended subsec. (m)(5)(A)(i) of this section and section 401(d)(4)(B) of this title and repealed subsec. (m)(1) of this section] apply to taxable years ending after the date of enactment of this Act (Sept. 2, 1974]." Amendment of subsec. (m)(4)(A) and (m)(6) of this section by section 2002(g)(10) of Pub. L. 93-406 effec- tive on Jan. 1, 1975. see section 2002()(2) of Pub. L. 93-406, set out as an Effective Date note under section 4973 of this title. Repeal of subsec. (m)(5)(AXiii) of this section by sec- tion 2001(e)(5) of Pub. L. 93-406 applicable to contri- butions made in taxable years beginning after Dec. 31, 1975, see section 2001(i)(4) of Pub. L. 93-406, set out as an Effective Date of 1974 Amendment note under sec- tion 401 of this title. Elimination of subsec. (n) of this section and the re- designation of subsecs. (o) and (p) as subsecs. (n) and (o), respectively, by section 2005(c)(3) of Pub. L. 93- 406, applicable only with respect to distributions or payments made after Dec. 31, 1973, in taxable years beginning after Dec. 31, 1973, see section 2005(d) of Pub. L. 93-406, set out as an Effective Date of 1974 Amendment note under section 402 of this title. Amendment of catchline of subsec. (o) of this sec- tion by section 2008(b)(2) of Pub. L. 93-406 applicable to taxable years ending on or after Sept. 21, 1972, see section 2008(c) of Pub. L. 93-406, set out as an Effec- tive Date of 1974 Amendment note under section 122 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Amendment by Pub. L. 91-172 applicable to taxable years ending after Dec. 31, 1969, see section 515(d) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 402 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Addition of subsec. (o) and redesignation of subsec. (o) as subsec. (p) by Pub. L. 89-365 applicable with re- spect to taxable years ending after Dec. 31, 1965, see section 1(d) of Pub. L. 89-365, set out as an Effective Date note under section 122 of this title. EFFECTIVE DATE OF 1965 AMENDMENT Amendment by Pub. L. 89-97 applicable to taxable years beginning after Dec. 31, 1966, see section 106(e) of Pub. L. 89-97, set out as an Effective Date of 1965 Amendment note under section 213 of this title. Amendment of subsec. (n)(3) by Pub. L. 89-44 appli- cable to taxable years beginning on or after July 1, 1965, see section 809(f) of Pub. L. 89-44, set out as an Effective Date of 1965 Amendment note under section 6420 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment of subsec. (e)(3) by Pub. L. 88-272 appli- cable to taxable years beginning after Dec. 31, 1963, see section 232(g) of Pub. L. 88-272, set out as an Ef- fective Date note under section 1301 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Section 11(c)(2) of Pub. L. 87-834 provided that: "The amendment made by subsection (b) [to subsec. (f) of this section] shall apply to taxable years ending after December 31, 1962." Amendment by Pub. L. 87-792 applicable to taxable years beginning after Dec. 31, 19t2, see section 8 of Pub. L. 87-792, set out as an Effective Date of 1962 Amendments note under section 37 of this title. SAVINGS POVISIO 1 Section 1951(b)(1)(B) of Pub. L. 94-455 provided that: "Notwithstanding subparagraph (A) [repealing subsec. (I) of this section], if the provisions of section 72(i) applied to amounts received in taxable years be- ginning before January 1, 1977, under an annuity con- tract, then amounts received under such contract on or after such date shall be treated aa if such provisions were not repealed." CROSS REFERENCES Amounts received by surviving annuitant under joint and survivor annuity contract in respect of decedents' income, see section 691 of this title. Basis of property acquired from decedent, certain provisions inapplicable to annuities, see section 1014 of this title. Beneficiary of employees' trust, taxability of, see section 402 of this title. Employee annuities, taxation of, see section 403 of this title. Employees' death benefits, see section 101 of this title. Retirement income, see section 37 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 37, 46, 5OA, 56, 79, 101, 105, 122, 401 to 409, 483, 691, 901, 1014, 1023, 1232, 1302, 1304, 1348, 1379, 4973 of this title; title 29 section 1345. § 73. Services of child (a) Treatment of amounts received Amounts received in respect of the services of a child shall be included in his gross income and not in the gross income of the parent, even though such amounts are not received by the child. (b) Treatment of expenditures All expenditures by the parent or the child attributable to amounts which are includible in the gross income of the child (and not of the parent) solely by reason of subsection (a) shall be treated as paid or incurred by the child. We) Parent defined For purposes of this section, the term "parent" includes an individual who is entitled to the services of a child by reason of having Page 103
TITLE 26-INTERNAL REVENUE CODE parental rights and duties in respect of the child. (d) Cross reference For assessment of tax against parent in certain cases, see section 6201(c). (Aug. 16, 1954, ch. 736, 68A Stat. 24.) SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 6201 of this title. § 74. Prizes and awards (a) General rule Except as provided in subsection (b) and in section 117 (relating to scholarships and fellow- ship grants), gross income includes amounts re- ceived as prizes and awards. (M) Exception Gross income does not include amounts re- ceived as prizes and awards made primarily in recognition of religious, charitable, scientific, educational, artistic, literary, or civic achieve- ment, but only if- (1) the recipient was selected without any action on his part to enter the contest or pro- ceeding; and (2) the recipient is not required to render substantial future services as a condition to receiving the prize or award. (Aug. 16, 1954, ch. 736, 68A Stat. 24.) SECTION RETrnuun TO IN OTHER SECTIONS This section is referred to in sections 4941, 4945 of this title. § 75. Dealers in tax-exempt securities (a) Adjustment for bond premium In computing the gross income of a taxpayer who holds during the taxable year a short-term municipal bond (as defined in subsection (b)(1) primarily for sale to customers in the ordinary course of his trade or business- (1) if the gross income of the taxpayer from such trade or business is computed by the use of inventories and his inventories are valued on any basis other than cost, the cost of secu- rities sold (as defined in subsection (b)(2) during such year shall be reduced by an amount equal to the amortizable bond premi- um which would be disallowed as a deduction for such year by section 171(a)(2) (relating to deduction for amortizable bond premium) if the definition in section 171(d) of the term "bond" did not exclude such municipal bond; or (2) if the gross income of the taxpayer from such trade or business is computed without the use of inventories, or by use of inven- tories valued at cost, and the municipal bond is sold or otherwise disposed of during such year, the adjusted basis (computed without regard to this paragraph) of the municipal bond shall be reduced by the amount of the adjustment which would be required under section 1016(a)(5) (relating to adjustment to basis for amortizable bond premium) if the definition in section 171(d) of the term "bond" did not exclude such municipal bond. Notwithstanding the provisions of paragraph (1), no reduction to the cost of securities sold during the taxable year shall be made in re- spect of any obligation described in subsection (b)(1)(A)(ii) which is held by the taxpayer at the close of the taxable year; but in the taxable year in which any such obligation is sold or otherwise disposed of, if such obligation is a municipal bond (as defined in subsection (b)(1)), the cost of securities sold during such year shall be reduced by an amount equal to the adjustment described in paragraph (2), without regard to the fact that the taxpayer values his inventories on any basis other than cost. (b) Definitions For purposes of subsection (a)- (1) The term "municipal bond" means any obligation issued by a government or political subdivision thereof if the interest on such ob- " ligation is excludable from gross income; but such term does not include such an obligation if- A)(i) it is sold or otherwise disposed of by the taxpayer within 30 days after the date of its acquisition by him, or (ii)t its earliest maturity or call date is a dat; more than 5 years from the date on which it, wa-s acquired by the taxpayer; and (B) when it is sold or otherwise disposed of by the taxpayer- (i) in the case of a sale, the amount real- ized, or (ii) in the case of any other disposition, its fair market value at the time of such disposition, is higher than its adjusted basis (computed without regard to this section and section 1016(a)(6)). Determinations under subparagraph (B) shall be exclusive of interest. (2) The term "cost of securities sold" means the amount ascertained by subtracting the in- ventory value of the closing inventory of a taxable year from the sum of- (A) the inventory value of the opening in- ventory for such year, and (B) the cost of securities and other prop- erty purchased during such year wlch would properly be included in the invenfory of the taxpayer if on hand at the close of the taxable year. (Aug. 16, 1954, ch. 736, 68A Stat. 25; Sept. 2, 1958, Pub. L. 85-866, title I, §2(a), 72 Stat. 1606.) AMENDMENTS 1958-Subsec. (a). Pub. L. 85-866, § 2(a)(2), (3). elimi- nated "short-term" each place it appeared, and added sentence to provide that no reduction to cost of securi- ties sold during taxable year shall be made in respect of subsec. (b)(1)(A)(ii) obligations held at close of year, and to permit reduction in cost of securities sold in taxable year sold if obligation is municipal bond. Subsec. (b)(1). Pub. L. 85-866, § 2(a)(1), substituted "municipal bond" for "short-term municipal bond", designated former subpars. (A) and (B) as (A)() and (i), respectively, and added subpar. (B). EFFECTIVE DATE OF 1958 AmENDMENT Section 2(c) of Pub. L. 85-866 provided that: "The amendments made by subsections (a) and (b) [to sub- sees. (a) and (b)(1) of this section and to section 1016(a)(6) of this title] shall apply with respect to tax- Page 104
TITLE 26-INTERNAL REVENUE CODE able years ending after December 31, 1957, but only with respect to obligations acquired after such date." CROSS REFERENCES General rule for inventories, see section 471 of this title. Last.in, first-out inventories, see section 472 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 1016 of this title. [§ 76. Repealed. Pub. L. 94-455, title XIX, § 1901(a)(14), Oct. 4, 1976, 90 Stat. 1765] Section, act Aug. 16, 1954, ch. 736, 68A Stat. 25, re- lated to the inclusion in gross of all income derived from mortgages made, or obligations issued, by a joint- stock land bank. § 77. Commodity credit loans (a) Election to include loans in income Amounts received as loans from the Commod- ity Credit Corporation shall, at the election of the taxpayer, be considered as income and shall be included in gross income for the taxable year in which received. (b) Effect of election on adjustments for subsequent years If a taxpayer exercises the election provided for in subsection (a) for any taxable year, then the method of computing income so adopted '7hall be adhered to with respect to all subse- quent taxable years unless with the approval of the Secretary a change to a different method is authorized. (Aug. 16, 1954, ch. 736, 68A Stat. 25; Pub. L. 94- 455, title XIX, § 1906(b)(13)(A), 90 Stat, 1834.) AMENDMENTS 1976-Subsec. (b). Pub. L. 94-455 struck out "or his delegate" following "Secretary". CROSS REFERENCES Adjustments to basis, see section 1016 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 1016 of this title. § 78. Dividends received from certain foreign corpora. tions by domestic corporations choosing foreign tax credit If a domestic corporation chooses to have the benefits of subpart A of part III of subchapter N (relating to foreign tax credit) for any tax- able year, an amount equal to the taxes deemed to be paid by such corporation under section 902(a) (relating to credit for corporate stock- holder in foreign corporation) or under section 960(a)(1) (relating to taxes paid by foreign cor- poration) for such taxable year shall be treated for purposes of this title (other than section 245) as a dividend received by such domestic corporation from the foreign corporation. (Added Pub. L. 87-834, § 9(b), Oct. 16, 1962, 76 Stat. 1001, and amended Pub. L. 94-455, title X, § 1033(b)(1), Oct. 4, 1976, 90 Stat. 1628.) AMENDMENTS 1976-Pub. L. 94-455 substituted "section 902(a)" for "section 902(a)(1)" and "section 960(a)(1)" for "section 960(a)(1)(C)". EFFECT,.VE DATE OF 1976 AMENDMENT Amendment by Pub. L. 94-455 applicable on differ- ent dates depending on the date the distributions were received, see section 1033(c) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 902 of this title. EFFECTIVE DATE Section applicable in respect of any distribution re- ceived by a domestic corporation after Dec. 31, 1964, and in respect of any distribution received by a domes- tic corporation before Jan. 1, 1965, in a taxable year of such corporation beginning after Dec. 31, 1962, but only to the extent that such distribution is made out of the accumulated profits of a foreign corporation for a taxable year (of such foreign corporation) beginning after Dec. 31, 1962, see section 9(e) of Pub. L. 87-834, set out as an Effective Date of 1962 Amendment note under section 902 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 819A, 902, 906, 908 of this title. § 79. Group-term life insurance purchased for em- ployees (a) General rule There shall be included in the gross income of an employee for the taxable year an amount equal to the cost of group-term life insurance on his life provided for part or all of such year under a policy (or policies) carried directly or indirectly by his employer (or employers); but only to the extent that such cost exceeds the sum of- (1) the cost of $50,000 of such insurance, and (2) the amount (if any) paid by the employ- ee toward the purchase of such insurance. (b) Exceptions Subsection (a) shall not apply to- (1) the cost of group-term life insurance on the life of an individual which is provided under a policy carried directly or indirectly by an employer after such individual has ter- minated his employment with such employer and either has reached the retirement age with respect to such employer or is disabled (within the meaning of section 72(m)(7)), (2) the cost of any portion of the group- term life insurance on the life of an employee provided during part or all of the taxable year of the employee under which- (A) the employer is directly or indirectly the beneficiary, or (B) a person described in section 170(c) is the sole beneficiary, for the entire period during such taxable year for which the employee receives such insur- ance, %nd (3) the cost of any group-term life insurance which is provided under a contract to which section 72(m)(3) applies. (c) Determination of cost of insurance For purposes of this section and section 6052, the cost of group-term insurance on the life of an employee provided during any period shall be determined on the basis of uniform preml- Page 105
TITLE 26-INTERNAL REVENUE CODE ums (computed on the basis of 5-year age brackets) prescribed by regulations by the Sec- retary. In the case of an employee who has at- tained age 64, the cost prescribed shall not exceed the cost with respect to such individual if he were age 63. (Added Pub. L. 88-272, title II, § 204(a)(1), Feb. 26, 1964, 78 Stat. 36, and amended Pub. L. 89- 97, title I, § 106(d)(3), July 30, 1965, 79 Stat. 337; Pub. L. 94-455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (c). Pub. L. 94-455 struck out "or his delegate" following "Secretary". 1965-Subsec. (b)(1). Pub. L. 89-97 substituted "sec- tion 72(m)(7)" for "paragraph (3) of section 213(g), de. termined without regard to paragraph (4) thereof". EFrEcTIVE DATE OF 1965 AMENDMENT Amendment by Pub. L. 89-97 applicable to taxable years beginning after Dec. 31, 1966, see section 106(e) of Pub. L. 89-97, set out as an Effective Date of 1965 Amendment note under section 213 of this title. EFFECTIVE DATE Section 204(d) of Pub. L. 88-272 provided that: "The amendments made by subsections (a) (to this section. and section 7701(a)(20) of this title] and (c) [to sec- tions 6052 and 6678 of this title] and paragraph (3) of section 6652(a) of the Internal Revenue Code of 1954 (as amended by section 221(b)(2) of this Act) [to sec- tion 6652(a) of this title], shall apply with respect to group-term life insurance provided alor December 31. 1963, in taxable years ending after such date. The amendments made by subsection (b) [to section 3401(a)(13), (14) of this title] shall apply with respect to remuneration paid after December 31, 1963, in the form of group.term life insurance provided after such date. In applying section 79(b) of the Internal Rev- enue Code of 1954 (as added by subsection (a)(1) of this section) [subsec. (b) of this section] to a taxable year beginning before May 1, 1964. if paragraph (2)(B) of such section applies with respect to an employee for the period beginning May 1, 1964, and ending with the close of his first taxable year ending after April 30, 1964, such paragraph (2)(B) shall be treated as apply- ing with respect to such employee for the period be- ginning January 1, 1964, and ending April 30, 1964." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 6052, 7701 of this title. § 80. Restoration of value of certain securities (a) General rule In the case of a domestic corporation subject to the tax imposed by section 11 or 802, if the value of any security (as defined in section 165(g)(2))- (1) which became worthless by reason of the expropriation, intervention, seizure, or similar taking by the government of any for- eign country, any political subdivision there- of, or any agency or instrumentality of the foregoing of property to which such security was related, and (2) which was taken into account as a loss from the sale or exchange of a capital asset or with respect to which a deduction for a loss was allowed under section 165, is restored in whole or in part during any tax- able year by reaon of any recovery of money or other property in respect of the property to which such security was related, the value so restored (to the extent that, when added to the value so restored during prior taxable years, it does not exceed the amount of the loss de- scribed in paragraph (2)) shall, except,as pro- vided in subsection (b), be included in gross income for the taxable year in which such res- toration occurs. b) Reduction for failure to receive tax benefit The amount otherwise includible in gross income under subsection (a) in respect of any security shall be reduced by an amount equal to the amount (if any) of the loss described in sub- section (a)(2) which did not result in a reduc- tion of the taxpayer's tax under this subtitle for any taxable year, determined under regula- tions prescribed by the Secretary. (c) Character of income For purposes of this subtitle- (1) Except as provided in paragraph (2), the amount included in gross income under this section shall be treated as ordinary income, (2) If the loss described in subsection (a)(2) was taken into account as a loss from the sale or exchange of a capital asset, the amount in- cluded in gross Income under this section shall be treated as long-term capital gain. (d) Treatment under foreign expropriation loss recov- ery provisions This section shall not apply to any recovery of a foreign expropriation loss to which section 1351 applies. (Added Pub. L. 89-384, § 1(b)(1), Apr. 8, 1966, 80 Stat. 101, and amended Pub. L. 94-455, title XIX, §§ 1901(b)(3)(K), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1793, 1834.) AMENDMENTS 1976-Subsec. (b). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c)(1). Pub. L. 94-455, § 1901(b)(3)(K), substi- tuted "ordinary income" for "gain from the sale or ex- change of property which is neither a capital asset nor property described in section 1231". EFFECTIVE DATE OF 1976 AMENDMENT Amendment by section 1901(b)(3)(K) of Pub. L. 94- 455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE Section 1(b)(3) of Pub. L. 89-384 provided that: "The amendments made by this subsection [adding this sec- tion] shall apply to taxable years beginning after De- cember 31, 1965, but only with respect to losses de- scribed in section 80(a)(2) of the Internal Revenue Code of 1954 (as added by paragraph (1) of this sub- section) (subsec. (a)(2) of this section] which were sus- tained after December 31, 1958." § 81. Certain increases in suspense accounts There shall be included in gross income for the taxable year for which an increase is re- quired- (1) Certain dealers' reserves The amount of any increase in the suspense account required by paragraph (4)(B)(ii) of section 166(f) (relating to certain debt obliga- tions guaranteed by dealers). Page 106
TITLE 26-INTERNAL REVENUE CODE (2) Vacation pay The amount of any increase in the suspense account required by paragraph (2)(B) of sec- tion 463(c) (relating to accrual of vacation pay). (Added Pub. L. 89-722, § 1(b)(1), Nov. 2, 1966, 80 Stat. 1152, and amended Pub. L. 93-625, § 4(c)(1), Jan. 3, 1975, 88 Stat. 2111; Pub. L. 94- 455, title VI, § 605(b), Oct. 4, 1976, 90 Stat. 1575.) AMENDMENTS 1976-Par. (1). Pub. L. 94-455 substituted "section 166(f)" for "section 166(g)". 1975-Pub. L. 93-625 incorporated existing provi. sions in introductory text and provisions designated as par. (1) and added par. (2). EFFECTIVE DATE or 1976 AMENDMENT Amendment by Pub. L. 94-455 applicable to guaran- tees made after Dec. 31, 1975, in taxable years begin- ning after such date, see section 605(c) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 166 of this title. EFFECTIVE DATE OF 1975 AMENDMENT Amendment by Pub. L. 93-625 applicable to taxable years beginning after Dec. 31, 1973, or applicable to taxable years ending after Dec. 31, 1972, where tax- payer maintained an account for vacation pay under section 97 of Technical Amendments Act of 1958, as amended [set out as a note under section 162 of this title], for his last taxable year ending before Jan. 1, 1973, see section 4(d) of Pub. L. 93-625, set out as an Effective Date note under section 463 of this title. EFFECTIVE DATE Section applicable, except as otherwise provided, to taxable years ending after Oct. 21, 1965, see section 2 of Pub. L. 89-722, set out as an Effective Date of 1966 Amendment note under section 166 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 166 of this title. § 82. Reimbursement for expenses of moving There shall be included in gross income (as compensation for services) any amount received or accrued, directly or indirectly, by an individ- ual as a payment for or reimbursement of ex- penses of moving from one residence to another residence which is attributable to employment or self-employment. (Added Pub. L. 91-172, title II, § 231(b), Dec. 30, 1969, 83 Stat. 579.) EFFECTIVE DATE Section applicable to taxable years beginning after December 31, 1969, except that it does not apply to moving expenses paid or incurred before July 1, 1970, in connection with the commencement of work by the taxpayer as an employee at a new principal place of work of which the taxpayer had been notified by his employer on or before December 19, 1969, see section 231(d) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 217 of this title. MOVING EXPENSES OF MEMBERS OF THE UNIFORMED SERVICES Withholding, reporting, inclusion within adjusted gross income, and deduction for reimbursement for moving expenses of members of the uniformed ser- vices, see section 2 of Pub. L. 93-490, Oct. 26, 1974, 88 Stat. 1466, set out as a note under section 217 of this title. § 83. Property transferred in connection with perfor- mance of services (a) General rule If, in connection with the performance of ser- vices, property is transferred to any person other than the person for whom such services are performed, the excess of- (1) the fair market value of such property (deterr.ined without regard to any restriction other than a restriction which by its terms will never lapse) at the first time the rights of the person having the beneficial interest in such property are transferable or are not sub- ject to a substantial risk of forfeiture, which- ever occurs earlier, over (2) the amount (if any) paid for such prop- erty, shall be included in the gross income of the person who performed such services in the first taxable year in which the rights of the person having the beneficial interest in such property are transferable or are not sub- ject to a substantial risk of forfeiture, which- ever is applicable. The preceding sentence shall not apply if such person sells or other- wise disposes of such property in an arm's length transaction before his rights in such property become transferable or not subject to a substantial risk of forfeiture. (b) Election to include in gross income in year of transfer (1) In general Any person who performs services in con- nection with which property is transferred to any person may elect to include in his gross income for the taxable year in which such property is transferred, the excess of- (A) the fair market value of such property at the time of transfer (determined without regard to any restriction other than a re- striction which by its terms will never lapse), over (B) the amount (if any) paid for such property. If such election is made, subsection (a) shall not apply with respect to the transfer of such property, and if such property is subsequent- ly forfeited, no deduction shall be allowed in respect of such forfeiture. (2) Election An election under paragraph (1) with re- spect to any transfer of property shall be made in such manner as the Secretary pre- scribes and shall be made not later than 30 days after the date of such transfer. Such election may not be revoked except with the consent of the Secretary. (c) Special rules For purposes of this section- (1) Substantial risk of forfeiture The rights of a person in property are sub- ject to a substantial risk of forfeiture if such person's rights to full enjoyment of such property are conditioned upon the future per- formance of substantial services by any indi- vidual. Page 107
TITLE 26-INTERNAL REVENUE CODE (2) Transferability of property The rights of a person in property are transferable only if the rights in such proper- ty of any transferee are not subject to a sub- stantial risk of forfeiture. (d) Certain restrictions which will never lapse (1) Valuation In the case of property subject to a restric- tion which by its terms will never lapse, and which allows the transferee to sell such prop- erty only at a price determined under a for- mula, the price so determined shall be deemed to be the fair market value of the property unless established to the contrary by the Secretary, and the burden of proof shall be on the Secretary with respect to such value. (2) Cancellation If, in the case of property subject to a re- striction which by its terms will never lapse, the restriction is canceled, then, unless the taxpayer establishes- (A) that such cancellation was not com- pensatory, and (B) that the person, if any, who would be allowed a deduction if the cancellation were treated as compensatory, will treat the transaction as not compensatory, as evi- denced in such manner as the Secretary shall prescribe by regulations, the excess of the fair market value of the property (computed without regard to the re- strictions) at the time of cancellation over the sum of-- (C) the fair market value of such property (computed by taking the restriction into ac- count) immediately before the cancellation, and (D) the amount, if any, paid for the can- cellation, shall be treated as compensation for the tax- able year in which such cancellation occurs. (e) Applicability of section This section shall not apply to- (1) a transaction to which section 421 ap- plies, (2) a transfer to or from a trust described in section 401(a) or a transfer under an annuity plan which meets the requirements of section 404(a)(2), (3) the transfer of an option without a read- lly ascertainable fair market value, or (4) the transfer of property pursuant to the exercise of an option with a readily ascertain- able fair market value at the date of grant. () Holding period In determining the period for which the tax- payer has held property to which subsection (a) applies, there shall be included only the period beginning at the first time his rights in such property are transferable or are not subject to a substantial risk of forfeiture, whichever occurs earlier. (g) Certain exchanges If property to which subsection (a) applies is exchanged for property subject to restrictions and conditions substantially similar to those to which the property given in such exchange was subject, and if section 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applied to such exchange, or if such ex- change was pursuant to the exercise of a con- version privilege- (1) such exchange shall be disregarded for purposes of subsection (a), and (2) the property received shall be treated as property to which subsection (a) applies. (h) Deduction by employer In the case of a transfer of property to which this section applies or a cancellation of a re- striction described in subsection (d), there shall be allowed as a deduction under section 162, to the person for whom were performed the ser- vices in connection with which such property was transferred, an amount equal to the amount included under subsection (a), (b), or (d)(2) in the gross income of the person who performed such services. Such deduction shall be allowed for the taxable year of such person in which or with which ends the taxable year in which such amount is included in the gross income of the person who performed such ser- vices. (i) Transition rules This section shall apply to property trans- ferred after June 30, 1969, except that this sec- tion shall not apply to property transferred- (1) pursuant to a binding written contract entered into bc~ore April 22, 1969, (2) upon the exercise of an option granted before April 22, 1969, (3) before May 1, 1970, pursuant to a writ- ten plan adopted and approved before July 1, 1969, (4) before January 1, 1973, upon the exer- cise of an option granted pursuant to a bind- ing written contract entered into before April 22, 1969, between a corporation and the trans- feror requiring the transferor to grant op- tions to employees of such corporation (or a subsidiary of such corporation) to purchase a determinable number of shares of stock of such corporation, but only if the transferee was an employee of such corporation (or a subsidiary of such corporation) on or before April 22, 1969, or (5) in exchange for (or pursuant to the ex- ercise of a conversion privilege contained in) property transferred before July 1, 1969, or for property to which this section does not apply (by reason of paragraphs (1), (2), (3), or (4)), if section 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applies, or if gain or loss is not other- wise required to be recognized upon the exer- cise of such conversion privilege, and if the property received in such exchange is subject to restrictions and conditions substantially similar to those to which the property given In such exchange was subject. (Added Pub. L. 91-172, title III, §321(a), Dec. 30, 1969, 83 Stat. 588, and amended Pub. L. 94- 455, title XIX, §§ 1901(a)(15), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1765, 1834.) AMENDMENTS 1976-Subsec. (b)(2). Pub. L. 94-455, § 1901(a)(15), struck out "(or. if later, 30 days after the date of the enactment of the Tax Reform Act of 1969)" following "after the date of such transfer", and § 1906(b)(13)(A), Page 108
TITLE 26-INTERNAL REVENUE CODE "or his delegate" following "Secretary" wherever ap- pearing. Subsec. (d)(1). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (d)(2)(B). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (b)(2) by section 1901(a)(15) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE Section 321(d) of Pub. L. 91-172 provided that: "The amendments made by subsections (a) and (c) [to sec- tions 402(b), 403 (c), and (d), and 404(a)(5) of this title] shall apply to taxable years ending after June 30, 1969. The amendments made by subsection (b) [en- acting this section] shall apply with respect to contri- butions made and premiums paid after August 1, 1969." SECTION REmRED TO IN OTHER SECTIONS This section is referred to in sections 402, 403 of this title. § 84. Transfer of appreciated property to political or- ganization (a) General rule If- (1) any person transfers property to a politi- cal organization, and (2) the fair market value of such property exceeds its adjusted basis, then for purposes of this chapter the transferor shall be treated as having sold such property to the political organization on the date of the transfer, and the transferor shall be treated as having realized an amount equal to the fair market value of such property on such date. (b) Basis of property In the case of a transfer of property to a po- litical organization to which subsection (a) ap- plies, the basis of such property in the hands of the political organization shall be the same as it would be in the hands of the transferor, in- creased by the amount of gain recognized to the transferor by reason of such transfer. (c) Political organization defined For purposes of this section, the term "politi- cal organization" has the meaning given to such term by section 527(e)(1). (Added Pub. L. 93-625, § 13(a)(1), Jan. 3, 1975, 88 Stat. 2120.) EFFECTIVE DATE Section 13(b) of Pub. L. 93-625 provided that: "The amendments made by subsection (a) [enacting this section] shall apply to transfers made after May 7, 1974, in taxable years ending after such date." NONRECOGNITION OF GAIN OR LOSS WHERE ORGANIZA- TION SOLD CONTRIBUTED PROPERTY BEFORE AUGUST 2, 1973 Section 13(c) of Pub. L. 93-625 provided that in the case of the sale or exchange of property before Aug. 2, 1973, which was acquired by the exempt political orga- nization by contribution, no gain or loss shall be recog- nized by such organization. PART III-ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME See. 101. Certain death payments. 102. Gifts and inheritances. 103. Interest on certain governmental obligations. 104. Compensation for injuries or sickness. 105. Amounts received under accident and health plans. 106. Contributions by employer to accident and health plans. 107. Rental value of parsonages. 108. Income from discharge of indebtedness. 109. Improvements by lessee on lessor's property. 110. Income taxes paid by lessee corporation. 111. Recovery of bad debts, prior taxes, and delin- quency amounts. 112. Certain combat pay of members of the Armed Forces. 113. Mustering-out payments for members of the Armed Forces. 114. Sports programs conducted for the American Na. tional Red Cross. 115. Income of States, municipalities, etc. 116. Partial exclusion of dividends received by individ- uals. 117. Scholarships and fellowship grants. 118. Contributions to the capital of a corporation. 119. Meals or lodging furnished for convenience of employer.' 120. Amounts received under qualified group legal ser- vices plans. 121. Gain from sale or exchange of residence of indi- vidual who has attained age 65. 122. Certain reduced uniformed services retirement pay. 123. Amounts received under insurance contracts for certain living expenses. 124. Cross references to other Acts. AMENDMENTS 1976-Pub. L. 94-455, title XXI, § 2134(c), Oct. 4, 1976, 90 Stat. 1928, added item 120. 1969-Pub. L. 91-172, title IX, § 901(b), Dec. 30, 1969, 83 Stat. 709, redesignated former item 123 as 124, and added item 123. 1966-Pub. L. 89-365, § 1(a)(2), Mar. 8, 1966, 80 Stat. 32, redesignated former item 122 as 123, and added item 122. 1964-Pub. L. 88-272, title II, § 206(b)(2), Feb. 26, 1964, 78 Stat. 40, redesignated former item 121 as 122, and added item 121. 1958-Pub. L. 85-866, title I, § 3(b), Sept. 2, 1958, 72 Stat. 1607, eliminated item 120. PART REFERRED TO IN OTHER SECTIONS This part is referred to in section 61 of this title. § 101. Certain death benefits (a) Proceeds of life insurance contracts payable by reason of death (1) General rule Except as otherwise provided in paragraph (2) and in subsection (d), gross income does not include amounts received (whether in a single sum or otherwise) under a life insur- ance contract, if such amounts are paid by reason of the death of the insured. (2) Transfer for valuable consideration In the case of a transfer for a valuable con- sideration, by assignment or otherwise, of a life insurance contract or any interest there- in, the amount excluded from gross income by paragraph (1) shall not exceed an amount 'So in original. Does not conform to section catch- line. Page 109 § 101
TITLE 26-INTERNAL REVENUE CODE equal to the sum of the actual value of such consideration and the premiums and other amounts subsequently paid by the transferee. The preceding sentence shall not apply in the case of such a transfer- (A) if such contract or interest therein has a basis for determining gain or loss in the hands of a transferee determined in whole or in part by reference to such basis of such contract or interest therein in the hands of the transferor, or (B) if such transfer is to the insured, to a partner of the insured, to a partnership in which the insured is a partner, or to a cor- poration in which the insured is a share- holder or officer. (b) Employees' death benefits (1) General rule Gross income does not include amounts re- ceived (whether in a single sum or otherwise) by the beneficiaries or the estate of an em- ployee, if such amounts are paid by or on behalf of an employer and are paid by reason of the death of the employee. (2) Special rules for paragraph (1) (A) $5,000 limitation The aggregate amounts excludable under paragraph (1) with respect to the death of any employee shall not exceed $5,000. (B) Nonforfeitable rights Paragraph (1) shall not apply to amounts with respect to which the employee pos- sessed, immediately before his death, a non- forfeitable right to receive the amounts while living. This subparagraph shall not apply to a lump sum distribution (as de- fined in section 402(e)(4))- (i) by a stock bonus, pension, or profit- sharing trust described in section 401(a) which is exempt from tax under section 501(a), (i) under an annuity contract under a plan described in section 403(a), or (iii) under an annuity contract pur- chased by an employer which is an organi- zation referred to in section 170(b)(1)(A) (ii) or (vi) or which is a religious organiza- tion (other than a trust) and which is exempt from tax under section 501(a), but only with respect to the portion of such total distributions payable which bears the same ratio to the amount of such total distributions payable which is (with- out regard to this subsection) includible in gross income, as the amounts contributed by the employer for such annuity con- tract which are excludable from gross income under section 403(b) bear the total amounts contributed by the employer for such annuity contract. (C) Joint and survivor annuities Paragraph (1) shall not apply to amounts received by a surviving annuitant under a Joint and survivor's annuity contract after the first day of the first period for which an amount was received as an annuity by the employee (or would have been received if the employee had lived). (D) Other annuities In the case of any amount to which sec- tion 72 (relating to annuities, etc.) applies, the amount which is excludable under para- graph (1) (as modified by the preceding sub- paragraphs of this paragraph) shall be de- termined by reference to the value of such amount as of the day on which the employ- ee died. Any amount so excludable under paragraph (1) shall, for purposes of section 72, be treated as additional consideration paid by the employee. Paragraph (1) shall not apply in the case of an annuity under chapter 73 of title 10 of the United States Code if the member or former member of the uniformed services by reason of whose death such annuity is payable died after at- taining retirement age. (3) Self-employed individual not considered an em- ployee For purposes of this subsection, the term "employee" does not include an individual who is an employee within the meaning of section 401(c)(1) (relating to self-employed in- dividuals). (c) Interest If any amount excluded from gross income by subsection (a) or (b) is held under an agreement to pay interest thereon, the interest payments shall be included in gross income. (d) Payment of life insurance proceeds at a date later than death (1) General rule The amounts held by an insurer with re- spect to any beneficiary shall be prorated (in accordance with such regulations as may be prescribed by the Secretary) over the period or periods with respect to which such pay- ments are to be made. There shall be ex- cluded from the gross income of such benefi- ciary in the taxable year received- (A) any amount determined by such pro- ration, and (B) in the case of the surviving spouse of the insured, that portion of the excess of the amounts received under one or more agreements specified in paragraph (2)(A) (whether or not payment of any part of such amounts is guaranteed by the insurer) over the amount determined in subpara- graph (A) of this paragraph which is not greater than $1,000 with respect to any in- sured. Gross income includes, to the extent not ex- cluded by the preceding sentence, amounts received under agreements to which this sub- section applies. (2) Amount held by an insurer An amount held by an insurer with respect to any beneficiary shall mean an amount to which subsection (a) applies which is- (A) held by any insurer under an agree- ment provided for in the life insurance con- tract, whether as an option or otherwise, to pay such amount on a date or dates later than the death of the insured, and (B) is equal to the value of such agree- ment to such beneficiary. (i) as of the date of death of the insured (as if any option exercised under the life § 101 Page 110
TITLE 26-INTERNAL REVENUE CODE insurance contract were exercised at such time), and (ii) as discounted on the basis of the in- terest rate and mortality tables used by the insurer in calculating payments under the agreement. (3) Surviving spouse For purposes of this subsection, the term "surviving spouse" means the spouse of the insured as of the date of death, including a spouse legally separated but not under a decree of absolute divorce. (4) Application of subsection This subsection shall not apply to any amount to which subsection (c) is applicable. (e) Alimony, etc., payments (1) In general This section shall not apply to so much of any payment as is includible in the gross income of the wife under section 71 (relating to alimony) or section 682 (relating to income of an estate or trust in case of divorce, etc.). (2) Cross reference For definition of "wife", see section 7701(a)(17). (Aug. 16, 1954, ch. 736, 68A Stat. 26; Sept. 2, 1958, Pub. L. 85-866, title I, § 23(d), 72 Stat. 1622; Oct. 10, 1962, Pub. L. 87-792, § 7(c), 76 Stat. 829; Mar. 8, 1966, Pub. L. 89-365, § 1(c), 80 Stat. 32; Dec. 30, 1969, Pub. L. 91-172, title I, § 101(J)(1), 83 Stat. 526; Sept. 2, 1974, Pub. L. 93- 406, title II, §§ 2005(c)(15), 2008(b)(3), 88 Stat. 992, 994; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(a)(16), 1906(b)(13)(A), 90 Stat. 1765, 1834.) AMENDMENTS 1976-Subsec. (d)(1). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (f). Pub. L. 94-455, § 1901(a)(16), struck out subsee. (f) relating to effective date of section. 1974-Subsec. (b)(2)(B). Pub. L. 93-406, § 2005(c)(15), substituted "a lump sum distribution (as defined in section 402(e)(4)" for "total distributions payable (as defined in section 402(a)(3)) which are paid to a distri- butee within one taxable year of the distributee by reason of the employee's death". Subsec. (b)(2)(D). Pub. L. 93-406, § 2008(b)(3), substi- tuted "if the member or former member of the uni- formed services by reason of whose death such annu- ity is payable" for "if the individual who made the election under such chapter". 1969-Subsec. (b)(2)(B)(iii). Pub. L. 91-172 substitut- ed references to section 170(b)(1)(A) (ii) and (vi), and to religious organizations, for references to section 503(b) (1), (2), or (3). 1966-Subsec. (b)(2)(D). Pub. L. 89-365 provided that par. (1) shall not apply in the case of an annuity under chapter 73 of Title 10 if the individual who made the election under that chapter died after attaining retire- ment age. 1962-Subsec. (b)(2)(B). Pub. L. 87-792, § 7(c)(1), sub- stituted "described in section 403(a)" for "which meets the requirements of paragraphs (3), (4), (5), and (6) of section 401(a)" in cl. (ii). Subsec. (b)(3). Pub. L. 87-792, § 7(c)(2), added subsec. (b)(3). 1958-Subsec. (b)(2)(B). Pub. L. 85-866 substituted "This subparagraph shall not apply to total distribu- tions payable (as defined in section 402(a)(3) which are paid to a distributee within one taxable year of the distributee by reason of the employee's death-" for "(other than total distributions payable, as defined in section 402(a)(3), which are paid to distributee, by a stock bonus, pension, or profit-sharing trust described in section 401(a) which is exempt from tax under sec. tion 501(a), or under an annuity contract under a plan which meets the requirements of paragraphs (3), (4), (5), and (6) of section 401(a), within one taxable year of the distributee by reason of the employee's death)", and added clauses (i), (ii), and (i1). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (d)(1) by section 1906(b)(13)(A) of Pub. L. 94-455 effective Feb. 1, 1977, see section 1906(d)(1) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 6013 of this title. Deletion of subsec. (f) by section 1901(a)(16) of Pub. L. 94-455 applicable with respect to taxable years be- ginning after Dec. 31, 1976, see section 1901(d) of Pub, L. 94-455, set out as an Effective Date of 1976 Amend- ment note under section 2 of this title. EFFECTIVE DATE OF 1974 AMENDMENT Amendment of subsec. (b)(2)(B) by section 2005(c)(15) of Pub. L. 93-406 applicable only with re- spect to distributions and payments made after Dec. 31, 1973, in taxable years beginning after Dec. 31, 1973, see section 2005(d) of Pub. L. 93-406, set out as an Effective Date of 1974 Amendment note under sec- tion 402 of this title. Amendment of subsec. (b)(2)(D) by section 2008(b)(3) of Pub. L. 93-406 applicable to taxable years ending on or after Sept. 21, 1972, with respect to individuals dying on or after Sept. 21, 1972, see section 2008(c) of Pub. L. 93-406, set out as an Effective Date of 1974 Amendment note under section 122 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Amendment by Pub. L. 91-172 effective Jan. 1, 1970, see section 101(k)(1) of Pub, L. 91-172, set out as an Effective Date note under section 4940 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendment of subsec. (b)(2)(D) by Pub. L. 89-365 applicable with respect to individuals making an elec- tion under chapter 73 of Title 10 who died after Dec. 31, 1965, see section 1(d) of Pub. L. 89-365, set out as an Effective Date note under section 122 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Amendment by Pub. L. 87-792 applicable to taxable years beginning after Dec. 31, 1962, see section 8 of Pub. L. 87-792, set out as an Effective Date of 1962 Amendment note under section 37 of this title. EFFECTIVE DATE OF 1958 AMENDMENT Amendment of subsec. (b)(2)(B) by Pub. L. 85-866 applicable to taxable years beginning after Dec. 31, 1957, see section 23(g) of Pub. L. 85-866, set out as an Effective Date of 1958 Amendment note under section 403 of this title. CROSS REFERENCES Basis rules of general application, see section 1011 et seq. of this title. Credit for the elderly, prohibition against reduction for exclusion from gross income of life insurance pro- ceeds, see section 37 of this title. Employee defined, see section 7701 of this title. Rules and regulations, see section 7805 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 37, 72, 406, 407, 7701 of this title; title 40 section 484. SECTION REFERRED TO IN D.C. CODE This section is referred to in section 46-301 of the District of Columbia Code. Page 111 § 10i
TITLE 26-INTERNAL REVENUE CODE § 102. Gifts and Inheritances (a) General rule Gross income does not include the value of property acquired by gift, bequest, devise, or in- heritance. (b) Income Subsection (a) shall not exclude from gross Income- (1) the income from any property referred to in subsection (a); or (2) where the gift, bequest, devise, or inheri- tance is of income from property, the amount of such income. Where, under the terms of the gift, bequest, devise, or inheritance, the payment, crediting, or distribution thereof is to be made at inter- vals, then, to the extent that it is paid or cred- ited or to be distributed out of income from property, it shall be treated for purposes of paragraph (2) as a gift, bequest, devise, or in- heritance of income from property. Any amount included in the gross income of a bene- ficiary under subchapter J shall be treated for purposes of paragraph (2) as a gift, bequest, devise, or Inheritance of income from property. (Aug. 16, 1954, ch. 736, 68A Stat. 28.) CROSS REFERENCES Estate tax, see section 2001 et seq. of this title. Gift tax, see section 2501 et seq. of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 274 of this title. § 103. Interest on certain governmental obligations (a) General rule Gross income does not include interest on- (1) the obligations of a State, a Territory, or a possession of the United States, or any po- litical subdivision of any of the foregoing, or of the District of Columbia; and (2) qualified scholarship funding bonds. (b) Industrial development bonds (1) Subsection (a)(1) or (2) not to apply Except as otherwise provided in this subsec- tion, any industrial development bond shall be treated as an obligation not described in subsection (a)(1) or (2). (2) Industrial development bond For purposes of this subsection, the term "industrial development bond" means any ob- ligation- (A) which is issued as part of an issue all or a major portion of the proceeds of which are to be used directly or indirectly in any trade or business carried on by any person who is not an exempt person (within the meaning of paragraph (3)), and (B) the payment of the principal or inter- est on which (under the terms of such obli- gation or any underlying arrangement) is, in whole or in major part- (i) secured by any interest in property used or to be used in a trade or business or in payments in respect of such proper- ty, or (ii) to be derived from payments in re- spect of property, or borrowed money, used or to be used in a trade or business. (3) Exempt person For purposes of paragraph (2)(A), the term "exempt person" means- (A) a governmental unit, or (B) an organization described in section 501(c)(3) and exempt from tax under sec- tion 501(a) (but only with respect to a trade or business carried on by such organization which is not an unrelated trade or business, determined by applying section 513(a) to such organization). (4) Certain exempt activities Paragraph (1) shall not apply to any obliga- tion which is issued as part of an issue sub- stantially all of the proceeds of which are to be used to provide- (A) residential real property for family units, (B) sports facilities, (C) convention or trade show facilities, (D) airports, docks, wharves, mass com- muting facilities, parking facilities, or stor- age or training facilities directly related to any of the foregoing, (E) sewage or solid waste disposal facili- ties or facilities for the local furnishing of electric energy or gas, (F) air or water pollution control facili- ties, or (G) facilities for the furnishing of water, if available on reasonable demand to mem- bers of the general public. (5) Industrial parks Paragraph (1) shall not apply to any obliga- tion issued as part of an issue substantially all of the proceeds of which are to be used for the acquisition or development of land as the site for an industrial park. For purposes of the preceding sentence, the term "develop- ment of land" includes the provision of water, sewage, drainage, or similar facilities, or of transportation, power, or communication fa- cilities, which are incidental to use of the site as an industrial park, but, except with respect to such facilities, does not include the provi- sion of structures or buildings. (6) Exemption for certain small issues (A) In general Paragraph (1) shall not apply to any obli- gation issued as part of an issue the aggre- gate authorized face amount of which is $1,000,000 or less and substantially all of the proceeds of which are to be used (I) for the acquisition, construction, reconstruc- tion, or improvement of land or property of a character subject to the allowance for de- preciation, or (ii) to redeem part or all of a prior issue which was issued for purposes described in clause (I) or this clause. (B) Certain prior issues taken into account If- (i) the proceeds of two or more issues of obligations (whether or not the issuer of each such issue is the same) are or will be used primarily with respect to facilities lo- cated in the same incorporated municipal- ity or located in the same county (but not in any incorporated municipality), § 102 Page 112
TITLE 26-INTERNAL REVENUE CODE (i) the principal user of such facilities is or will be the same person or two or more related persons, and (iii) but for this subparagraph, subpara- graph (A) would apply to each such issue, then, for purposes of subparagraph (A), in determining the aggregate face amount of any later issue there shall be taken into ac- count the face amount of obligations issued under all prior such issues and outstanding at the time of such later issue (not Includ- ing as outstanding any obligation which is to be redeemed from the proceeds of the later issue). (C) Related persons For purposes of this paragraph and para- graph (7), a person Is a related person to an- other person if- (I) the relationship between such per- sons would result in a disallowance of losses under section 267 or 707(b), or (ii) such persons are members of the same controlled group of corporations (as defined in section 1563(a), except that "more than 50 percent" shall be substitut- ed for "at least 80 percent" each place it appears therein). (D) $5,000,000 limit in certain cases At the election of the issuer, made at such time and in such manner as the Secretary shall by regulations prescribe, with respect to any issue this paragraph shall be ap- plied- (I) by substituting "$5,000,000" for "$1,000,000" in subparagraph (A), and (ii) in determining the aggregate face amount of such Issue, by taking into ac- count not only the amount described in subparagraph (B), but also the aggregate amount of capital expenditures with re- spect to facilities described in subpara- graph (E) paid or incurred during the 6- year period beginning 3 years before the date of such issue and ending 3 years after such date (and financed otherwise than out of the proceeds of outstanding issues to which subparagraph (A) ap- plied), as if the aggregate amount of such capital expenditures constituted the face amount of a prior outstanding issue de- scribed in subparagraph (B). (E) Facilities taken into account For purposes of subparagraph (D)(ii), the facilities described in this subparagraph are facilities- (i) located in the same incorporated mu- nicipality or located in the same county (but not in any incorporated municipal- ity), and (ii) the principal user of which is or will be the same person or two or more related persons. For purposes of clause (I), the determina- tion of whether or not facilities are located in the same governmental unit shall be made as of the date of issue of the issue in question. (F) Certain capital expenditures not taken into account For purposes of subparagraph (D)(i), any capital expenditure- (I) to replace property destroyed or damaged by fire, storm, or other casualty, to the extent of the fair market value of the property replaced, (it) required by a change made after the date of issue of the issue in question in a Federal or State law or local ordinance of general application or required by a change made after such date in rules and regulations of general application issued under such a law or ordinance, or (iii) required by circumstances which could not be reasonably foreseen on such date of issue or arising out of a mistake of law or fact (but the aggregate amount of expenditures not taken into account under this clause with respect to any issue shall not exceed $1,000,000), shall not be taken into account. (G) Limitation on loss of tax exemption In applying subparagraph (D)(i) with re- spect to capital expenditures made after the date of any issue, no obligation issued as a part of such issue shall be treated as an ob- ligation not described in subsection (a)(1) by reason of any such expenditure for any period before the date on which such ex- penditure is paid or incurred. (H) Certain refinancing issues In the case of any issue described in sub- paragraph (A)(ii), an election may be made under subparagraph (D) only if all of the prior issues being redeemed are issues to which subparagraph (A) applies. In apply- ing subparagraph (D)(ii) with respect to such a refinancing issue, capital expendi- tures shall be taken into account only for purposes of determining whether the prior issues being redeemed qualified (and would have continued to qualify) under subpara- graph (A). (7) Exception Paragraphs (4), (5), and (6) shall not apply with respect to any obligation for any period during which it is held by a person who is a substantial user of the facilities or a related person. (c) Arbitrage bonds (I) Subsection (a)(1) or (4) not to apply Except as provided in this subsection, any arbitrage bond shall be treated as an obliga- tion not described in subsection (a)(1) or (4). (2) Arbitrage bond For purposes of this subsection, the term "arbitrage bond" means any obligation which is issued as part of an issue all or a major por- tion of the proceeds of which are reasonably expected to be used directly or indirectly- (A) to acquire securities (within the mean- ing of section 165(g)(2)(A) or (B)) or obliga- tions (other than obligations described in subsection (a)(1) or (2) or (4)) which may be reasonably expected at the time of issuance of such issue, to produce a yield over the Page 113 § 103
TITLE 26-INTERNAL REVENUE CODE term of the issue which is materially higher (taking into account any discount or premi- um) than the yield on obligations of such issue, or (B) to replace funds which were used di- rectly or indirectly to acquire securities or obligations described in subparagraph (A). (3) Exception Paragraph (1) shall not apply to any obliga- tion- (A) which is issued as part of an issue sub- stantially all of the proceeds of which are reasonably expected to be used to provide permanent financing for real property used or to be used for residential purposes for the personnel of an educational organiza- tion described in section 170(b)(1)(A)(ii) which grants baccalaureate or higher de- grees, or to replace funds which were so used, and (B) the yield on which over the term of the issue is not reasonably expected, at the time of issuance of such issue, to be sub- stantially lower than the yield on obliga- tions acquired or to be acquired in providing such financing. This paragraph .hall not apply with respect to any obligation for any period during which it is held by a person who is a substantial user of property financed by the proceeds of the issue of which such obligation is a part, or by a member of the family (within the meaning of section 318(a)(1)) of any such person. (4) Special rules For purposes of paragraph (1), an obliga- tion shall not be treated as an arbitrage bond solely by reason of the fact that- (A) the proceeds of the issue of which such obligation is a part may be invested for a temporary period in securities or other ob- ligations until such proceeds are needed for the purpose for which such issue was issued, or (B) an amount of the proceeds of the issue of which such obligation is a part may be invested in securities or other obligations which are part of a reasonably required re- serve or replacement fund. The amount referred to in subparagraph (B) shall not exceed 15 percent of the proceeds of the issue of which such obligation is a part unless the issuer establishes that a higher amount is necessary. (5) Student loan incentive payments Payments made by the Commissioner of Education pursuant to section 2 of the Emer- gency Insured Student Loan Act of 1969 are not to be taken into account, for purposes of subsection (d)(2)(A), in determining yields on student loan notes. (6) Regulations The Secretary shall prescribe such regula- tions as may be necessary to carry out the purposes of this subsection. (d) Certain irrigation dams A dam for the furnishing of water for irriga- tion purposes which has a subordinate use in connection with the generation of electric energy by water shall be treated as meeting the requirements of subsection (c)(4)(G) if- (1) substantially all of the stored water is contractually available for release from such dam for irrigation purposes, and (2) the water so released is available on rea- sonable demand to members of the general public. (e) Qualified scholarship funding bonds For purposes of subsection (a), the term "qualified scholarship funding bonds" means obligations issued by a corporation which- (1) is a corporation not for profit estab- lished and operated exclusively for the pur- pose of acquiring student loan notes incurred under the Higher Education Act of 1965, and (2) is organized at the request of a State or one or more political subdivisions thereof or is requested to exercise such power by one or more political subdivisions and required by its corporate charter and bylaws, or required by State law, to devote any income (after pay- ment of expenses, debt service, and the cre- ation of reserves for the same) to the pur- chase of additional student loan notes or to pay over any income to the State or a politi- cal subdivision thereof. (e) Cross references For provisions relating to the taxable status of- (1) Puerto Rican bonds, see section 3 of the Act of March 2, 1917, as amended (48 U.S.C. 745). (2) Virgin Islands insular and municipal bonds, see section 1 of the Act of October 27, 1949 (48 U.S.C. 1403). (3) Certain obligations issued under title I of the Housing Act of 1949, see section 102(g) of title I of such Act (42 U.S.C. 1452(g)). (24) Exempt-interest dlvidends.-For treatment of exempt-interest dividends, see section 852(b)(5)(B). (Aug. 16, 1954, ch. 736, 68A Stat. 29; June 28, 1968, Pub. L. 90-364, title I, § 107(a), 82 Stat. 266; Oct. 24, 1968, Pub. L. 90-634, title IV, § 401(a), 82 Stat. 1349; Dec. 30, 1969, Pub. L. 91- 172, title VI, § 601(a), 83 Stat. G56; Dec. 10, 1971, Pub. L. 92-178, title III, § 315(a), (b), 85 Stat. 529; Dec. 23, 1975, Pub. L. 94-164, § 7(a), 89 Stat. 976; Dec. 31, 1975, Pub. L. 94-182, title III, § 301(a), 89 Stat. 1056; Oct. 4, 1976, Pub. L. 94- 455, title XIX, §§ 1901(a)(17), (b)(8)(B), 1906(b)(13)(A), title XXI, §§ 2105(a)-(c), 2137(d), 90 Stat. 1765, 1766, 1794, 1834, 1902, 1931.) REFERENCES IN TEXT The references in subsec. (c)(1) and (2)(A) to subsec. (a)(4), which references were added to subsec. (c)(1) and (2)(A) by section 2105(c)(2) of Pub. L. 94-455, probably are intended to be references to subsec. (a)(2) since subsec. (a)(4) of this section was redesig- nated (a)(2) by section 1901(a)(17)(A) of Pub. L. 94-455 and since there is no subsec. (a)(4) remaining in this section as amended by Pub. L. 94-455. Section 2 of the Emergency Insured Student Loan Act of 1969, referred to in subsec. (c)(5), was classified to section 1078a of Title 20, Education, and was re- pealed effective Oct. 1, 1977, by Pub. L. 94-482, title I, § 127(c)(2), Oct. 12, 1976, 90 Stat. 2142. The Higher Education Act of 1965, referred to in subsec. (e) relating to qualified scholarship funding bonds, is Pub. L. 89-329, Nov. 8, 1965, 79 Stat. 1219, as amended, which Is classified principally to chapter 28 (§ 1001 et seq.) of Title 20, Education. For complete classification of this Act to the Code, see Short Title note set out under section 1001 of Title 20 and Tables volume. Page 114 § 103
TITLE 26-INTERNAL REVENUE CODE The Housing Act of 1949, referred to in subsea. Ce) relating to cross references, Is act July 15, 1949, ch. 338, 63 Stat. 413, as amended. Title I of the Housing Act of 1949 is classified generally to subchapter II (§ 1450 et seq.) of chapter 8A of Title 42, The Public Health and Welfare. For complete classification of this Act. to the Code, see Short Title note set out under section 1441 of Title 42 and Tables volume. CODIFICATION Section, as amended by Pub. L. 94-455, contains two subsecs. (e). The first, relating to qualified scholarship funding bonds, was added by section 2105(b) of Pub. L. 94-455, as a new subsec. f), which was in turn redesig. nated as (e) by section 1901(a)(17)(B) of Pub. L. 94- 455. The second, the result of language in section 1901(a)(17)(E) of Pub. L. 94-455, which directed that subsec. (e), relating to certain cross-references, be amended to read as set out in the second of the two subsecs. (e) above, has been handled as an amendment of the existing cross-reference subsection as the prob- able intent of Congress, even though the cross-refer- ence subsection, but for the specific directory lan- guage of section 1901(a)(17)(E) of Pub. L. 94-455, would have otherwise carried the subsec. f) designa- tion under the other provisions of Pub. L. 94-455. ' Section 2137(d) of Pub. L. 94-455 directed that a new par. be added to the cross references relating to exclu- sions from gross Income of interest on certain govern. ment obligations to read as follows: "(24) Exempt-in- terest dividends.-For treatment of exempt-interest dividends, see section 852tb)(5)(B)." This amendment has been executed to subsec. (e) following par. (3) thereof as the probable intent of Congress notwith- standing the directory language of section 2137(d) of Pub. L. 94-455 that the new par, (24) be inserted after par. (23) of "section 103(g), as redesignated by section 1305 of this Act", since section 1305 of Pub. L. 94-455 did no redesignating and in no way involved the amendment of this section. AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, §§ 1901(a)(17)(A), 2105(a), added par. (2) relating to qualified scholarship funding bonds. Former pars. (2) and (3), relating to ob- ligations of the United States and to the obligations of corporations organized under an Act of Congress, were stricken. Subsec. (b). Pub. !,. 9--455, § 1901(a)(17)tB), (C), re- designated former sub~ec. c) as (b) and in par. (1) of subsec. Cb) as so redesignated substituted "subsection (a)(1) or (2)" for "subection (a)C1)". Former subsec. (b), which created an exception to the rule that gross income did not include interest on obligations of the United States, by providing that the exception did not apply to obligations of the United States (with speci- fied exceptions) unless under the authorizing Acts such Interest is wholly exempt from the taxes imposed by this subtitle, was stricken. Subsec. (). Pub. L. 94-455, §§ 1901(a)(17)(B), (D), Cb)C8)CB), 1906Cb)(13)(A), 2105(c), redesignated former subsec. (d) as (c) and, in subsec. (c) as so redesignated, substituted "Ca)(1) or (4)" for "a)(1)" in par. (1) and "(a)(1) or, (2) or 4)" for "Ca)C1)" in par. (2)(A), substi- tuted "educational organization described in section 170Cb)(1)CA)M')" for "educational institution (within the meaning of section 151(e)(4))" in par. (3)(A), added par. (5), redesignated former par. (5) as (6), and in par. (6) as so redesignated substituted "Secretary" for "Secretary or his delegate". Former subsec. (c) was re- designated as b). See Codification note above. Subsec. d). Pub. L. 94-455, § 1901(a)t17)tB), redesig- nated former subsec. Ce) as (d). Former subsec. d) was redesignated as (c). Subsec. (e). Pub. L. 94-455, §§ 1901a)T17)CB), CE), 2105(b), 2137(d), added subsec. (e) relating to qualified scholarship funding bonds, redesignated former subsec. f) relating to cross references as subsec. (e), and reduced the number of cross references in subsec. Ce) as so redesignated from twenty-three, which made reference to various obligations of the United States and of corporations organized under Acts of Congress, to three, relating, respectively, to Puerto Rican bonds, Virgin Islands insular and municipal bonds, and cer- tain obligations issued under title I of the Housing Act of 1949. A fourth cross reference, relating to the treat- ment of exempt-interest dividends, was added as the probable intent of Congress. Former subsec. Ce) was re- designated as Cd). See Codification note above. Subsec. Cf). Pub. L. 94-455, § 1901(a)(17)(B), redesig- nated former subsec. f), relating to cross references, as (e). 1975-Subsec. (e). Pub. L. 94-182 added subsec. (e) and redesignated former subsec. Ce) as (f). The identi- cal amendment was made by Pub. L. 94-164. Subsec. Cf). Pub. L. 94-164 and Pub. L. 94-182 rede- signated former subsec. (e) as subsec. Cf). 1971-Subsec. c)(4)(E). Pub. L. 92-178, §315(a)(1), substituted "energy or gas," for "energy, gas, or water or". Subsec. (c)(4)(F). Pub. L. 92-178, § 315(a)(2), substi- tuted ", or" for a period. Subsec. (c)C4)(G). Pub. L. 92-178, § 315(a)(3), added subpar. C). Subsec. (c)t6)CF)(Cii). Pub. L. 92-178, § 315(b), substi- tuted "$1,000,000" for "$250,000". 1969-Subsec. (d). Pub. L, 91-172 added subsec. (d). Former subsec. Cd) redesignated (e). Subsec. Ce). Pub. L. 91-172 redesignated former subsec. (d) as (e). 1968-Subsec. Cc). Pub. L. 90-364 added subsec Cc). Former subsec. (c) redesignated Cd). Subsec. (c)(6)(D) to (H). Pub. L. 90-634 added subsec. Cc)C6)CD) to (H). Subsec. (d). Pub. L. 90-364 redesignated former subsec. (c) as Cd). EFFECTIVE DATE OF 1976 AMENDMENT Amendment by section 1901(a)(17), Cb)(8)(B) of Pub. L. 94-455 applicable with respect to taxable years ending after Oct. 4, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amend- ment note under section 2 of this title. Amendraent of subsec. (c)(6) by section 1906(b)(13)CA) of Pub. L. 94-455 effective Feb. 1, 1977, see section 1906(d)(1) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 6013 of this title. Sectio:a 2105(d) of Pub. L. 94-455 provided that: "The amendments made by this section [enacting sub- secs. (a)(2), (c)(6) and (e) of this section, relating to qualified scholarship funding bonds, and amending subsec. (c)(1), (2) of this section] apply to obligations issued on or after the date of the enactment of this Act [Oct. 4, 1976]." Amendment by section 2137(d) of Pub. L. 94-455 ap- plicable to taxable years beginning after Dec. 31, 1975, see section 2137(e) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 852 of this title. EFFECTIVE DATE OF 1975 AMENDMENT Section 301(b) of Pub. L. 94-182 provided that: "The amendment made by subsection Ca) [to this section] shall apply to obligations issued after the date of the enactment of this Act [Dec. 31, 19751," Section 7(b) of Pub. L. 94-164 provided that: "The amendments made by this section [to this section] shall apply to obligations issued after the date of en- actment of this Act [Dec. 23, 1975]." EFFECTIVE DATE OF 1971 AMZENDMENT Section 315(c) of Pub. L. 92-178 provided that: "The amendments made by subsection (a) [amending subsec. (c)(4)(E), F) and enacting subsec. (c)C4)CG) of this section] shall apply with respect to obligations issued after January 1, 1969. The amendment made by subsection b) [to subsec. (c)(0)CF)(Cii) of this section] shall apply with respect to expenditures incurred after the date of the enactment of this Act [Dec. 10, 1971]." Page 115 § 103
TITLE 26-INTERNAL REVENUE CODE EFFECTIVE DATE OF 1969 AMENDMENT Section 601(b) of Pub. L. 91-172 provided that: "The amendments made by subsection (a) [to this section] shall apply with respect to obligations issued after Oc- tober 9, 1969." EFFECTIVE DATE OF 1968 AMENDMENT Section 401(b) of Pub. L. 90-634 provided that: "The amendment made by subsection (a) [to this section] shall apply with respect to obligations issued after the date of the enactment of this Act [Oct. 24, 1968]." Section 107(b)(1) of Pub. L. 90-364 provided that: "Except as provided by paragraph (2) [set out as a note below], the amendment made by subsection (a) [adding subsec. (c), now subsec. (b), of this section] shall apply to taxable years ending after April 30, 1968, but only with respect to obligations issued after such date." TRANSITIONAL PROVISIONS FOR INDUSTRIAL DEVELOPMENT BONDS IssuED BEFORE JANUARY 1, 1969 Section 107(b)(2) of Pub. L. 90-364 provided that: "Section 103(c)(1) of the Internal Revenue Code of 1954, as amended by subsection (a) [subsec. (b)(1), for- merly subsec. (c)(1) of this section], shall not apply with respect to any obligation issued before January 1, 1969, if before May 1, 1968- "(A) the issuance of the obligation (or the project in connection with which the proceeds of the obliga- tions are to be used) was authorized or approved by the governing body of the governmental unit issuing the obligation or by the voters of such governmental unit; "(B) in connection with the issuance of such obli- gation or with the use of the proceeds to be derived from the sale of such obligation or the property to be acquired or improved with such proceeds, a gov- ernmental unit has made a significant financial com- mitment; "(C) any person (other than a governmental unit) who will use the proceeds to be derived from the sale of such obligation or the property to be acquired or improved with such proceeds has expended (or has entered into a binding contract to expend) for pur- poses which are related to the use of such proceeds or property, an amount equal to or in excess of 20 percent of such proceeds; or "(D) in the case of an obligation issued in conjunc- tion with a project where financial assistance will be provided by a governmental agency concerned with economic development, such agency has approved the project or an application for financial assistance is pending." CROSS REFERENCES Bonds and other evidences of indebtedness having taxfree interest as not subject to special rules for de- termining capital gains and losses, see section 1232 of this title. Estates, trusts and beneficiaries, tax-exempt interest in determining distributable net income, see section 643 of this title. Insurance company taxable income as gross income less, among others, deduction for tax-free interest, see section 832 of this title. Life insurance companies, taxable income as gross income minus, among others, deduction for partially tax-exempt interest, see section 804 of this title. Mutual insurance companies, taxable income as gross investment income minus, among others, deduc- tion for tax-free interest, see section 822 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 593, 643, 667, 804, 809, 818, 819, 822, 832, 1232, 4940, 4942, 6049, 6362, 7701 of this title; title 15 sections 77c, 78c; title 46 sec- tion 1177. § 104. Compensation for Injuries or sickness (a) In general Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include- (1) amounts received under workmen's com- pensation acts as compensation for personal injuries or sickness; (2) the amount of any damages received (whether by suit or agreement) on account of personal injuries or sickness; (3) amounts received through accident or health insurance for personal injuries or sick- ness (other than amounts received by an em- ployee, to the extent such amounts (A) are at- tributable to contributions by the employer which were not includible in the gross income of the employee, or (B) are paid by the em- ployer); (4) amounts received as a pension, annuity, or similar allowance for personal injuries or sickness resulting from active service in the armed forces of any country or in the Coast and Geodetic Survey or the Public Health Service, or as a disability annuity payable under the provisions of section 831 of the Foreign Service Act of 1946, as amended (22 U.S.C. 1081); and (5) amounts received by an individual as dis- ability income attributable to injuries in- curred as a direct result of a violent attack which the Secretary of State determines to be a terrorist attack and which occurred while such individual was an employee of the United States engaged in the performance of his official duties outside the United States. For purposes of paragraph (3), in the case of an individual who is, or has been, an employee within the meaning of section 401(c)(1) (relat- ing to self-employed individuals), contributions made on behalf of such individual while he was such an employee to a trust described in section 401(a) which is exempt from tax under section 501(a), or under a plan described in section 403(a), shall, to the extent allowed as deduc- tions under section 404, be treated as contribu- tions by the employer which were not includi- ble in the gross income of the employee. (b) Termination of application of subsection (a)(4) in certain cases (1) In general Subsection (a)(4) shall not apply in the case of any individual who is not described in para- graph (2). (2) Individuals to whom subsection (a)(4) continues to apply An individual is described in this para- graph if- (A) on or before September 24, 1975, he was entitled to receive any amount de- scribed in subsection (a)(4), (B) on September 24, 1975, he was a member of any organization (or reserve component thereof) referred to in subsec- tion (a)(4) or under a binding written com- mitment to become such a member, § 104 Page 116
TITLE 26-INTERNAL REVENUE CODE (C) he receives an amount described in subsection (a)(4) by reason of a combat-re- lated injury, or (D) on application therefor, he would be entitled to receive disability compensation from the Veterans' Administration. (3) Special rules for combat-related injuries For purposes of this subsection, the term "combat-related injury" means personal injury or sickness- (A) which is incurred- (I) as a direct result of armed conflict, (ii) while engaged in extrahazardous service, or (iii) under conditions simulating war; or (B) which is caused by an instrumentality of war. In the case of an individual who is not de- scribed in subparagraph (A) or (B) of para- graph (2), except as provided in paragraph (4), the only amounts taken into account under subsection (a)(4) shall be the amounts which he receives by reason of a combat-re- lated injury. (4) Amount excluded to be not less than veterans' disability compensation In the case of any individual described in paragraph (2), the amounts excludable under subsection (a)(4) for any period with respect to any individual shall not be less than the maximum amount which such individual, on application therefor, would be entitled to re- ceive as disability compensation from the Vet- erans' Administration. (c) Cross references (1) For exclusion fhom employee's gross income of employer contributions to accident and health plans, see section 106. (2) For exclusion of part of disability retirement pay from the application of subsection (a)(4) of this sec- tion, see section 1403 of title 10, United States Code (relating to career compensation laws). (Aug. 16, 1954, ch. 736, 68A Stat. 30; Sept. 8, 1960, Pub. L. 86-723, § 51, 74 Stat. 847; Oct. 10, 1962, Pub. L. 87-792, § 7(d), 76 Stat. 829; Oct. 4, 1976, Pub. L. 94-455, title V, § 505(b), (e)(1), title XIX, § 1901(a)(18), 90 Stat. 1567, 1568, 1766.) AMENDMENTS 1976-Subsec. (a)(4). Pub. L. 94-455, § 1901(a)(18)(A), struck out ", 60 Stat. 1021" following "(22 U.S.C. 1081". Subsec. (a)(5). Pub. L. 94-455, § 505(e)(1), added par. (5). Subsec. (b). Putt. L. 94-455, § 505(b), redesignated ex- isting provisions as subsec. (c) and added (b). Subsec. (c). Pub. L. 94-455, § 505(b), redesignated former subsec. (b) as (c) and, as so redesignated, § 1901(a)(18)(B), substituted "1403 of title 10, United States Code (relating to career compensation laws)" for "402(h) of the Career Compensation Act of 1949 (37 U.S.C. 272(h))". 1962-Subsec. (a). Pub. L. 87-792 inserted sentence requiring contributions made on behalf of an individ- ual who is, or has been, an employee within the mean- ing of section 401(c)(1), while he was such an employ- ee to a trust which is exempt from tax, or under a plan described in section 403(a), to be treated as con- tributions by the employer which were not includible in the gross income of the employee. 1960-Subsec. (a)(4). Pub. L. 86-723 provided for ex- clusion from gross income of amounts received as a disability annuity payable under the provisions of sec- tion 831 of the Foreign Service Act of 1946, as amend- ed. CHANGE OF NAME The Coast and Geodetic Survey was consolidated with the National Weather Bureau in 1965 to form the Environmental Science Services Administration by Reorg. Plan No. 2 of 1965, eff. July 13, 1965, 30 FR 8819, 79 Stat. 1318. The Environmental Science Ser- vices Administration was abolished in 1970 and its per- sonnel, property, records, etc., were transferred to the National Oceanic and Atmospheric Administration by Reorg. Plan No. 4 of 1970, eff. Oct. 3, 1970, 35 FR 15627, 84 Stat. 2090. By order of the Acting Associate Administrator of the National Oceanic and Atmo- spheric Administration, 35 FR 19249, Dec. 19, 1970, the Coast and Geodetic Survey was redesignated the National Ocean Survey. See notes under section 311 of Title 15, Commerce and Trade. EFFECTIVE DATE OF 1976 AMENDMENT Enactment of subsec. (b) and amendment of subsec. (c) by section 505(b) of Pub. L, 94-455 applicable to taxable years beginning after Dec. 31, 1975, see section 508 of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 3 of this title. Section 505(e)(2) of Pub. L. 94-455 provided that: "The amendments made by this subsection [enacting subsec. (a)(5) of this section] shall apply to taxable years beginning after December 31, 1970." Amendment of subsec. (a)(4) by section 1901(a)(18)(A) of Pub. L. 94-455 applicable with re- spect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Amendment by Pub. L. 87-792 applicable to taxable years beginning after Dec. 31, 1962, see section 8 of Pub. L. 87-792, set out as an Effective Date of 1972 Amendment note under section 37 of this title. EFFECTIVE DATE OF 1960 AMENDMENT Amendment of subsec. (a)(4) by Pub. L. 86-723 effec- tive with respect to taxable years ending after Sept. 8, 1960, see section 56(e) of Pub. L. 86-723, set out as an Effective Date of 1960 Amendment note under section 809 of Title 22, Foreign Relations and Intercourse. TRANSFER OF FUNCTIONS All functions of Public Health Service, of the Sur- geon General of the Public Health Service, and of all other officers and employees of the Public Health Ser- vice, and all functions of all Pogencies of or in the Public Health Service transferred to Secretary of Health, Education, and Welfare by 1966 Reorg. Plan No. 3, 31 F.R. 8855, 80 Stat. 1610, effective June 25, 1966, set out in the Appendix to Title 5, Government Organization and Employees. CROSS REFERENCES Amounts received through accident or health insur- ance, treatment as, see section 105 of this title. Credit for the elderly: reduction of section 37 amount inapplicable to exclusions under this section, see section 37 of this title. Disability retired pay, treatment under this title, see section 1403 of Title 10, Armed Forces. Employee defined, see section 7701 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 37, 105, 7701 of this title; title 10 section 1403. SECTION REFERRED TO IN D.C. CODE This section is referred to in section 47-1557a of the District of Columbia Code, 71-999 0 - 78 - 10 (Vol. 7) Page 117 § 104
TITLE 26-INTERNAL REVENUE CODE § 105. Amounts received under accident and health plans (a) Amounts attributable to employer contributions Except as otherwise provided in this section, amounts received by an employee through acci- dent or health insurance for personal injuries or sickness shall be included in gross income to the extent such amounts (1) are attributable to contributions by the employer which were not includible in the gross income of the employee, or (2) are paid by the employer. (b) Amounts expended for medical care Except in the case of amounts attributable to (and not in excess of) deductions allowed under section 213 (relating to medical, etc., expenses) for any prior taxable year, gross income does not include amounts referred to in subsection (a) if such amounts are paid, directly or indi- rectly, to the taxpayer to reimburse the taxpay- er for expenses incurred by him for the medical care (as defined in section 213(e)) of the tax- payer, his spouse, and his dependents (as de- fined in section 152). (c) Payments unrelated to absence from work Gross income does not include amounts re- ferred to in subsection (a) to the extent such amounts- (1) constitute payment for the permanent loss or loss of use of a member or function of the body, or the permanent disfigurement, of the taxpayer, his spouse, or a dependent (as defined in section 152), and (2) are computed with reference to the nature of the injury without regard to the period the employee is absent from work. (d) Certain disability payments (1) In general In the case of a taxpayer who- (A) has not attained age 65 before the close of the taxable year, and (B) retired on disability and, when he re- tired, was permanently and totally disabled, gross income does not include amounts re- ferred to in subsection (a) if such amounts constitute wages or payments in lieu of wages for a period during which the employee is absent from work on account of permanent and total disability. (2) Limitation This subsection shall not apply to the extent that the amounts referred to in para- graph (1) exceed a weekly rate of $100. (3) Phaseout over $15,000 If the adjusted gross income of the taxpay- er for the taxable year (determined without regard to this subsection) exceeds $15,000, the amount which but for this paragraph would be excluded under this subsection for the tax- able year shall be reduced by an amount equal to the excess of the adjusted gross income (as so determined) over $15,000. (4) Married couple must file joint return Except in the case of a husband and wife who live apart at all times during the taxable year, if the taxpayer is married at the close of the taxable year, the exclusion provided by this subsection shall be allowed only if the taxpayer and his spouse file a Joint return for the taxable year. For purposes of this subsec- tion, marital status shall be determined under section 143. (5) Permanent and total disability defined For purposes of this subsection, an individ- ual is permanently and totally disabled if he is unable to engage in any substantial gainful activity by reason of any medically determin- able physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months. An individual shall not be considered to be permanently and totally disabled unless he furnishes proof of the existence thereof in such form and manner, and at such times, as the Secretary may require. (6) Joint return For purposes of this subsection, the term "joint return" Means the joint return of a husband and wife made under section 6013. (7) Coordination with section 72 In the case of an individual described in subparagraphs (A) and (B) of paragraph (1), for purposes of section 72 the annuity start- ing date shall not be deemed to occur before the beginning of the taxable year in which the taxpayer attains age 65, or before the be- ginning of an earlier taxable year for which the taxpayer makes an irrevocable election not to seek the benefits of this subsection for such year and all subsequent years. (e) Accident and health plans For purposes of this section and section 104- (1) amounts received under an accident or health plan for employees, and (2) amounts received from a sickness and disability fund for employees maintained under the law of a State or the District of Co- lumbia, shall be treated as amounts received through accident or health insurance. (f) Rules for application of section 213 For purposes of section 213(a) (relating to medical, dental, etc., expenses) amounts ex- cluded from gross income under subsection (c) or (d) shall not be considered as compensation (by insurance or otherwise) for expenses paid for medical care. (g) Self-employed individual not considered an em. ployee For purposes of this section, the term "em- ployee" does not include an individual who is an employee within the meaning of section 401(c)(1) (relating to self-employed individuals). (Aug. 16, 1954, ch. 736, 68A Stat. 30; Oct. 10, 1962, Pub. L. 87-792, § 7(e), 78 Stat. 829; Feb. 26, 1964, Pub. L. 88-272, title II, § 205(a), 78 Stat. 38; Oct. 4, 1976, Pub. L. 94-455, title V, § 505(a), title XIX, § 1901(c)(2), 90 Stat. 1566, 1803.) AMENDMENTS 1076-Subsec. (d). Pub. L. 94-455, § 505(a), substitut- ed provisions relating to an exclusion of up to $5,200 a year for taxpayers retiring on disability prior to age 65: dollar-for-dollar phase out of exclusion for adjust. ed annual gross income (including disability income) in excess of $15,000: requirement that married couple must file joint return; defined "permanent and total disability" and "Joint return"; and added special rule Page 118 § 105
TITLE 26-INTERNAL REVENUE CODE for coordination with section 72 of this title for provi- sions relating to wage continuation plans. Subsec. (e)(2). Pub. L. 94-455, § 1901(c)(2), struck out "a territory" following "of a State". 1964-Subsec. (d). Pub. L. 88-272 substituted provi- sions stating that "The preceding sentence shall not apply to amounts attributable to the first 30" days if the amounts exceed 75 percent of regular weekly wages, and if they do not exceed said 75 percent, the first sentence of this subsection shall not apply to the extent the amounts exceed $75 weekly and shall not apply to amounts attributable to the first 7 calendar days unless the employee is hospitalized for injury or sickness for at least 1 day in such period, for provi- sions stating that said "preceding sentence" did not apply in cases of sickness, to amounts attributable to the first 7 days unless the employee was hospitalized for sickness for at least 1 day during such period, 1962-Subsec. (g). Pub. L. 87-792 added subsec. (g). EFrECTIvE DATE OF 1976 AmENiMENr Amendment of subsec. (d) by section 505(a) of Pub. L. 94-455 applicable to taxable years beginning after Dec. 31, 1975, see section 508 of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 3 of this title. Amendment of subsec. (e)(2) by section 1901(c)(2) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFEcTIvE DATE OF 1964 AMENDMENT Section 205(b) of Pub. L. 88-272 provided that: "The amendment made by subsection (a) [to subsec. (d) of this section] shall apply to amounts attributable to pe- riods of absence commencing after December 31, 1963." EFFECTIvE DATE OF 1962 AMENDMENT Amendment by Pub. L. 87-792 applicable to taxable years beginning after Dec. 31, 1962, see section 8 of Pub. L. 87-792, set out as an Effective Date of 1962 Amendment note under section 37 of this title. SPECIAL RULE FOR EXISTING PERMANENT AND TOTAL DISABILITY CASES Section 505(c) of Pub. L. 94-455 provided that: "In the case of any individual who- "(1) retired before January 1, 1976, "(2) either retired on disability or was entitled to retire on disability, and "(3) on January 1, 1976, was permanently and to- tally disabled (within the meaning of section 105(d)(5) of the Internal Revenue Code of 1954) [subsec. (d)(5) of this section], such individual shall be deemed to have met the re- quirements of section 105(d)(1)(B) of such Code (as amended by subsection (a) of this section) [subsec. (d)(1)(B) of this section]." SPECIAL RULE FOR COORDINATION WITH SECTION 72 OF THIS TITLE Section 505(d) of Pub. L. 94-455 provided that: "In the case of an individual who- "(1) retired on disability before January 1, 1976, and "(2) on December 31, 1975, was entitled to exclude any amount with respect to such retirement disabil- ity from gross income under section 105(d) of the In- ternal Revenue Code of 1954 [subsec. (d) of this sec- tion], for purposes of section 72 the annuity starting date shall not be deemed to occur before the beginning of the taxable year in which the taxpayer attains age 65, or before the beginning of an earlier taxable year for which the taxpayer makes an irrevocable election not to seek the benefits of this subsection for such year and all subsequent years." CROSS REFERENCES Credit for the elderly: reduction of section 37 amount inapplicable to exclusions under this section, see section 37 of this title. Employee defined, see section 7701 of this title. Rules and regulations, see section 7805 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 37, 403, 7701 of this title. SECTION REFERRED TO IN D.C. CODE This section is referred to in section 47-1557a of the District of Columbia Code. § 106. Contributions by employer to accident and health plans Gross income does not include contributions by the employer to accident or health plans for compensation (through insurance or otherwise) to his employees for personal injuries or sick- ness. (Aug. 16, 1954, ch. 736, 68A Stat. 32.) CROSS REFERENCES Compensation for injuries or sickness, exclusion of, see section 104 of this title. Employee defined, see section 7701 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 104, 7701 of this title. § 107. Rental value of parsonages In the case of a minister of the gospel, gross income does not include- (1) the rental value of a home furnished to him as part of his compensation; or (2) the rental allowance paid to him as part of his compensation, to the extent used by him to rent or provide a home. (Aug. 16, 1954, ch. 736, 68A Stat. 32,) CROSS REFERENCES Inclusion in gross income, see section 61 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 1402 of this title; title 42 section 411. § 108. Income from discharge of indebtedness No amount shall be included in gross income by reason of the discharge, in whole or in part, within the taxable year, of any indebtedness for which the taxpayer is liable, or subject to which the taxpaytr holds property, if- (1) the indebtedness was incurred or as- sumed- (A) by a corporation, or (B) by an individual in connection with property used in his trade or business, and (2) such taxpayer makes and files a consent to the regulations prescribed under section 1017 (relating to adjustment of basis) then in effect at such time and in such manner as the Secretary by regulations prescribes. In such case, the amount of any income of such taxpayer attributable to any unamortized pre- mium (computed as of the first day of the tax- able year in which such discharge occurred) with respect to such indebtedness shall not be Page 119 § 108
TITLE 26-INTERNAL REVENUE CODE included in gross income, and the amount of the deduction attributable to any unamortized discount (computed as of the first day of the taxable year in which such discharge occurred) with respect to such indebtedness shall not be allowed as a deduction. (Aug. 16, 1954, ch. 736, 68A Stat. 32; June 29, 1956, ch. 463, § 5, 70 Stat. 403; June 8, 1960, Pub. L. 88-496, § l(a), 74 Stat. 164; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1906(b)(13)(A), 1951(b)(2)(A), 90 Stat. 1834, 1836.) AMENDMENTS 1976-Pub. L. 94-455, § 1951(b)(2)(A), struck out "(a) Special rule of exclusion.-" following "Income from discharge of indebtedness" and struck out subsec. (b) which related to discharge, cancellation, or modifica. tion of indebtedness of certain railroad corporations. Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". 1960-Subsec. (b. Pub. L. 86-496 provided that if the discharge, cancellation, or modification of any indebt- edness is effected pursuant to a court order in a receiv- ership proceeding or in a proceeding under section 77 of the Bankruptcy Act, commenced before Jan. 1, 1960, then no amount is to be included in gross income with respect to it, and eliminated provisions which made subsection inapplicable to discharges occurring in a taxable year beginning after Dec. 31, 1957. 1956-Subsec. (b). Act June 29, 1956, substituted "December 31, 1957" for "December 31, 1955". EFFECTIVE DATE OF 1976 AMENDMENT Amendment by section 1951(b)(2)(A) of Pub. L. 94- 455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1951(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 72 of this title. EFFECTIVE DATE OF 1960 AMENDMENT Section 1(b) of Pub. L. 86-496 provided that: "The amendment made by subsection (a) [to subsec. (b) of this section] shall apply to taxable years ending after December 31, 1959, but only with respect to discharges occurring after such date." SAVINGS PROVISION Section 1951(b)(2)(B) of Pub. L. 94-455 provided that: "If any discharge, cancellation, or modification of indebtedness of a railroad corporation occurs in a taxable year beginning after December 31, 1976, pur- suant to an order of a court in a proceeding referred to in section 108(b)(A) or (B) which commenced before January 1, 1960, then, notwithstanding the amend. ments made by subparagraph (A) [repealing subsec. (b) of this section], the provisions of subsection (b) of section 108 shall be considered as not repealed with re- spect to such discharge, cancellation, or modification of indebtedness." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 1017 of this title. § 109. Improvements by lessee on lessor's property Gross income does not include income (other than rent) derived by a lessor of real property on the termination of a lease, representing the value of such property attributable to buildings erected or other improvements made by the lessee. (Aug. 16, 1954, ch. 736, 68A Stat. 33.) CROSS REFERENCES Basic rule for property on which lessee has made im- provements, see section 1019 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 1019 of this title. § 110. Income taxes paid by lessee corporation If- (1) a lease was entered into before January 1, 1954, (2) both lessee and lessor are corporations, and (3) under the lease, the lessee Is obligated to pay, or to reimburse the lessor for, any part of the tax imposed by this subtitle on the lessor with respect to the rentals derived by the lessor from the lessee, then gross income of the lessor does not include such payment or reimbursement, and no deduc- tion for such payment or reimbursement shall be allowed to the lessee. For purposes of the preceding sentence, a lease shall be considered to have been entered into before January 1, 1954, if it is a renewal or continuance of a lease entered into before such date and if such re- newal or continuance was made in accordance with an option contained in the lease on De- cember 31, 1953. (Aug. 16, 1954, ch. 736, 68A Stat. 33.) § 111. Recovery of bad debts, prior taxes, and delin- quency amounts (a) General rule Gross income does not include Income attrib- utable to the recovery during the taxable year of a bad debt, prior tax, or delinquency amount, to the extent of the amount of the recovery ex- clusion with respect to such debt, tax, or amount. (b Definitions For purposes of subsection (a)- (1) Bad debt The term "bad debt" means a debt ou ac- count of the worthlessness or partial worth- lessness of which a deduction was allowed for a prior taxable year. (2) Prior tax The term "prior tax" means a tax on ac- count of which a deduction or credit was al- lowed for a prior taxable year. (3) Delinquency amount The term "delinquency amount" means an amount paid or accrued on account of which a deduction or credit was allowed for a prior taxable year and which is attributable to fail- ure to file return with respect to a tax, or pay a tax, within the time required by the law under which the tax is imposed, or to failure to file return with respect to a tax or pay a tax. (4) Recovery exclusion The term "recovery exclusion", with respect to a bad debt, prior tax, or delinquency amount, means the amount, determined in ac- cordance with regulations prescribed by the Secretary, of the deductions or credits al- lowed, on account of such bad debt, prior tax, or delinquency amount, which did not result in a reduction of the taxpayer's tax under this subtitle (not including the accumulated § 109 Page 120
TITLE 26-INTERNAL REVENUE CODE earnings tax imposed by section 531 or the tax on personal holding companies imposed by section 541) or corresponding provisions of prior income tax laws (other than subchapter E of chapter 2 of the Internal Revenue Code of 1939, relating to World War II excess prof- its tax), reduced by the amount excludable in previous taxable years with respect to such debt, tax, or amount under this section. (c) Special rules for accumulated earnings tax and for personal holding company tax In applying subsections (a) and (b) for the purpose of determining the accumulated earn- ings tax under section 531 or the tax under sec- tion 541 (relating to personal holding compa- nies)- (1) a recovery exclusion allowed for pur- poses of this subtitle (other than section 531 or section 541) shall be allowed whether or not the bad debt, prior tax, or delinquency amount resulted in a reduction of the tax under section 531 or the tax under section 541 for the prior taxable year; and (2) where a bad debt, prior tax, or delin- quency amount was not allowable as a deduc- tion or credit for the prior taxable year for purposes of this subtitle other than of section 531 or section 541 but was allowable for the same taxable year under section 531 or sec- tion 541, then a recovery exclusion shall be al- lowable if such bad debt, prior tax, or delin- quency amount did not result in a reduction of the tax under section 531 or the tax under section 541. (Aug. 16, 1954, ch. 736, 68A Stat. 33; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) REFERENCES IN TEXT Subchapter E of chapter 2 of the Internal Revenue Code of 1939, referred to in subsec. (b)(4), was com- prised of sections 710 to 736 of former Title 26, Inter. nal Revenue Code, and was repealed by act Nov. 8, 1945, ch. 453, title I, § 122(a), 59 Stat. 568. AMENDMENT 1976-Subsec. (b)(4). Pub. L. 94-455 struck out "or his delegate" following "Secretary". CRoss REFERENCES Additions to the tax and additional amounts- Failure to file tax return or to pay tax, see section 6651 of this title. Failure to pay tax, see section 6653 of this title. Penalties for willful failure to- File return, or pay tax, see section 7203 of this title. Pay over tax, see section 7202 of this title. Recovery of bad debts, prior taxes, or delinquency amounts as item of distributor or transferor corpora- tion with respect to carryovers in certain corporate ac- quisitions, see section 381 of this title. Rules and regulations, see section 7805 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 381, 1351 of this title. § 112. Certain combat pay of members of the Armed Forces (a) Enlisted personnel Gross income does not include compensation received for active service as a member below the grade of commissioned officer in the Armed Forces of the United States for any month during any part of which such member- (1) served in a combat zone, or (2) was hospitalized as a result of wounds, disease, or injury incurred while serving in a combat zone; but this paragraph shall not apply for any month beginning more than 2 years after the date of the termination of combatant activities in such zone. With respect to service in the combat zone des- ignated for purposes of the Vietnam conflict, paragraph (2) shall not apply to any month after January 1978. (b) Commissioned officers Gross income does not include so much of the compensation as does not exceed $500 received for active service as a commissioned officer in the Armed Forces of the United States for any month during any part of which such officer- (1) served in a combat zone, or (2) was hospitalized as a result of wounds, disease, or injury incurred while serving in a combat zone; but this paragraph shall not apply for any month beginning more than 2 years after the date of the termination of combatant activities in such zone. With respect to service in the combat zone des- ignated for purposes of the Vietnam conflict, paragraph (2) shall not apply to any month after January 1978. (c) Definitions For purposes of this section- (1) The term "commissioned officer" does not include a commissioned warrant officer. (2) The term "combat zone" means any area which the President of the United States by Executive Order designates, for purposes of this section or corresponding provisions of prior income tax laws, as an area in which Armed Forces of the United States are or have (after June 24, 1950) engaged in combat. (3) Service is performed in a combat zone only if performed on or after the date desig- nated by the President by Executive Order as the date of the commencing of combatant ac- tivities in such zone, and on or before the date designated by the President by Execu- tive Order as the date of the termination of combatant activities in such zone; except that June 25, 1950, shall be considered the date of the commencing of combatant activities in the combat zone designated in Executive Order 10195. (4) The term "compensation" does not in- clude pensions and retirement pay. (d) Prisoners of war, etc. (1) Members of the Armed Forces Gross income does not include compensa- tion received for active service as a member of the Armed Forces of the United States for any month during any part of which such member is in a missing status (as defined in section 551(2) of title 37, United States Code) during the Vietnam conflict as a result of such conflict, other than a period with re- spect to which it is officially determined under section 552(c) of such title 37 that he is officially absent from his post of duty with- out authority. Page 121 §n12
TITLE 26-INTERNAL REVENUE CODE (2) Civilian employees Gross income does not include compensa- tion received for active service as an employee for any month during any part of which such employee is in a missing status during the Vietnam conflict as a result of such conflict. For purposes of this paragraph, the terms "active service", "employee", and "missing status" have the respective meanings given to such terms by section 5561 of title 5 of the United States Code. (3) Period of conflict For purposes of this subsection, the Viet- nam conflict began February 28, 1961, and ends on the date designated by the President by Executive order as the date of the termi- nation of combatant activities in Vietnam. For purposes of this subsection, an individual is in a missing status as a result of the Viet- nam conflict if immediately before such status began he was performing service in Vietnam or was performing service in South- east Asia in direct support of military oper- ations in Vietnam. (Aug. 16, 1954, ch. 736, 68A Stat. 34; Nov. 2, 1966, Pub. L. 89-739, § 1, 80 Stat. 1165; Apr. 26, 1972, Pub. L. 92-279, § 1, 86 Stat. 124; Jan. 2, 1975, Pub. L. 93-597, § 2(a), (b), 88 Stat. 1950; Oct. 20, 1976, Pub. L. 94-569, § 3(b), 90 Stat. 2699.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-569 substituted "after January 1978" for "beginning more than 2 years after the date of the enactment of this sentence" following "With respect to service in the combat zone designat- ed for purposes of the Vietnam conflict, paragraph (2) shall not apply to any month". Subsec. (b). Pub. L. 04-569 substituted "after Janu- ary 1978" for "beginning more than 2 years after the date of enactment of this sentence" following "With respect to service in the combat zone designated for purposes of the Vietnam conflict, paragraph (2) shall not apply to any month". 1975-Subsec. (a). Pub. L. 93-597, § 2(a)(3), added provision relating to the applicability of par. (2) with respect to service in the combat zone designated for purposes of the Vietnam conflict. Subsec. (a)(1). Pub. L. 93-597, § 2(a)(1), struck out "during an induction period" after "served in a combat zone". Subsec. (a)(2). Pub. L. 93-597, § 2(a)(2), substituted "; but this paragraph shall not apply for any month be- ginning more than 2 years after the date of the termi- nation of combatant activities in such zone" for "during an induction period; but this paragraph shall not apply for any month during any part of which there are no combatant activities in any combat zone as determined under subsection (c)(3) of this section". Subsec. (b). Pub. L. 93-597, § 2(a)(3), added provision relating to applicability of par. (2) with respect to ser- vice in the combat zone designated for purposes of the Vietnam conflict. Subsec. (b)(1). Pub. L. 93-597, § 2(a)(l), struck out "during an induction period" after "served in a combat zone". Subsec. (b)(2). Pub. L. 93-597, § 2(a)(2), substituted "; but this paragraph shall not apply for any month be- ginning more than 2 years after the date of the termi- nation of combatant activities in such zone" for "during an induction period; but this paragraph shall not apply for any month during any part of which there are no combatant activities in any combat zone as determined under subsection (c)(3) of this section". Subsec. (c)(5). Pub. L. 93-597, § 2(b), struck out par. (5), which defined "induction period". 1972-Subsec. (d). Pub. L. 92-279 added subsec. (d). 1966-Subsec. (b). Pub. L. 89-739 substituted "$500" for "$200". EFFECTIVE DATE O 1975 AMENDMENT Section 2(c) of Pub. L. 93-597 provided that: "The amendments made by this section [amending subsecs. (a) to (c) of this section] shall take effect on July 1, 1973." EFFECTIVE DATE OF 1972 AMENDMENT Section 3(a)C1) of Pub. L. 92-279 provided that: "The amendment made by the first section of this Act [en- acting subsec. (d) of this section] shall apply to tax- able years ending on or after February 28, 1961." EFFECTIVE DATE OF 1966 AMENDMENT Section 2 of Pub. L. 89-739 provided that: "The amendment made by the first section of this Act [amending subsec. (b) of this section] shall apply with respect to compensation received in taxable years ending after December 31, 1965, for periods of active service after such date." REruND OR CREDIT OF OVERPAYMENT; APPLICABLE PERIOD Section 3(a)(2), (3) of Pub. L. 92-279 provided that: "(2) If refund or credit of any overpayment for any taxable year resulting from the application of the amendment made by the first section of this Act [en- acting subsec. (d) of this section] (including interest, additions to the tax, and additional amounts) is pre- vented at any time before the expiration of the appli- cable period specified in paragraph (3) by the oper- ation of any law or rule of law, such refund or credit of such overpayment may, nevertheless, be made or al- lowed if claim therefor is filed before the expiration of such applicable period. "(3) For purposes of paragraph (2), the applicable period for any individual with respect to any compen- sation is the period ending on whichever of the follow- ing days is the later: "CA) the day which is one year after the date of the enactment of this'Act [Apr. 26, 1972), or "(B) the day which is 2 years after the date on which it is determined that the individual's missing status (within the meaning of section 112(d) of the Internal Revenue Code of 1954) [section 112(d) of this title] has terminated for purposes of such sec. tion 112." Ex. ORD. No. 10585. TERMINATION OF COMBATANT ACTIVITIES IN KOMEA Ex. Ord. No. 10585, Jan. 1, 1955, 20 P.R. 17, provided: By virtue of the authority vested in me by section 112(c)(3) of the Internal Revenue Code of 1954 [subsec. (c)(3) of this section), January 31, 1955, as of midnight thereof, is hereby designated as the date of termination of combatant activities in the zone com- prised of the area described in Executive Order No. 10195 of December 20, 1950 (15 P.R. 9177). DWIGHT D. EISENHOWER. Ex. ORD. No, 11216. DESIGNATION OF VIETNAM AND ADJACENT WATERS AS COMBAT ZONE Ex. Ord. No. 11216, Apr. 24, 1965, 30 F.R. 5817, pro- vided: Pursuant to the authority vested in me by section 112 of the Internal Revenue Code of 1954 [this sec- tion], I hereby designate, for the purposes of that sec- tion, as an area in which Armed Forces of the United States are and have been engaged in combat: Vietnam, including the waters adjacent thereto within the following-described limits: From a point on the East Coast of Vietnam at the juncture of Vietnam with China southeastward to 21" N Lat., 108'15' E Long.; thence southward to 18' N Lat., 108"15' E Long.; thence southeastward to 17*30 N Lat., 111' E Long.; thence southward to 11' N Lat., 111" E Long.; thence Page 122
TITLE 26-INTERNAL REVENUE CODE southwestward to 7" N Lat., 105" E Long.; thence west- ward to 7" N Lat., 103" E Long.; thence northward to 9-30' N Lat., 103" E Long.; thence northeastward to 10-15' N Lat., 104-27' E Long.; thence northward to a point on the West Coast of Vietnam at the Juncture of Vietnam with Cambodia. The date of the commencing of combatant activities in such area is hereby designated as January 1. 1964. LYNDON B. JOHNSON. CROSS REFERENCES Additional estate taxes inapplicable to members of armed forces dying in combat zone or by reason of combat-zone-incurred wounds, etc., see section 2201 of this title. Communications excise tax, exemption from, see sec- tion 4253 of this title. Income taxes on members of armed forces on death, see section 692 of this title. Sale or exchange of residence, see section 1034 of this title. Time for performing certain acts postponed by reason of war, see section 7508 of this title. Wages as not including remuneration paid to mem- bers of armed services entitled to benefits of this sec- tion, see section 3401 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 2, 692, 2201, 3401, 4253, 6013, 7508 of this title; title 5 section 6326. § 113. Mustering-out payments for members of the Armed Forces Gross income does not include amounts re- ceived during the taxable year as mustering-out payments with respect to service in the Armed Forces of the United States. (Aug. 16, 1954, ch. 736, 68A Stat. 35.) § 114. Sports programs conducted for the American National Red Cross (a) General rule In the case of a taxpayer which is a corpora- tion primarily engaged in the furnishing of sports programs, gross income does not include amounts received as proceeds from a sports pro- gram conducted by the taxpayer if- (1) the taxpayer agrees in writing with the American National Red Cross to conduct such sports program exclusively for the benefit of the American National Red Cross; (2) the taxpayer turns over to the American National Red Cross the proceeds from such sports program, minus the expenses paid or incurred by the taxpayer- (A) which would not have been so paid or incurred but for such sports program, and (B) which would be allowable as a deduc- tion under section 162 (relating to trade or business expenses) but for subsection (b) of this section; and (3) the facilities used for such program are not regularly used during the taxable year for the conduct of sports programs to which this subsection applies. For purposes of this subsection, the term "pro- ceeds from such sports program" includes all amounts paid for admission to the sports pro- gram, plus all proceeds received by the taxpay- er from such program or activities carried on in connection therewith. (b) Treatment of expenses Expenses described in subsection (a)(2) shall be allowed as a deduction under section 162 only to the extent that such expenses exceed the amount excluded from gross income by sub- section (a) of this section. (Aug. 16, 1954, ch. 736, 68A Stat. 35.) CROSS REFERL.1CES American National Red Cross, see section 1 et seq. of Title 36, Patriotic Societies and Observances. § 115. Income of states, municipalities, etc. Gross income does not include- (1) income derived from any public utility or the exercise of any essential governmental function and accruing to a State or any politi- cal subdivision thereof, or the District of Co- lumbia; or (2) income accruing to the government of any possession of the United States, or any political subdivision thereof. (Aug. 16, 1954, ch. 736, 68A Stat. 35; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(a)(19), 90 Stat. 1766.) AMENDMENTS 1976-Pub. L. 94-455 struck out "(a) General rle" which preceded "Gross income does not include", struck out subsecs. (b) and (c), which related to con- tracts concerning public utilities made before Sept. 8, 1916, and contracts concerning bridge acquisition made before May 29, 1928, respectively, and in par. (1) of former subsec. (a), struck out "or territory" which followed "accruing to a State". EFFECTIVE DATE OF 1976 AMENDMENT Amendment by Pub. L. 94-455 applicable with re- spect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 2 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 501 of this title. § 116. Partial exclusion of dividends received by indi- viduals (a) Exclusion from gross income Gross income does not include amounts re- ceived by an individual as dividends from do- mestic corporations, to the extent that the divi- dends do not exceed $100. If the dividends re- ceived in a taxable year exceed $100, the exclu- sion provided by the preceding sentence shall apply to the dividends first received in such year. (b) Certain dividends excluded Subsection (a) shall not apply to any dividend from- (1) a corporation organized under the China Trade Act, 1922 (see sec. 941); (2) a corporation which, for the taxable year of the corporation in which the distribu- tion is made, or for the next preceding tax- able year of the corporation, is a corporation exempt from tax under section 501 (relating to certain charitable, etc., organizations) or section 521 (relating to farmers' cooperative associations); or (3) a real estate investment trust which, for the taxable year of the trust in which the Page 123 § 116
TITLE 26-INTERNAL REVENUE CODE dividend is paid, qualifies under part II of subchapter M (sec. 856 and following). (c) Special rules for certain distributions For purposes of subsection (a)- (1) Any amount allowed as a deduction under section 591 (relating to deduction for dividends paid by mutual savings banks, etc.) shall not be treated as a dividend. (2) A dividend received from a regulated in- vestment company shall be subject to the limitations prescribed in section 854. (3) The amount of dividends properly allo- cable to a beneficiary under section 652 or 662 shall be deemed to have been received by the beneficiary ratably on the same date that the dividends were received by the estate or trust. (d) Certain nonresident aliens ineligible for exclusion In the case of a nonresident alien individual, subsection (a) shall apply only- (1) in determining the tax imposed for the taxable year pursuant to section 871(b)(1) and only in respect of dividends which are ef- fectively connected with the conduct of a trade or business within the United States, or (2) in determining the tax imposes for the taxable year pursuant to section 877(b). (Aug. 16, 1954, ch. 736, 68A Stat. 37; June 25, 1959, Pub. L. 86-69, § 3(a)(2), 73 Stat. 139; Sept. 14, 1960, Pub. L. 86-779, § 10(f), 74 Stat. 1009: Feb. 26, 1964, Pub. L. 88-272, title II, § 201(c), (d)(6)(C), 78 Stat. 32; Nov. 13, 1966, Pub. L. 89- 809, title I, § 103(g), 80 Stat. 1552; Oct. 4, 1976, Pub. L. 94-455, title X, § 10,51(h)(2), title XIX, § 1901(a)(20), 90 Stat. 1647, 1649, 1766.) AMENDMENT OF SUBSEC. (b) Subsec. (b) of this section amended by Pub. L. 94-455, title X, § 1053(d)(1), OcL 4, 1976, 90 Star 1649, which struck out par. (1) and redesignated as pars. (1) and (2) former pars. (2) and (3), applicable with respect to taxable years beginning after Dec. 31, 1977. REFERENCES IN TEXT The China Trade Act, 1922, referred to in subsec. (b)(1), Is act Sept. 19, 1922, ch. 346, 42 Stat. 849, as amended, which is classified generally to chapter 4 (§ 141 et seq.) of Title 15, Commerce and Trade. For complete classification of this Act to the Code, see Tables volume. AMENDMENTS 1976-Subsec. (a). Pub. L. 94-45f, ; 1901(a)(20), sub- stituted "Gross income" for "Effective with respect to any taxable year ending after July 31, 1954, gross income" following "Exclusion from gross income.-". Subsec. (b). Pub. L. 94-455, § 1053(d)(1), struck out par. (1), relating to a corporation organized under the China Trade Act, 1922, and redesignated pars. (2) and (3) as (1) and (2), respectively. Subsec. (b)(2). Pub. L. 94-455, § 1051(h)(2), added "a corporation exempt from tax under section 501 (relat- ing to certain charitable, etc., organizations) or section 521 (relating to farmers' cooperative associations); or" following "the corporation is". 1966-Subsec. (d). Pub. L. 89-809 limited the avail- ability of the exclusion to dividends which are effec- tively connected with the conduct of a trade or busi- ness in the United States and extended the allowance of the exclusion to an expatriate subject to tax under section 877(b). 1964-Subsec. (a). Pub. L. 88-272, § 201(c), substitut- ed "$100" for "$50" wherever appearing. Subsec. (c)(3). Pub. L. 88-272, § 201(d)(6)(C), added par. (3). 1960-Subsec. (b). Pub. L. 86-779 added par. (3). 1959-Subsec. (b). Pub. L. 86-69 redesignated par'c. (2) and (3) as (1) and (2) and eliminated former par. (1) which related to dividends from insurance compa- nies subject to a tax imposed by part I or II of sub- chapter L. EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (a) by section 1901(a)(20) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Amendment of subsec. (b) by section 1051(h)(2) of Pub. L. 94-455 applicable to taxable years beginning after Dec. 31, 1975, see section 1051(0) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 33 of this title. Amendment of subsec. (b) by section 1053(d)(1) of Pub. L. 94-455 (striking out par. (1) provision for ex- clusion of dividend from corporation organized under the China Trade Act, 1922, and redesignating as pars. (1) and (2) prior pars. (2) and (3)) applicable with re- spect to taxable years beginning after Dec. 31, 1977, see section 1053(e) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 941 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-809 applicable with re- spect to taxable years beginning after Dec. 31, 1966, see section 103(n)(1) of Pub. L. 89-809, set out as an Effective Date of 1966 Amendment note under section 871 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Section 201(e) of Pub. L. 88-272 provided that: "The amendments made by subsection (a) [to section 34 of this title] shall apply with respect to taxable years ending after December 31, 1963. The amendment made by subsection (b [repealing section 34 of this title] shall apply with respect to taxable years ending after December 31. 1964. The amendment made by subsection (c) [to subsec. (c) of this section] shall apply with respect to taxable years beginning after December 31, 1963. The amendments made by subsec- tion (d) [to the analysis preceding section 31, and sec- tions 35, 37, 46, 116(c)(3), 584, 642. 702, 854, 857, 871, 1375 and 6014 of this title] shall apply with respect to dividends received after December 31, 1964, in taxable years ending after such date". EFFECTIVE DATE OF 1960 AMNDMENT Amendment by Pub. L. 86-779 applicable to taxable years of real estate investment trusts beginning after Dec. 31, 1960, see section 10(k) of Pub. L. 86-779, set out as an Effective Date note under section 856 of this title. EFFECTIVE DATE OF 1959 AMENDMENT Section 3(a)(3) of Pub. L. 86-69 provided that: "The amendments made by this subsection [to section 34 of this title and subsec. (b) of this section] shall apply to dividends received after December 31, 1958, in taxable years ending after such date." CRoss REFERENCES Common trust funds, see section 584 of this title. Corporate distributions of property, see section 301 of this title. Dividends not treated as such for certain purposes on distributions of electing small business corpora. tions, see section 1375 of this title. Estates, trusts, and beneficiaries, see sections 642, 643 of this title. Income and credits of partner, see section 702 of this title. § 116 Page 124
TITLE 26-INTERNAL REVENUE CODE Limitations applicable to dividends received from regulated investment company, see section 854 of this title. Restrictions applicable to dividends received from real estate investment trusts, see section 857 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 301, 584, 642, 643, 702, 854, 857, 1375 of this title. § 117. Scholarships and fellowship grants (a) General rule In the case of an individual, gross income does not include- (1) any amount received- (A) as a scholarship at an educational or- ganization described in section 170(b)(1)(A)(ii), or (B) as a fellowship grant, including the value of contributed services and accommo- dations; and (2) any amount received to cover expenses for- (A) travel, (B) research, (C) clerical help, or (D) equipment, which are incident to such a scholarship or to a fellowship grant, but only to the extent that the amount is so expended by the recipi- ent. (b) Limitations (1) Individuals who are candidates for degrees In the case of an individual who is a candi- date for a degree at an educational organiza- tion described in section 170(b)(1)(A)(ii), sub- section (a) shall not apply to that portion of any amount received which represents pay- ment for teachIng, research, or other services in the nature of part-time employment re- quired as a condition to receiving the scholar- ship or the fellowship grant. If teaching, re- search, or other services are required of all candidates (whether or not recipients of scholarships or fellowship grants) for a par- ticular degree as a condition to receiving such degree, such teaching, research, or other ser- vices shall not be regarded as part-time em- ployment within the meaning of this para- graph. (2) Individuals who are not candidates for degrees In the case of an individual who is not a candidate for a degree at an educational orga- nization described in section 170(b)(1)(A)(ii), subsection (a) shall apply only if the condi- tion in subparagraph (A) is satisfied and then only within the limitations provided in sub- paragraph (B). (A) Conditions for exclusion The grantor of the scholarship or fellow- ship grant is- (i) an organization described in section 501(c)(3) which is exempt from tax under section 501(a), (ii) a foreign government, (iii) an international organization, or a binational or multinational education and cultural foundation or commission cre- ated or continued pursuant to the Mutual Educational and Cultural Exchange Act of 1961, or (iv) the United States, or an instrumen- tality or agency thereof, or a State, or a possession of the United States, or any political subdivision thereof, or the Dis- trict of Columbia. (B) Extent of exclusion The amount of the scholarship or fellow- ship grant excluded under subsection (a)(1) in any taxable year shall be limited to an amount equal to $300 times the number of months for which the recipient received amounts under the scholarship or fellow- ship grant during such taxable year, except that no exclusion shall be allowed under subsection (a) after the recipient has been entitled to exclude under this section for a period of 36 months (whether or not con- secutive) amounts received as a scholarship or fellowship grant while not a candidate for a degree at an educational organization described in section 170(b)(1)(A)(ii). (Aug. 16, 1954, ch. 736, 68A Stat. 38; Sept. 21, 1961, Pub. L. 87-256, § 110(a), 75 Stat. 535; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(b)(8)(A), (c)(3), 90 Stat. 1794, 1803.) REFERENCES IN TEXT The Mutual Educational and Cultural Exchange Act of 1961, referred to in subsec. (b)(2)(A)(iii), is Pub. L. 87-256, Sept. 21, 1961, 75 Stat. 527, as amended, which is principally classified to chapter 33 (§ 2451 et seq.) of Title 22, Foreign Relations and Intercourse. For com- plete classification of this Act to the Code, see Short Title note set out under section 2451 of Title 22 and Tables volume. AMENDMENTS 1976-Subsecs. (a)(1)(A), (b)(1), (2), Pub. L. 94-455, § 1901(b)(8)(A), substituted "educational organization described in section 170(b)(1)(A)(ii)" for "educational institution (as defined in section 151(e)(4))" following "scholarship at an". Subsec. (b)(2)(A)Xv). Pub, L. 94-455, § 1901(c)(3), struck out "a territory" following "or a State". Subsec. (b)(2)(B). Pub. L. 94-455, § 1901(b)(8)(A), substituted "educational organization described in sec- tion 170(b)(1)(A)(il)" for "educational institution (as defined in section 151(e)(4))" following "degree at an". 1961-Subsec. (b)(2)(A). Pub. L. 87-256 included cases where the grantor of the scholarship or fellow- ship grant is a foreign government, an international organization, or a binational or multinational educa- tional and cultural foundation or commission created or continued pursuant to the Mutual Educational and Cultural Exchange Act of 1961. EFFECTIVE DATE OF 1976 AMENDMENT Amendment by Pub. L. 94-455 applicable with re- spect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1961 AMENDMENT Section 110(h)(1) of Pub. L. 87-256 provided that: "The amendments made by subsections (a), (b), and (c) of this section (to subsec. (b)(2)(A) of this section and sections 871 and 872 of this title] shall apply to taxable years beginning after December 31, 1961." Page 125 § 117
TITLE 26-INTERNAL REVENUE CODE SCHOLARSHIP PROGRAMS FOR MEMBERS OF THE UNIFORMED SERVICES Pub. L. 93-483, § 4. Oct. 26, 1974, 88 Stat. 1458, as amended Pub. L. 94-455, title XXI, § 2130, Oct. 4,1976, 90 Stat. 1922, provided that: "(a) In general.-Any amount received from appro- priated funds as a scholarship, including the value of contributed services and accommodations, by a member of a uniformed service who is receiving train- ing under the Armed Forces Health Professions Schol- arship Program (or any other program determined by the Secretary of the Treasury or his delegate to have substantially similar objectives) from an educational institution (as defined in section 151(e)(4) of the Inter- nal Revenue Code of 1954) [now section 170(b)(4)(A)(ii) of this title] shall be treated as a scholarship under section 117 of such Code [this sec- tion], whether that member is receiving training while on active duty or in an off-duty or inactive status, and without regard to whether a period of active duty is required of the member as a condition of receiving those payments. "(b) Definition of uniformed services.-For purposes of this section, the term 'uniformed service' has the meaning given it by section 101(3) of title 37, United States Code. "(c) Effective date.-The provisions of this section shall apply with respect to amounts received during calendar years 1973, 1974, and 1975, and, in the case of a member of a uniformed service receiving training in programs described in subsection (a) during calendar year 1976, with respect to amounts received during cal- endar years 1976, 1977, 1978, and 1979." CROSS REFEIENCES Prizes and awards as includible in gross income, see section 74 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 74, 1441, 4941 of this title. § 118. Contributions to the capital of a corporation (a) General rule In the case of a corporation, gross income does not include any contribution to the capital of the taxpayer. (b) Contributions in aid of construction (1) General rule For purposes of this section, the term "con- tribution to the capital of the taxpayer" in- cludes any amount of money or other proper- ty received from any person (whether or not a shareholder) by a regulated public utility which provides water or sewerage disposal services if- (A) such amount is a contribution in aid of construction, (B) where the contribution is in property which is other than water or sewerage dis- posal facilities, such amount meats the re- quirements of the expenditure rule of para- graph (2), and (C) such amounts (or any property ac- quired or constructed with such amounts) are not included in the taxpayer's rate base for rate-making purposes. (2) Expenditure rule An amount meets the requirements of this paragraph if- (A) an amount equal to such amount is expended for the acquisition or construc- tion of tangible property described in sec- tion 1231(b)- (i) which was the purpose motivating the contribution, and (ii) which is used predominantly in the trade or business of furnishing water or sewerage disposal services, (B) the expenditure referred to in subpar- agraph (A) occurs before the end of the second taxable year after the year in which such amount was received, and (C) accurate records are kept of the amounts contributed and expenditures made on the basis of the project for which the contribution was made and on the basis of the year of contribution or expenditure. (3) Definitions For purposes of this section- (A) Contribution in aid of construction The term "contribution in aid of construc- tion" shall be defined by regulations pre- scribed by the Secretary; except that such term shall not include amounts paid as cus- tomer connection fees (including amounts paid to connect the customer's property to a main water or sewer line and amounts paid as service charges for starting or stop- ping services). (B) Predominantly The term "predominantly" means 80 per- cent or more. (C) Regulated public utility The term "regulated public utility" has the meaning given such term by section 7701(a)(33); except that such term shall not include any such utility which is not re- quired to provide water or sewerage disposal services to members of the general public in its service area. (4) Disallowance of deductions and investment credit; adjusted basis Notwithstanding any other provision of this subtitle, no deduction or credit shall be al- lowed for, or by reason of, the expenditure which constitutes a contribution in aid of con- struction to which this subsection applies. The adjusted basis of any property acquired with contributions in aid of construction to which this subsection applies shall be zero. (c) Cross reference For basis of property acquired by a corporation through a contribution to its capital, see section 362. (Aug. 16, 1954, ch. 736, 68A Stat. 39; Oct. 4, 1976, Pub. L. 94-455, title XXI, §2120(a), 90 Stat. 1912.) AMENDMENTS 1976-Subsec. (b). Pub. L. 94-455, §2120(a), added subsec. (b). Former subsec. (b) redesignated (c). Subsec. (c). Pub. L. 94-455, § 2120(a), redesignated former subsec. (b) as (c). EFFECTIVE DATE OF 1976 AMENDMENT Section 2120(c) of Pub. L. 94-455 provided that: "The amendments made by this section (enacting subsec. (b) of this section and section 362(c)(3) of this title] apply to contributions made after January 31, 1976." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 362 of this title. Page 126 § 118
TITLE 26-INTERNAL REVENUE CODE § 119. Meals or lodging furnished for the convenience of the employer There shall be excluded from gross income of an employee the value of any meals or lodging furnished to him by his employer for the conve- nience of the employer, but only if- (1) in the case of meals, the meals are fur- nished on the business premises of the em- ployer, or (2) in the case of lodging, the employee is required to accept such lodging on the busi- ness premises of his employer as a condition of his employment. In determining whether meals or lodging are furnished for the convenience of the employer, the provisions of an employment contract or of a State statute fixing terms of employment shall not be determinative of whether the meals or lodging are intended as compensation. (Aug. 16, 1954, ch. 736, 68A Stat. 39.) SECTION REFERRE TO IN OTHER SECTIONS This section is referred to in sections 280A, 1402 of this title; title 42 section 411. § 120. Amounts received under qualified group legal services plans (a) Exclusion by employee for contributions and legal services provided by employer Gross income of an employee, his spouse, or his dependents, does not include-- (1) amounts contributed by an employer on behalf of an employee, his spouse, or his de- pendents under a qualified group legal ser- vices plan (as defined in subsection (b)); or (2) the value of legal services provided, or amounts paid for legal services, under a quali- fied group legal services plan (as defined in subsection (b)) to, or with respect to, an em- ployee, his spouse, or his dependents. (b) Qualified group legal services plan For purposes of this section, a qualified group legal services plan is a separate written plan of an employer for the exclusive benefit of his em- ployees or their spouses or dependents to pro- vide such employees, spouses, or dependents with specified benefits consisting of personal legal services through prepayment of, or provi- sion in advance for, legal fees in whole or in part by the employer, if the plan meets the re- quirements of subsection (c). (c) Requirements (1) Discrimination The contributions or benefits provided under the plan shall not discriminate in favor of employees who are officers, shareholders, self-employed individuals, or highly compen- sated. (2) Eligibility The plan shall benefit employees who quali- fy under a classification set up by the em- ployer and found by the Secretary not to be discriminatory in favor of employees who are described in paragraph (1). For purposes of this paragraph, there shall be excluded from consideration employees not included in the plan who are included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and one or more employers, if there is evi- dence that group legal services plan benefits were the subject of good faith bargaining be- tween such employee representatives and such employer or employers. (3) Contribution limitation Not more than 25 percent of the amounts contributed under the plan during the year may be provided for the class of individuals who are shareholders or owners (or their spouses or dependents), each of whom (on any day of the year) owns more than 5 per- cent of the stock or of the capital or profits interest in the employer. (4) Notification The plan shall give notice to the Secretary, in such manner as the Secretary may by regu- lations prescribe, that it is applying for recog- nition of the status of a qualified group legal services plan. (5) Contributions Amounts contributed under the plan shall be paid only (A) to insurance companies, or to organizations or persons that provide person- al legal services, or indemnification against the cost of personal legal services, in ex- change for a prepayment or payment of a premium, (B) to organizations or trusts de- scribed in section 501(c)(20), (C) to organiza- tions described in section 501(c) which are permitted by that section to receive payments from an employer for support of one or more qualified group legal services plan or plans, except that such organizations shall pay or credit the contribution to an organization or trust described in section 501(c)(20), (D) as prepayments to providers of legal services under the plan, or (E) a combination of the above. (d) Other definitions and special rules For purposes of this section- (1) Self-employed individual; employee The term "self-employed individual" means, and the term "employee" includes, for any year, an individual who is an employee within the meaning of section 401(c)(1) (relating to self-employed individuals). (2) Employer An individual who owns the entire interest in an unincorporated trade or business shall be treated as his own employer. A partner- ship shall be treated as the employer of each partner who is an employee within the mean- ing of paragraph (1). (3) Allocations Allocations of amounts contributed under the plan shall be made in accordance with regulations prescribed by the Secretary and shall take into account the expected relative utilization of benefits to be provided from such contributions or plan assets and the manner in which any premium or other charge was developed. (4) Dependent The term "dependent" has the meaning given to it by section 152. Page 127 § 120
TITLE 26-INTERNAL REVENUE CODE (5) Exclusive benefit In the case of a plan to which contributions are made by more than one employer, in de- termining whether the plan is for the exclu- sive benefit of an employer's employees or their spouses or dependents, the employees of any employer who maintains the plan shall be considered to be the employees of each employer who maintains the plan. (6) Attribution rules For purposes of this section- (A) ownership of stock in a corporation shall be determined in accordance with the rules provided under subsections (d) and (e) of section 1563 (without regard to section 1563(e)(3)(C)), and (B) the interest of an employee in a trade or business which is not incorporated shall be determined in accordance with regula- tions prescribed by the Secretary, which shall be based on principles similar to the principles which apply in the case of sub- paragraph (A). (7) Time of notice to Secretary A plan shall not be a qualified group legal services plan for any period prior to the time notification was provided to the Secretary in accordance with subsection (c)(4), if such notice is given after the time prescribed by the Secretary by regulations for giving such notice. (Added Pub. L. 94-455, title XXI, § 2134(a), Oct. 4, 1976, 90 Stat. 1926.) PRIOR PROVISIONS A prior section 120, act Aug. 16, 1954, ch. 736, 68A Stat. 39, which related to statutory subsistence allowance received by police, was repealed by Pub. L. 85-866, title I, § 3(a), (c), Sept. 2, 1958, 72 Stat. 1607, effective with respect to taxable years ending after Sept. 30, 1958, but only with respect to amounts re- ceived as a statutory subsistence allowance for any day after Sept. 30, 1958. EFFECTIVE DATE Section 2134(e) of Pub. L. 94-455 provided that: "(1) In general.-Except as provided in paragraph (2), the amendments made by this section [enacting this section and section 501(c)(20) of this title] shall apply to taxable years beginning after December 31, 1976, and ending before January 1, 1982. "(2) Notice requirement.-For purposes of section 120(d)(6) of the Internal Revenue Code of 1954, [subsec. (d)(6) of this section], the time prescribed by the Secretary of the Treasury by regulations for giving the notice required by section 120(c)(4) of such Code (subsec. (c)(4) of this section] shall not expire before the 90th day after the day on which regula- tions prescribed under such section 120(c)(4) [subsec. (c)(4) of this section] first become final. "(3) Existing plans.- "(A) For purposes of section 120 of the Internal Revenue Code of 1954 [this section], a written group legal services plan which was in existence on June 4, 1976, shall be considered as satisfying the require- ments of subsections (b) and (c) of such section 120 [subsecs. (b and (c) of this section] for the period ending with the compliance date (determined under subparagraph (B)). "(B) Compliance date.-For purposes of this para- graph, the term 'compliance date' means- "(i) the date occurring 180 days after the date of the enactment of this Act [Oct. 4, 1976], or "(ii) if later, in the case of a plan which is main- tained pursuant to one or more agreements which the Secretary of Labor finds to be collective bar- gaining agreements, the earlier of December 31, 1981, or the date on which the last of the collective bargaining agreements relating to the plan termi- nates (determined without regard to any extension thereof agreed to after the date of the enactment of this Act (Oct. 4, 1976])." STUDY AND REPORT Section 2134(d) of Pub. L. 94-455 provided that: "(1) A complete study and investigation with respect to the desirability and feasibility of continuing the ex- clusion from income of certain prepaid group legal ser- vices benefits under section 120 of the Internal Rev- enue Code of 1954 [this section] shall be made by the Secretary of Labor and by the Secretary of the Trea- sury. "(2) The Secretary of Labor ani the Secretary of the Treasury shall report to the President and the Congress with respect to the study and investigation conducted under paragraph (1) not later than Decem- ber 31, 1980." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 37, 501 of this title. § 121. Gain from sale or exchange of residence of in- dividual who has attained age 65 (a) General rule At the election of the taxpayer, gross income does not include gain from the sale or exchange of property if- (1) the taxpayer has attained the age of 65 before the date of such sale or exchange, and (2) during the 8-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as his principal residence for periods aggregat- ing 5 years or more. (b) Limitations (1) Where adjusted sales price exceeds $35,000 If the adjusted sales price of the property sold or exchanged exceeds $35,000, subsection (a) shall apply to that portion of the gain which bears the same ratio to the total amount of such gain as $35,000 bears to such adjusted sales price. For purposes of che pre- ceding sentence, the term "adjusted sales price" has the meaning assigned to such term by section 1034(b)(1) (determined without regard to subsection (d)(7) of this section). (2) Application to only one sale or exchange Subsection (a) shall not apply to any sale or exchange by the taxpayer if an election by the taxpayer or his spouse under subsection (a) with respect to any other sale or exchange is in effect. (c) Election An election under subsection (a) may be made or revoked at any time before the expiration of the period for making a claim for credit or refund of the tax imposed by this chapter for the taxable year in which the sale or exchange occurred, and shall be made or evoked in such manner as the Secretary shall by regulations prescribe. In the case of a taxpayer who is mar- ried, an election under subsection (a) or a revo- cation thereof may be made only if his spouse joins in such election or revocation. Page 128
TITLE 26-INTERNAL REVENUE CODE (d) Special rules (1) Property held jointly by husband and wife For purposes of this section, if- (A) property is held by a husband and wife as joint tenants, tenants by the entire- ty, or community property, (B) such husband and wife make a joint return under section 6013 for the taxable year of the sale or exchange, and (C) one spouse satisfies the age, holding, and use requirements of subsection (a) with respect to such property, then both husband and wife shall be treated as satisfying the age, holding, and use re- quirements of subsection (a) with respect to such property. (2) Property of deceased spouse For purposes of this section, in the case of an unmarried individual whose spouse is de- ceased on the date of the sale or exchange of property, if- (A) the deceased spouse (during the 8- year period ending on the date of the sale or exchange) satisfied the holding and use requirements of subsection (a)(2) with re- spect to such property, and (B) no election by the deceased spouse under subsection (a) is in effect with re- spect to a prior sale or exchange, then such individual shall be treated as satis- fying the holding and use requirements of subsection (a)(2) with respect to such proper- ty. (3) Tenant-stockholder in cooperative housing cor- poration For purposes of this section, if the taxpayer holds stock as a tenant-stockholder (as de- fined in section 216) in a cooperative housing corporation (as defined in such section), then- (A) the holding requirements of subsec- tion (a)(2) shall be applied to the holding of such stock, and (B) the use requirements of subsection (a)(2) shall be applied to the house or apart- ment which the taxpayer was entitled to occupy as such stockholder. (4) Involuntary conversions For purposes of this section, the destruc- tion, theft, seizure, requisition, or condemna- tion of property shall be treated as the sale of such property. (5) Property used in part as principal residence In the case of property only a portion of which, during the 8-year period ending on the date of the sale or exchange, has been owned and used by the taxpayer as his principal resi- dence for periods aggregating 5 years or more, this section shall apply with respect to so much of the gain from the sale or exchange of such property as is determined, under reg- ulations prescribed by the Secretary, to be at- tributable to the portion of the property so owned and used by the taxpayer. (6) Determination of marital status In the case of any sale or exchange, for pur- poses of this section- (A) the determination of whether an indi- vidual is married shall be made as of the date of the sale or exchange; and (B) an individual legally separated from his spouse under a decree of divorce or of separate maintenance shall not be consid- ered as married. (7) Application of sections 1033 and 1034 In applying sections 1033 (relating to invol- untary conversions) and 1034 (relating to sale or exchange of residence), the amount real- ized from the sale or exchange of property shall be treated as being the amount deter- mined without regard to this section, reduced by the amount of gain not included in gross income pursuant to an election under this sec- tion. (Added Pub. L. 88-272, title II, § 206(a), Feb. 26, 1964, 78 Stat. 38, and amended Pub. L. 94-455, title XIV, § 1404(a), title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1733, 1834.) AMENDMENTS 1976--Subsec. (b)(1). Pub. L. 94-455, § 1404(a), substi- tuted "t35,000" for "$20,000" in three places following "price exceeds", "exchanged exceeds", and "gain as". Subsecs. (c), (d)(5). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". EFFECTIVE DATE OF 1976 AMENDMENT Section 1404(b) of Pub. L. 94-455 provided that: "The amendment made by subsection (a) [to subsec. (b)(1) of this section] shall apply to taxable years be- ginning after December 31, 1976." EFFECTIVE DATE Section 206(c) of Pub. L. 88-272 provided that: "The amendments made by this section [adding this section, redesignating former section 121 as 122, and amending sections 1033, 1034 and 6012 of this title] shall apply to dispositions after Dec. 31, 1963, in taxable years ending after such date." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 1038, 1250, 6012 of this title. § 122, Certain reduced uniformed services retirement pay (a) General rule In the case of a member or former member of the uniformed services of the United States, gross income does not include the amount of any reduction in his retired or retainer pay pur- suant to the provisons of chapter 73 of title 10, United States Code. (b) Special rule (1) Amount excluded from gross income In the case of any individual referred to in subsection (a), all amounts received after De- cember 31, 1965, as retired or retainer pay shall be excluded from gross income until there has been so excluded an amount equal to the consideration for the contract. The preceding sentence shall apply only to the extent that the amounts received would, but for such sentence, be includible in gross income. (2) Consideration for the contract For purposes of paragraph (1) and section 72(n), the term "consideration for the con- Page 129 § 122
TITLE 26-INTERNAL REVENUE CODE tract" means, in respect of any individual, the sum of- (A) the total amount of the reductions before January 1, 1966, in his retired or re- tainer pay by reason of an election under chapter 73 of title 10 of the United States Code, and (B) any amounts deposited at any time by him pursuant to section 1438 or 1452(d) of such title 10. (Added Pub. L. 89-365, § l(a)(1), Mar. 8, 1966, 80 Stat. 32, and amended Pub. L. 93-406, title II, §§ 2005(c)(10), 2008(a), (b)(1), Sept. 2, 1974, 88 Stat. 992, 994.) AMENDME Ts 1974-Subsec. (a). Pub. L. 93-406, § 2008(a), substitut- ed "United States, gross income does not include the amount of any reduction in his retired or retainer pay pursuant to the provisions of chapter 73 of title 10, United States Code" for "United States who has made an election under chapter 73 of title 10 of the United States Code to receive a reduced amount of retired or retainer pay, gross income does not include the amount of any reduction after December 31, 1965, in his retired or retainer pay by reason of such election". Subsec. (b)(2). Pub. L. 93-406, § 2005(c)(10), substi- tuted "72(n)" for "72(o)". Subsec. (b)(2)(B). Pub. L. 93-406, § 2008(b)(1), insert- ed reference to section 1452(d) of title 10. EFFECTIVE DATE OF 1974 AMENDMENT Amendment by section 2005(c)(10) of Pub. L. 93-406 applicable only with respect to distributions or pay- ments made after Dec. 31, 1973, in taxable years begin- ning after Dec. 31, 1973, see section 2005(d) of Pub. L. 93-406, set out as an Effective Date of 1974 Amend- ment note under section 402 of this title. Section 2008(c) of Pub. L. 93-406 provided that: "The amendments made by this section [amending this section and sections 72, 101, and 2039 of this title] apply to taxable years ending on or after September 21, 1972. The amendments made by paragraphs (33 and (4) of subsection (b) [amending sections 101 and 2039 of this title] apply with respect to individuals dying on or after such date". EFFECTIVE DATE Section l(d) of Pub. L. 89-365 provided that: "The amendments made by subsections (a) and (b) [enact- ing this section and amending section 72 of this title] shall apply with respect to taxable years ending after December 31, 1965. The amendment made by subsec- tion (c) [amending section 101(b)(2)(D) of this title] shall apply with respect to individuals making an elec- tion under chapter 73 of title 10 of the United States Code who die after December 31, 1965." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 72 of this title. § 123. Amounts received under insurance contracts for certain living expenses (a) General rule In the case of an individual whose principal residence is damaged or destroyed by fire, storm, or other casualty, or who is denied access to his principal residence by governmen- tal authorities because of the occurrence or threat of occurrence of such a casualty, gross income does not include amounts received by such individual under an insurance contract which are paid to compensate or reimburse such individual for living expenses incurred for himself and members of his household result- ing from the loss of use or occupancy of such residence. (b) Limitation Subsection (a) shall apply to amounts re- ceived by the taxpayer for living expenses in- curred during any period only to the extent the amounts received do not exceed the amount by which- (1) the actual living expenses incurred during such period for himself and members of his household resulting from the loss of use or occupancy of their residence, exceed (2) the normal living expenses which would have been incurred for himself and members of his household during such period. (Added Pub. L. 91-172, title IX, § 901(a), Dec. 30, 1969, 83 Stat. 709.) EFFECTIVE DATE Section 901(c) of Pib. L. 91-172 provided that: "The amendments made by this section [enacting this sec- tion] shall apply with respect to amounts received on or after January 1, 1969." § 124. Cross references to other acts (a) For exemption of- (1) Adjustments of indebtedness under wage earners' plans, see section 679 of the Bankruptcy Act (11 U.S.C. 1079). (2) Allowances and expenditures to meet losses sus- tained by persons serving the United States abroad, due to appreciation of foreign currencies, see section 5943 of title 5, United States Code. (3) Amounts credited to the Maritime Administration under section 9(b)(6) of the Merchant Ship Sales Act of 1946, see section 9(c)(l) of that Act (50 U.S.C. App. 1742). (4) Benefits under laws administered by the Veter- ans' Administration, see section 3101 of title 38, United States Code. (5) Earnings of ship contractors deposited in special reserve funds, see section 607(d) of the Merchant Marine Act, 1936 (46 U.S.C. 1177). (6) Income derived from Federal Reserve banks, in- cluding capital stock and surplus, see section 7 of the Federal Reserve Act (12 U.S.C. 531). (7) Railroad retirement annuities and pensions, see section 12 of the Railroad Retirement Act of 1935 (45 U.S.C. 2281). (8) Railroad unemployment benefits, see section 2(e) of the Railroad Unemployment Insurance Act (45 U.S.C. 352). (9) Special pensions of persons on Army and Navy medal of honor roll, see 38 U.S.C. 562(a)-(c). (b) For extension of military income tax-exemption benefits to commissioned officers of Public Health Ser- vice in certain circumstances, see section 212 of the Public Health Service Act (42 U.S.C. 213). (Aug. 16, 1954, ch. 736, 68A Stat. 39, § 121; Aug. 1, 1956, ch. 837, title V, § 501(t), 70 Stat. 885; June 17, 1957, Pub. L. 85-56, title XXII, § 2201(25), 71 Stat. 160; Sept. 2, 1958, Pub. L. 85-857, § 13(t) 72 Stat. 1266; renumbered § 122, Feb. 26, 1964, Pub. L. 88-272, title II, § 206(a), 78 Stat. 38; renumbered § 123, Mar. 8, 1966, Pub. L. 89-365, § 1(a)(1), 80 Stat. 32; renum- bered § 124, Dec. 30, 1969, Pub. L. 91-172, title IX, § 901(a), 83 Stat. 709; amended Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(a)(21), 90 Stat. 1766.) REFERENCES IN TEXT Section 9 of the Merchant Ship Sales Act of 1946 (50 U.S.C. App. 1742), referred to in subsec. (a)(3), was re- Page 130 § 123
TITLE 26-INTERNAL REVENUE CODE pealed by Pub. L. 94-412, title V, § 501(g), Sept. 14, 1976, 90 Stat. 1258. The Railroad Retirement Act of 1935, as amended, referred to in subsec. (a)(7), is act Aug. 29, 1935, ch. 812, 49 Stat. 867 (as amended generally by acts June 24, 1937, ch. 382, part I, 50 Stat. 307, and Oct. 16, 1974, Pub. L. 93-445, title I, 88 Stat. 1305) and is now known as the Railroad Retirement Act of 1974, which is clas. sified generally to subehapter IV (§231 et seq.) of chapter 9 of Title 45, Railroads. Section 12 of the Rail- road Retirement Act of 1935 (45 U.S.C. 2281), is now covered by section 231m of Title 45. For complete clas- sification of this Act to the Code, see Tables volume. AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, § 1901(a)(21), struck out pars. (4), (5), (6), (9), (10), (11), (12), (13), and (17) relating to: benefits under World War Adjust- ment Compensation Act; benefits under World War Veteran's Act 1924; dividends and interest derived from certain preferred stock by Reconstruction Fi- nance Corporation; income derived from Ogdensburg bridge; income derived from Owensburg bridge and ferries; income from Saint Clair River bridge and fer- ries; leave compensation payments under section 6 of Armed Forces Leave Act of 1946; mustering-out pay- ments under Mustering-Out Payment Act of 1944; and gain derived from sale or other disposition of Treasury Bills issued after June 17, 1930, under the Second Li- berty Bond Act, respectively, renumbered pars. (7), (8), (14), (15), (18), and (18) as pars. (5), (6), (7), (8), (9), and (4), respectively, struck out references to Statutes at Large, and updated cross references to the United States Code. Subsec. (b). Pub. L. 94-455, § 1901(a)(21), struck out "58 Stat. 689;" following "Health Service Act(". 1958-Subsec. (a)(18). Pub. L. 85-857 substituted "section 3101 of Title 38, United States Code" for "sec- tion 1001 of the Veterans' Benefits Act of 1957". 1957-Subsec. (a)(18). Pub. L. 85-56 substituted pro- visions relating to benefits under laws administered by the Veterans' Administration, for provisions which re- lated to dependency and indemnity compensation. 1956-Subsec. (a). Act Aug. 1, 1956, added par. (18), relating to dependency and indemnity compensation. EFFECTIvE DATE OF 1976 AMENDMENT Amendment by Pub. L. 94-455 applicable with re- spect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as Effec- tive Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1958 AMENDMENT Amendment by Pub. L. 85-857 effective Jan. 1, 1959, see section 2 of Pub. L. 85-857, set out as an Effective Date note preceding Part I of Title 38, Veterans' Bene- fits. CRoss REFERENCES Patronage refunds paid by Federal intermediate credit banks as exempt from income tax, see section 2077 of Title 12, Banks and Banking. PART IV-STANDARD DEDUCTION FOR INDIVIDUALS Sec. 141. Standard deduction. 142. Individuals not eligible for standard deduction. 143. Determination of marital status. 144. Election of standard deduction. 145. Cross reference. PART REFERRED TO IN OTHER SECTIONS This part is referred to in sections 21, 63 of this title. § 141. Standard deduction (a) Standard deduction Except as otherwise provided in this section, the standard deduction referred to in this title is the larger of the percentage standard deduc- tion or the low income allowance. (b) Percentage standard deduction The percentage standard deduction is an amount equal to 16 percent of adjusted gross income, but not more than- (1) $2,800 in the case of- (A) a Joint return under section 6013, or (B) a surviving spouse (as defined in sec- tion 2(a)), (2) $2,400 in the case of an individual who is not married and who is not a surviving spouse (as so defined), or (3) $1,400 in the case of a married individual filing a separate return. (c) Low income allowance The low income allowance is- (1) $2,100 in the case of- (A) a joint return under section 6013, or (B) a surviving spouse (as defined in sec- tion 2(a)), (2) $1,700 in the case of an individual who is not married and who is not a surviving spouse (as so defined), or (3) $1,050 in the case of a married individual filing a separate return. (d) Married individuals filing separate returns Notwithstanding subsection (a)- (1) The low income allowance shall not apply in the case of a separate return by a married individual if the tax of the other spouse is determined with regard to the per- centage standard deduction. (2) A married individual filing a separate return may, if the low income allowance is less than the percentage standard deduction, and if the low income allowance of his spouse is greater than the percentage standard de- duction of such spouse, elect (under regula- tions prescribed by the Secretary) to have his tax determined with regard to the low income allowance in lieu of being determined with regard to the 10-percent standard deduction. (e) Limitations in case of certain dependent taxpay- ers In the case of a taxpayer with respect to whom a deduction under section 151(e) is al- lowable to another taxpayer for the taxable year- (1) the percentage standard deduction shall be computed only with reference to so much of his adjusted gross income as is attributable to his earned income (as defined in section 911(b)), and (2) the low income allowance shall not exceed his earned income for the taxable year. (Aug. 16, 1954, ch. 136, 68A Stat. 40; Feb. 26, 1964, Pub. L. 88-272, title I, § 112(a), 78 Stat. 23; Dec. 30, 1969, Pub. L. 91-172, title VIII, § 802(a), (c)(4), (e), 83 Stat. 676, 678; Dec. 10, 1971, Pub. L. 92-178, title II, §§ 202, 203(a)-(c), title III, § 301(a), 85 Stat. 511, 520; Mar. 29, 1975, Pub. L. 94-12, title II, §§ 201(a), 202(a), 89 Stat. 28, 29; Dec. 23, 1975, Pub. L. 94-164, § 2(a)(1), (b)(1). 89 Page 131 § 141
TITLE 26-INTERNAL REVENUE CODE Stat. 970, 971; Oct. 4, 1976, Pub. L. 94-455, title IV, §401(b)(1), (2), title XIX, § 1906(b)(13)(A), 90 Stat. 1556, 1834.) AMENDMENTS 1976-Subsec. (b. Pub. L. 94-455, § 401(b)(2), struck out par. (2) relating to application of 6-month rule. Subsec. (c). Pub. L. 94-455, §401(b)(1), struck out par. (2) relating to application of 6-month rule. Subsec. (d)(2). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "by the Secre- tary". 1975-Subsec. (b). Pub. L. 94-164, § 2(b)(1). redesig- nated existing pars. (I) to (3) as pars. (1(A) to (C), and in par. (1)(A) as so redesignated substituted "$2,800" for "$2,600" in par. (1)(B) "$2,400" for "$2,300", and in par. (1)(C) "$1,400" for "$1,300", and added par. (2). Pub. L. 94-12, § 202(a), substituted provisions In- creasing the percentage standard deduction to 16 per- cent, with a maximum of $2,600 for Joint returns and surviving spouses, $2,300 for single persons, and $1,300 for married individuals filing separately, for provisions showing a tabular schedule for the percentage stan- dard deduction calling for a graduated scale of 10 per- cent and a maximum of $1,000 for 1970, 13 percent and a maximum of $1,500 for 1971, and 15 percent and a maximum of $2,000 for 1972 and thereafter. Subsec. (c). Pub. L. 94-164, § 2(a)(1), redesignated ex- isting pars. (1)-(3) as pars. (1)(A)-(C), and in par. (1)(A) as so redesignated, substituted "$2,100" for "$1,900", in par. (1)(B), "$1,700" for "$1,600", and In par. (1)(C), "$1,050" for "$950", and added par. (2). Pub. L. 94-12, § 201(a), substituted pars. (1), (2), and (3) for provisions making a flat $1,300 low income allowance ($650 in the case of a married individual filing a separate return). 1971-Subsec. (b). Pub. L. 92-178, § 202, deleted from the table separate reference to taxable year 1972, the applicable percentage of 14, and maximum amount of $2,000 therefor and reinstated reference to taxable year 1972, substituting in the table "1972 and there- after" for "1973 and thereafter". Subsec. (c). Pub. L. 92-178, § 203(a) and (b), substi. tuted provisions for low income allowance of $1,050 ($525 In the case of a married individual filing a sepa- rate return), with respect to taxable years beginning after Dec. 31, 1970, and before Jan. 1. 1972, for former low Income allowance provisions prescribing In par. (1), the general rule; par. (2), the basic allowance; par. (3), the general rule and income phase-out with re- spect to additional allowance; par. (4), married individ- uals filing separate returns; par. (5). number of exemp- tions; and par. (6), special rule for 1971; and Increased low income allowance from $1,050 to $1,300 ($525 to $650 in the case of a married individual filing a sepa- rate return), for taxable years beginning after Dec. 31, 1971, respectively. Subsec. (el. Pub. L. 92-178, § 301(a), added subsec. (e). 1969-Subsec. (a). Pub. L. 91-172, § 802(a), altered the definition of standard deduction by substituting "larger of the percentage standard deduction or the low Income allowance" for "larger of the 10 per cent standard deduction or the minimum standard deduc- tion" as the definition, and struck out the maximum limits. Subsec. (b. Pub. L. 91-172, § 802(a), substituted a table to be used in determining the percentage stan- dard deduction for the definition of the 10 per cent standard deduction. Subsec. (c). Pub. L. 91-172, § 802(a), substituted low- income allowance provisions for minimum standard deduction provisions. Subsec. (d). Pub. L. 91-172, § 802(c)(4), substituted "low income allowance" and "percentage" for "mini- mum standard deduction" and "10-percent", respec- tively, wherever appearing. 1964-Pub. L. 88-272 designated existing provisions as subsec. (a), substituted "Except as otherwise pro- vided in this section, the standard deduction referred to in this title is the larger of the 10-percent standard deduction or the minimum standard deduction. The standard deduction shall not exceed $1,000" for "The standard deduction referred to in section 63(b) (defin- ing taxable income in case of individual electing stan- dard deduction) shall be an amount equal to 10 per- cent of the adjusted gross Income or $1,000, whichever Is the lesser" therein, and added subsecs. (b to (d). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (b) and (c) by section 401(b) of Pub. L. 94-455 applicable to taxable years ending after Dec. 31, 1975, see section 401(e) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 42 of this title. EFFECTIVE AND TERMINATION DATES OF 1975 AMENDMENT Amendment by Pub. L. 94-164 applicable to taxable years ending after Dec. 31, 1975 and before Jan. 1, 1978, see section 2(g) of Pub. L. 94-164, set out as an Effective Date of 1975 Amendment note under section 43 of this title. Amendment by Pub. L. 94-12 applicable to taxable years ending after Dec. 31, 1974, and to cease to apply to taxable years ending after Dec. 31, 1975, see section 209(a) of Pub. L. 94-12, set out as an Effective and Termination Dates of 1975 Amendment note under section 42 of this title. EFFECTIVE DATE OF 1971 AMENDMENT Section 202 of Pub. L. 92-178 provided in part that amendment of subsec. (b) by Pub, L. 92-178 shall be effective with respect to taxable years beginning after Dec. 31, 1971. Section 203(a) and (b) of Pub. L. 92-178 provided In part that amendment of subsec. (c) by such section 203(a) and (b) shall be effective with respect to tax- able years beginning after Dec. 31, 1970, and before Jan. 1, 1972, and with respect to taxable years begin- ning after Dec. 31, 1971, respectively. Section 301(d) of Pub. L. 92-178 provided that: "The amendments made by this section [enacting section 4(d)(5) and sections 141(e) and 144(a)(4) of this title] shall apply to taxable years beginning after December 31, 1971." EFFECTIVE DATE OF 1969 AMENDMENT Section 802(d) of Pub. L. 91-172 provided that: "The amendments made by subsections (a) [amending this section], (b) [amending section 143 of this title], and c) [amending sections 4(a), (c), (f)(4), 141(d) and, 1304(c)(4) of this title] shall apply to taxable years be- ginning after December 31, 1969." EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272, except for purposes of section 21 of this title, effective with respect to tax- able years beginning after Dec. 31, 1963, see section 131 of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 1 of this title. REPEALS Section 802(e) of Pub. L. 91-172, which amended subsec. c) of this section to provide for low income allowance of $1,000 ($500 in the case of a married indi- vidual filing a separate return), effective with respect to taxable years beginning after Dec. 31, 1971, was re- pealed by section 203(c) of Pub. L. 92-178. CRoss REFERENCES Individuals electing standard deduction, see section 63 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section Is referred to In sections 21, 57, 144, 584, 703, 3402, 6012, 6014, 6153 of this title. § 141 Page 132
TITLE 26-INTERNAL REVENUE CODE § 142. Individuals not eligible for standard deduction (a) Husband and wife The standard deduction shall not be allowed to a husband or wife if the tax of the other spouse is determined under section 1 on the basis of the taxable income computed without regard to the standard deduction. (b) Certain other taxpayers ineligible The standard deduction shall not be allowed in computing the taxable income of- (1) a nonresident alien individual; (2) a citizen of the United States entitled to the benefits of section 931 (relating to income from sources within possessions of the United States); (3) an individual making a return under sec- tion 443(a)(1) for a period of less than 12 months on account of a change in his annual accounting period; or (4) an estate or trust, common trust fund, or partnership. (Aug. 16, 1954, ch. 736, 68A Stat. 40.) SECTION REFERRED TO IN OTHER SECTIONS This section Is referred to in sections 42, 144, 642, 931, 6012 of this title. § 143. Determination of marital status (a) General rule For purposes of this part and part V- (1) The determination of whether an indi- vidual is married shall be made as of the close of his taxable year; except that if his spouse dies during his taxable year such determina- tion shall be made as of the time of such death; and (2) An individual legally separated from his spouse under a decree of divorce or of sepa- rate maintenance shall not be considered as married. (b) Certain married individuals living apart For purposes of this part and part V, if- (1) an individual who is married (within the meaning of subsection (a)) and who files a separate return maintains as his home a household which constitutes for more than one-half of the taxable year the principal place of abode of a dependent (A) who (within the meaning of section 152) is a son, stepson, daughter, or stepdaughter of the in- dividual, rind (B) with respect to whom such individual is entitled to a deduction for the taxable year under section 151, (2) such individual furnishes over half of the cost of maintaining such household during the taxable year, and (3) during the entire taxable year such indi- vidual's spouse is not a member of such household, such individual shall not be con- sidered as married. (Aug. 16, 1954, ch. 736, 68A Stat. 41; Dec. 30, 1969, Pub. L. 91-172, title VIII, § 802(b), 83 Stat. 677; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(a)(22), 90 Stat. 1767.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455 added "and part V" following "purposes of this part". Subsec. (b). Pub. L. 94-455 added "and part V" fol- lowing "purposes of this part". 1969-Pub. L. 91-172 substituted "(a) General Rule.-For purposes of this part-" for "For purposes of this part-" in the material preceding par. (1) and added subsec. (b). EFFECTIVE DATE OF 1976 AMENDMENT Amendment by Pub. L. 94-455 applicable with re- spect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Amendment by Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1969, see section 802(d) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 141 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 1, 2, 37, 42, 43, 105, 143, 219, 220, 1304, 340., 6012, 6362, 6428 of this title. § 144. Election of standard deduction (a) Method of election The standard deduction shall be allowed if the taxpayer so elects in his return, and the Secretary shall prescribe the manner of signify- ing such election in the return. (b) Change of election Under regulations prescribed by the Secre- tary, a change of election with respect to the standard deduction for any taxable year may be made after the filing of the return for such year. If the spouse of the taxpayer filed a sepa- rate return for any taxable year corresponding, for purposes of section 142(a), to the taxable year of the taxpayer, the change shall not be allowed unless, in accordance with such regula- tions- (1) the spouse makes a change of election with respect to the standard deduction for the taxable year covered in such separate return, consistent with the change of election sought by the taxpayer, and (2) the taxpayer and his spouse consent in writing to the assessment, within such period as may be agreed on with the Secretary, of any deficiency, to the extent attributable to such change of election, even though at the time of the filing of such consent the Pssess- ment of such deficiency would otherwise be prevented by the operation of any law or rule of law. This subsection shall not apply if the tax liabil- ity of the taxpayer's spouse, for the taxable year corresponding (for purposes of section 142(a)) to the taxable year of the taxpayer, has been compromised under section 7122. (c) Change of election defined For purposes of this title, the term "change of election with respect to the standard deduc- tion" means- (1) a change of an election to take (or not to take) the standard deduction; or (2) a change of an election under section 141(d)(2). (Aug. 16, 1954, ch. 736, 68A Stat. 41; Feb. 26, 1964, Pub. L. 88-272, title I, § 112(c), title II, § 232(c), 78 Stat. 24, 110; Dec. 10, 1971, Pub. L. 92-178, title II, § 206, title III, § 301(c), 85 Stat. 511, 520; Oct. 4, 1976, Pub. L. 94-455, title V. 71-999 0 - 78 - 11 (Vol. 7) Page 133 § 144
TITLE 26-INTERNAL REVENUE CODE § 501(b)(3)-(5), title XIX, § 1906(b)(13)(A), 90 Stat. 1558, 1559, 1834.) AMzNDMENTS 1976-Subsec. (a). Pub. L. 94-455, § 501(b)(3), deleted par. (1) designation, continued existing provision for allowance of standard deduction when an election is signified on the return in manner prescribed by the Secretary without retention of requirement that return show an adjusted gross income of $10,000 or more, deleted "or his delegate" following "Secretary", and deleted remaining par. (1) provisions respecting election where adjusted gross income on the return is $10,000 or more but the correct adjusted gross income is less; and deleted: par. (2) provision for allowance of an election where the adjusted gross income on the return is less than $10,000 and where the adjusted gross income on the return is less than $10,000 but the correct adjusted gross income is $10,000 or more; par. (3) provision deeming failure to signify an election as provided in par. (1) or (2) an indication not to take the standard deduction: and par. (4) provision for allowance of standard deduction, notwithstanding par. (2), where adjusted gross income shown on the return is less than $10,000 and taxpayer is unable to pay the required tax by reason of section 4(d)(5) of this title. Subsec. (b). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c). Pub. L. 94-455, § 501(b)(4), struck out par. (2) definition of "change of election" to mean "a change of an election to pay (or not to pay) the tax under section 3" and redesignated par. (3) as (2). Subsec. (d). Pub. L. 94-455, § 501(b)(5), repealed subsec. (d), which related to election of income averag- ing by individuals. 1971-Subsec. (a)(1), (2). Pub. L. 92-178, § 206, substi- tuted "$10,000" for "$5,000" in three instances In pars. (1) and (2). Subsec. (a)(4). Pub. L. 92-178, § 301(c), added par (4) 1964-Subsec. (b). Pub. L. 88-272, § 112(o)(1), substi- tuted "with respect to the standard deduction for any taxable year" for "for any taxable year to take, or not to take, the standard deduction, or to pay, or not to pay, the tax under section 3". Subsec. (c). Pub. L. 88-272, § 112(c)(2), added subsec, (c). Subsec. (d). Pub. L. 88-272, § 232(c), added subsec. (d). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (a) and (c) and repeal of subsec. (d) by section 501(b)(3) to (5) of Pub. L. 94-455 applicable to taxable years beginning after Dec. 31, 1975, see section 508 of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 3 of this title. EFFECTIVE DATE OF 1971 AMENDMENT Section 206 of Pub. L. 92-178 provided in part that amendment of subsec. (a)(1), (2) by Pub. L. 92-178 shall be effective with respect to taxable years begin- ning after Dec. 31, 1970. Enactment of subsec. (a)(4) by Pub. L. 92-178 appli- cable to taxable years beginning after Dec. 31, 1971, see section 301(d) of Pub. L. 92-178, set out as an Ef- fective Date of 1971 Amendment note under section 141 of this title, EFmEcTIvE DATE Or 1964 AMENDMENT Amendment of subsecs. (b), (c) by Pub. L. 88-272, except for purposes of section 21 of this title, effective with respect to taxable years beginning after Dec. 31, 1963, see F,._ion 131 of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 1 of this title. Enactment of subsec. (d) by Pub. L. 88-272 applica- ble to taxable years beginning after Dec. 31, 1963, see section 232(g) of Pub. L. 88-272, set out as an Effective Date note under section 1301 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 36, 63, 6212, 6504 of this title. SECTION REFERRED TO IN D.C. CODE This section is referred to in section 47-1557b of the District of Columbia Code, § 145. Cross reference For disallowance of certain credits against the tax In the case of individuals electing the standard deduction, see section 36. (Aug. 16, 1954, ch. 736, 68A Stat. 42.) PART V-DEDUCTIONS FOR PERSONAL EXEMPTIONS sec, 151. Allowance of deductions for personal exemptions. 152. Dependent defined. 153. Cross references. AMENDMETS 1976-Pub. L. 94-455, title XIX, § 1901(b)(7)(A)(ii), Oct. 4, 1976, 90 Stat. 1794, redesignated former item 154 as 153 and struck out former item 153 "Determina- tion of marital status". PART RFERmIM TO IN OTHER SECTIONS This part is referred to in section 21 of this title. § 151. Allowance of deductions for personal exemp- tions (a) Allowance of deductions In the case of an individual, the exemptions provided by this section shall be allowed as de- ductions in computing taxable income. (b) Taxpayer and spouse An exemption of $750 for the taxpayer; and an additional exemption of $750 for the spouse of the taxpayer if a Joint return is not made by the taxpayer and his spouse, and if the spouse, for the calendar year in which the taxable year of the taxpayer begins, has no gross income and is not the dependent of another taxpayer. (c) Additional exemption for taxpayer or spouse aged 65 or more (1) For taxpayer An additional exemption of $750 for the taxpayer if he has attained the age of 65 before the close of his taxable year. (2) For spouse An additional exemption of $750 for the spouse of the taxpayer if a joint return is not made by the taxpayer and his spouse, and if the spouse has attained the age of 65 before the close of such taxable year, and, for the calendar year in which the taxable year of the taxpayer begins, has no gross income and is not the dependent of another taxpayer. (d) Additional exemption for blindness of taxpayer or spouse (1) For taxpayer An additional exemption of $750 for the tax payer if he is blind at the close of his taxable year. (2) For spouse An additional exemption of $750 for the spouse of the taxpayer if a separate return is made by the taxpayer, and if the spouse is Page 134 § 145
TITLE 26-INTERNAL REVENUE CODE blind and, for the calendar year in which the taxable year of the taxpayer begins, has no gross income and is not the dependent of an- other taxpayer. For purposes of this para- graph, the determination of whether the spouse is blind shall be made as of the close of the taxable year of the taxpayer; except that if the spouse dies during such taxable year such determination shall be made as of the time of such death. (3) Blindness defined For purposes of this subsection, an individ- ual is blind only if his central visual acuity does not exceed 20/200 in the better eye with correcting lenses, or if his visual acuity is greater than 20/200 but is accompanied by a limitation in the fields of vision such that the widest diameter of the visual field subtends an angle no greater than 20 degrees. (e) Additional exemption for dependents (1) In general An exemption of $750 for each dependent (as defined in section 152)- (A) whose gross income for the calendar year in which the taxable year of the tax- payer begins is less than $750, or (B) who is a child of the taxpayer and who (I) has not attained the age of 19 at the close of the calendar year in which the tax- able year of the taxpayer begins, or (ii) is a student. (2) Exemption denied in case of certain married de- pendents No exemption shall be allowed under this subsection for any dependent who has made a joint return with his spouse under section 6013 for the taxable year beginning in the calendar year in which the taxable year of the taxpayer begins. (3) Child defined For purposes of paragraph (1)(B), the term "child" means an individual who (within the meaning of section 152) is a son, stepson, daughter, or stepdaughter of the taxpayer. (4) Student defined For purposes of paragraph (1)(B)(ii), the term "student" means an individual who during each of 5 calendar months during the calendar year in which the taxable year of the taxpayer begins- (A) is a full-time student at an education- al organization described in section 170(b)(1)(A)(ii); or (B) is pursuing a full-time course of insti- tutional on-farm training under the supervi- sion of an accredited agent of an education- al organization described in section 170(b)(1)(A)(ii) or of a State or political subdivision of a State. (Aug. 16, 1954, ch. 736, 68A Stat. 42; Dec. 30, 1969, Pub. L. 91-172, title VIII, § 801(a)(1), (b)(1), (c)(1), (d)(1), title IX, § 941(b), 83 Stat. 675, 726; Dec. 10, 1971, Pub. L. 92-178, title II, § 201(a)(1), (b)(1), (c), 85 Stat. 510; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(a)(23), 90 Stat. 1767.) AMENDMENTS 1976-Subsec. (e)(4). Pub. L. 94-455 struck out "and educational institution" following "Student" in par. catchline, substituted in subpars. (A) and (B) "organi- zation described in section 170(b)(1)(A)(ii)" for "insti. tution", and struck out the provisions following subpar. (B) defining educational institution. 1971-Pub. L. 92-178 increased the exemption from $650 to $675 with respect to taxable years beginning after Dec. 31, 1970, and before Jan. 1, 1972, and from $675 to $750 with respect to taxable years beginning after Dec. 31, 1971. 1969-Pub. L. 91-172, § 801(a)(1), (b)(1), (c)(1), (d)(1), increased the exemption from $600 to $625 with re- spect to taxable years beginning after Dec. 31, 1969 and before Jan. 1, 1971, from 1,625 to $650 for taxable years beginning after Dec. 31, 1970 and before Jan. 1, 1972, from $650 to $700 for axable years-beginning after Dec. 31, 1971, and befoie Jan. 1, 1973, and from $700 to $750 for taxable years beginning after Dec. 31, 1972. Subsecs. (b), (c), Pub. L. 9 i-172, § 941(b), substituted "if a joint return is not made by the taxpayer and his spouse" for "if a separate return is made by the tax- payer". EFFECTIVE DATE OF 1976 AMENDMENT Amendment by Pub. L. 94-455 applicable with re- spect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1971 AMENDMENT Section 201(a), (b) of Pub. L. 92-178 provided in part that the increase in exemption from $650 to $675 was effective with respect to taxable years 'aeginning after Dec. 31, 1970, and before Jan. 1, 1972, and from $675 to $750 was effective with respect to taxable years be- ginning after Dec. 31, 1971. EFFECTIVE DATE OF 1969 AMENDMENT Section 801(a)(1) of Pub. L. 91-172 provided in part that the increase in exemption from $600 to $625 is ef- fective with respect to taxable years beginning after Dec. 31, 1969, and before Jan. 1, 1971. Section 801(b)(1) of Pub. L. 91-172 provided in part that the increase in the exemption from $625 to $650 is effective with respect to taxable years beginning after Dec. 31, 1970, and before Jan. 1, 1972. Section 941(c) of Pub. L. 91-172 provided that: "The amendments made by subsections (a) [amending sec- tion 6012 of this title] and (b) [amending this section] shall apply to taxable years beginning after December 31, 1969." REPEALS Section 801(c)(1) and (d)(1) of Pub. L. 91-172, which provided for an increase in the personal exemption to $700, effective with respect to taxable years beginning after Dec. 31, 1971, and before Jan. 1, 1973, and to $750, effective with respect to taxable years beginning after Dec. 31, 1972, was repealed by section 201(c) of Pub. L. 92-178. CROSS REFERENCES Adjusted gross income minus standard deduction and deductions for personal exemptions as taxable income, see section 63 of this title. Adjustment in deduction for personal exemption on making return for short period, see section 443 of this title. Benefit of personal exemptions in tax-free covenant bond cases, see section 1451 of this title. Deduction for personal expmptions not allowed in self-employment partnership income, see section 1402 of this title. Nonresident alien entitled to benefits of this section, see section 874 of this title. Partnership not entitled to personal exemptions under this section, see section 703 of this title. Page 135
TITLE 26-INTERNAL REVENUE CODE SECTION RETERU TO IN OTHER SECTIONS This section Is referred to in sections 2, 21, 42, 43, 44A, 57, 63, 141, 143, 152, 153, 172. 443, 642, 703, 873, 874. 891. 904, 911, 931, 933. 1211, 1402, 1451, 3402. 6012, 6654 of this title. SECTION REFrmD TO IN D.C. CODE This section is referred to in sections 47-1564a, 47- 1567a of the District of Columbia Code. § 152. Dependent defined (a) General definition For purposes of this subtitle, the term "de- pendent" means any of the following individ- uals over half of whose support, for the calen- dar year in which the taxable year of the tax- payer begins, was received from the taxpayer (or is treated under subsection (W) or (e) as re- ceived from the taxpayer): (1) A son or daughter of the taxpayer, or a descendant of either, (2) A stepson or stepdaughter of the tax- payer, (3) A brother, sister, stepbrother, or stepsis- ter of the taxpayer, (4) The father or mother of the taxpayer, or an ancestor of either, (5) A stepfather or stepmother of the tax- payer, (6) A son or daughter of a brother or sister of the taxpayer, (7) A brother or sister of the father or mother of the taxpayer, (8) A son-in-law, daughter-in-law, father-in- law, mother-in-law, brother-in-law, or sister- in-law of the taxpayer, or (9) An individual (other than an individual who at any time during the taxable year was the spouse, determined without regard to sec- tion 143, of the taxpayer) who, for the tax- able year of the taxpayer, has as his principal place of abode the home of the taxpayer and is a member of the taxpayer's household. (b) Rules relating to general definition For purposes of this section- (1) The terms "brother" and "sister" in- clude a brother or sister by the halfblood. (2) In determining whether any of the rela- tionships specified in subsection (a) or para- graph (1) of this subsection exists, a legally adopted child of an individual (and a child who is a member of an individual's household, if placed with such individual by an autho- rized placement agency for legal adoption by such individual), or a foster child of an indi- vidual (if such child satisfies the require- ments of subsection (a)(9) with respect to such individual), shall be treated as a child of such individual by blood. (3) The term "dependent" does not include any individual who is not a citizen or national of the United States unless such individual is a resident of the United States or of a coun- try contiguous to the United States. The pre- ceding sentence shall not exclude from the definition of "dependent" any child of the taxpayer legally adopted by him, if, for the taxable year of the taxpayer, the child has as his principal place of abode the home of the taxpayer and is a member of the taxpayer's household, and if the taxpayer is a citizen or national of the United States. (4) A payment to a wife which is includible in the gross income of the wife under section 71 or 682 shall not be treated as a payment by her husband for the support of any depen- dent. (5) An individual is not a member of the taxpayer's household if at any time during the taxable year of the taxpayer the relation- ship between such individual and the taxpay- er is in violation of local law. (c) Multiple support agreements For purposes of subsection (a), over half of the support of an individual for a calendar year shall be treated as received from the taxpayer if- (1) no one person contributed over half of such support; (2) over half of such support was received from persons each of whom, but for the fact that he did not contribute over half of such support, would have been entitled to claim such individual as a dependent for a taxable year beginning in such calendar year; (3) the taxpayer contributed over 10 per- cent of such support; and (4) each person described in paragraph (2) (other than the taxpayer) who contributed over 10 percent of such support files a written declaration (in such manner and form as the Secretary may by regulations prescribe) that he will not claim such individual as a depen- dent for any taxable year beginning in such calendar year. (d) Special support test in case of students For purposes of subsection (a), in the case of any individual who is- (1) a son, stepson, daughter, or stepdaugh- ter of the taxpayer (within the meaning of this section), and (2) a student (within the meaning of section 151(e)(4)), amounts received as scholarships for study at an educational organization described in section 170(b)(1)(A)(ii) shall not be taken into account in determining whether such individual re- ceived more than half of his support from the taxpayer. (e) Support test in case of child of divorced parents, etc. (1) General rule If- (A) a child (as defined in section 151(e)(3)) receives over half of his support during the calendar year from his parents who are divorced or legally separated under a decree of divorce or separate mainte- nance, or who are separated under a written separation agreement, and (B) such child is in the custody of one or both of his parents for more than one-half of the calendar year, such child shall be treated, for purposes of subsection (a), as receiving over half of his support during the calendar year from the parent having custody for a greater portion of the calendar year unless he is treated, under the provisions of paragraph (2), as having received over half of his support for such year from the other parent (referred to Page 136 § 152
TITLE 26-INTERNAL REVENUE CODE in this subsection as the parent not having custody). (2) Special rule The child of parent described in paragraph (1) shall be treated as having received over half of his support during the calendar year from the parent not having custody if- (A)(i) the decree of divorce or of separate maintenance, or a written agreement be- tween the parents applicable to the taxable year beginning in such calendar year, pro- vides that the parent not having custody shall be entitled to any deduction allowable under section 151 for such child, and (11) such parent not having custody pro- vides at least $600 for the support of such child during the calendar year, or (B)(I) the parent not having custody pro- vides $1,200 or more for the support of such child (or if there is more than one such child, $1,200 or more for each of such chil- dren) for the calendar year, and (ii) the parent having custody of such child does not clearly establish that he pro- vided more for the support of such child during the calendar year than the parent not having custody. For the purposes of this paragraph, amounts expended for the support of a child or chil- dren shall be treated as received from the parent not having custody to the extent that such parent provided amounts for such sup- port. (3) Itemized statements required If a taxpayer claims that paragraph (2)(B) applies with respect to a child for a calendar year and the other parent claims that para- graph (2)(B)(i) is not satisfied or claims to have provided more for the support of such child during such calendar year than the tax- payer, each parent shall be entitled to re- ceive, under regulations to be prescribed by the Secretary, an itemized statement of the expenditures upon which the other parent's claim of support is based. (4) Exception for multiple-support agreement The provisions of this subsection shall not apply in any case where over half of the sup- port of the child is treated as having been re- ceived from a taxpayer under the provisions of subsection (c). (5) Regulations The Secretary shall prescribe such regula- tions as may be necessary to carry out the purposes of this subsection. (Aug. 16, 1954, ch. 736, 68A Stat. 43; Aug. 9, 1955, ch. 693, § 2, 69 Stat. 626; Sept. 2, 1958, Pub. L. 85-866, title I, § 4(a)-(c), 72 Stat. 1607; Sept. 23, 1959, Pub. L. 86-376, § 1(a), 73 Stat. 699; Aug. 31, 1967, Pub. L. 90-78, § 1, 81 Stat. 191; Dec. 30, 1969, Pub. L. 91-172, title IX, § 912(a), 83 Stat. 722; Oct. 27, 1972, Pub. L. 92- 580, § 1(a), 86 Stat. 1276; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(a)(24), (b)(7)(B), (8)(A), 1906(b)(13)(A), title XXI, § 2139(a), 90 Stat. 1767, 1794, 1834, 1932.) AMENDMENTS 1976-Subsec. (a)(9). Pub. L. 94-455, § 1901(b)(7)(B), substituted "section 143" for "section 153". Subsec. (a)(10). Pub. L. 94-455, § 1901(a)(24)(A), struck out subsec. (a)(10) relating to descendents of a taxpayer, who were members of the taxpayer's house- hold, before receiving institutional care. Subsec. (b)(3). Pub. L. 94-455, § 1901(a)(24)(B). among other changes struck out "of the Canal Zone, or of the Republic of Panama" following "country contiguous to the United States," and the provisions relating to children born or adopted in the Philip- pines. Subsec. (c)(4). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. d). Pub. L. 94-455, § 1901(b)(8)(A), substitut- ed "organization described in section 170(b)(1)(A)(ii)" for "institution (as defined in section 151(e)(4))". Subsec. (e)(2)(B)(i). Pub. L. 94-455, § 2139(a), substi- tuted "each" for "all". Subsec. (e)(3), (5). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". 1972-Subsec. (b)(3). Pub. L. 92-580 substituted "citi- zen or national of the United States" for "citizen of the United States" in two places. 1969-Subsec. (b)(2). Pub. L. 91-172 inserted refer- ence to foster children who satisfy the requirements of subsec. (a)(9) of this section. 1967-Subsec. (a). Pub. L. 90-78, § l(b), inserted "or (e)" following "subsection (c)". Subsec. (e). Pub. L. 90-78, § 1(a), added subsec. Ce). 1959-Subsec. (b)(2). Pub. L. 86-376 provided that a child who is a member of an individual's household if placed with such individual by an authorized place- ment agency for legal adoption by such individual shall be treated as a child by blood. 1958-Subsec. (a)(9). Pub. L. 85-866, § 4(a), inserted "(other than an individual who at any time during the taxable year was the spouse, determined without regard to section 153, of the taxpayer)". Subsec. (b)(3). Pub. L. 85-866, § 4(b), among other changes, eliminated provision that the term "depen- dent" does not include any individual who Is not a United States citizen unless such individual is a resi- dent of United States or of a contiguous country, or of Canal Zone or Panama, and added provision barring exclusion from definition of "dependent" any child of taxpayer, legally adopted by him, if, for taxable year of taxpayer, child's principal place of abode is taxpay- er's home and child is member of taxpayer's house- hold, if taxpayer is United States citizen. Subsec. (b)(5). Pub. L. 85-866, § 4(c), added subsec. (b)(5). 1955-Subsec. (b)(3). Act Aug. 9, 1955, substituted "January 1. 1956" for "July 5, 1946". EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (a)(9), deletion of subsec. (a)(10), and amendment of subsecs. (b)(3) and (d) by section 1901(a)(24), (b)(7)(B), (8)(A) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Section 2139(b) of Pub. L. 94-455 provided that: "The amendment made by this section [amending subsec. (e)(2)(B) of this section] shall apply to taxable years beginning after the date of the enactment of this Act [Oct. 4, 1976]." EFFECTIVE DATE OF 1972 AMENDMENT Section l(c) of Pub. L. 92-580 provided that: "The amendments made by subsections (a) [amending subsec. (b)(3) of this section] and (b) [amending sec- tion 873(b)(3) of this title] shall apply to taxable years beginning after December 31, 1971." EFFECTIVE DATE OF 1969 AMENDMENT Section 912(b) of Pub. L. 91-172 provided that: "The amendment made by subsection Ca) of this section [amending this section] shall apply to taxable years beginning after December 31, 1969." Page 137 § 152
§ 153 TITLE 26-INTERNA EFFECTIVE DATE OF 1967 AMENDMENT Section 2 of Pub. L. 90-78 provided that: "The amendments made by the first section of this Act [to subsecs. (a) and (e) of this section] shall apply with re- spect to taxable years beginning after December 31, 1966." EFFECTIVE DATE OF 1959 AMwDMEmT Section 1(b) of Pub. L. 86-376 provided that: "The amendment made by subsection (a) [to subsec. (b)(2) of this section] shall apply to taxable years beginning after December 31, 1958." EFFECTIVE DATE OF 1958 AMENDMENT Amendments of subsecs. (a)(9) and (b)(5) of this sec- tion by Pub. L. 85-866, applicable to taxable years be- ginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 1(c) of Pub. L. 85-866. set out as an Effective Date of 1958 Amendment note under section 165 of this title. Section 4(d) of Pub. L. 85-866 provided that: "The amendment made by subsection (b) [to subsec. (b)(3) of this section] shall apply with respect to taxable years beginning after December 31, 1957." EFFECTIVE DATE OF 1955 AMENDMENT Section 3(b) of act Aug. 9. 1955, provided that the amendment by section 2 of such act shall apply with respect to taxable years beginning after Dec. 31. 1953 and ending Aug. 16, 1954. CRoss REFERENCES Alimony payments by husband deductible, see sec- tion 215 of this title. Husband and wife, definition of, see section 7701 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 2, 44A. 5OB, 105, 120. 143, 151, 153, 170, 213. 7701 of this title; title 20 section 1232g; title 33 section 909. SECTION REFEiUED TO IN L.C. CODE This section is referred to in section 47-1551a of the District of Columbia Code. § 153. Cross references (1) For definitions of "husband" and "wife", as used in section 152(b)(4), see section 7701(a)(17). (2) For deductions of estates and trusts, in lieu of the exemptions under section 151, see section 642(b). (3) For exemptions of nonresident aliens, see section 873(b)(3). (4) For exemptions of citizens deriving incomt mainly from sources within possessions of the United States, see section 931(e). (5) For determination of marital status, see section 143. (Aug. 16, 1954, ch. 736, 68A Stat. 45, § 154; Nov. 13, 1966, Pub. L. 89-809, title I, § 103(c)(2), 80 Stat. 1551, renumbered and amended Oct. 4, 1976, Pub. L. 94-455, title XIX, 1901(b)(7)(A)(i), (C), 90 Stat. 1794.) PRIOR PROVISIONS A prior section 153, act Aug. 16, 1954, ch. 736, 68A Stat. 45, related to determination of marital status, was repealed by Pub. L. 94-455, title XIX, § 1901(b)(7)(A)(i), (d), Oct. 4, 1976, 90 Stat. 1794, 1803, applicable with respect to taxable years beginning after Dec. 31, 1976, and is now covered by section 143 of this title. AMENDmENTs 1976-Pub. L. 94-455, § 1901(b)(7)(C), added par. (5). 1966-Par. (3). Pub. L. 89-809 substituted "873(b)(3)" for "873(d)". LL REVENUE CODE Page 138 EFcTIvE DATE OF 1976 AMENDMENT Enactment of par. (5) by Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under sec- tion 2 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-809 applicable with re- spect to taxable years beginning after Dec. 31, 1966, see section 103(n)(1) of Pub. L. 89-809, set out as an Effective Date of 1966 Amendment note under section 871 of this title. PART VI-ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS Sec. 161. Allowance of deductions. 162. Trade or business expenses. 163. Interest. 164. Taxes. 165. Losses. 166. Bad debts. 167. Depreciation. (168. Repealed.] 169. Amortization of pollution control facilisies. 170. Charitable, etc., contributions and gifts. 171. Amortizable bond premium. 172. Net operating loss deduction. 173. Circulation expenditures. 174. Research and experimental expenditures. 175. Soil and water conservation expenditures. 176. Payments with respect to employees of certain foreign corporations. 177. Trademark and trade name expenditures. 178. Depreciation or amortization of improvements made by lessee on lessor's property. 179. Additional first-year depreciation allowance for small business. 180. Expenditures by farmers for fertilizer, etc. [181. Repealed.] 182. Expenditures by farmers for clearing land. 183. Activities not engaged in for profit. 184. Amortization of certain railroad rolling stock. 185. Amortization of railroad grading and tunnel bores. 186. Recoveries of damages for antitrust violations, etc. [187. Repealed.] 188. Amortization of certain expenditures for on-the- Job training and child care facilities. 189. Amortization of real property construction period interest and taxes. 190. Expenditures to remove architectural and trans- portation barriers to the handicapped and el- derly. 191. Amortization of certain rehabilitation expendi- tures for certified historic structures. AMENDMENTS 1976-Pub. L. 94-455, title II, § 201(b), title XIX, 9§ 1901(b)(11)(B), 1951(c)(2)(D), title XXI, §§ 2122(b)(1), 2124(a)(3)(A), Oct. 4, 1976, 90 Stat. 1527, 1795, 1841, 1915. 1917, struck out item 168 "Amortiza- tion of emergency facilities" and item 187 "Amortiza- tion of certain coal mine safety equipment" and added items 189, 190, and 191. 1971-Pub. L. 92-178, title III, § 303(c)(6), Dec. 10, 1971, 85 Stat. 522, added item 188. 1969-Pub. L. 91-172, title II, § 213(c)(1), title VII, §§ 704(b)(1), 705(b), 707(b), title IX, § 904(b), Dec. 30, 1969, 83 Stat. 572, 669. 674, 675, 712, substituted refer- ence to pollution control facilities for reference to grain storage facilities in item 169, and added items 183 to 187. 1964-Pub. L. 88-272, title II, § 203(a)(3)(D). Feb. 26, 1964, 78 Stat. 3i, deleted item 181 "Deduction for cer- tain unused investment credit". 1962-Pub. L. 87-834, 99 2(g)(3), 21(c), Oct. 16, 1962, 76 Stat. 973. 1064. added items 181. 182.
TITLE 26-INTERNAL REVENUE CODE 1960-Pub. L. 86-779, § 6(b), Sept. 14, 1960, 74 Stat. 1001, added item 180. 1958-Pub. L. 85-866 title I, § 15(b), title II, § 204(b), Sept. 2, 1958, 72 Stat. 1613, 1680, added items 178 and 179. 1956-Act June 29, 1956, ch. 464, § 4(b), 70 Stat. 406, added item 177. 1954-Act Sept. 1, 1954, ch. 1206, title II, § 210(b), 68 Stat. 1097, added item 176. PART REFERRED TO IN OTHER SECTIONS This part is referred to in sections 62, 241 of this title. § 161. Allowance of deductions In computing taxable income under section 63(a), there shall be allowed as deductions the items specified in this part, subject to the ex- ceptions provided in part IX (sec. 261 and fol- lowing, relating to items not deductible). (Aug. 16, 1954, ch. 736, 68A Stat. 45.) CROSS REWERENCES Adjusted gross income as gross income minus certain deductions, see section 62 of this title. Deductions of nonresident alien individuals, see sec- tion 873 of this title. § 162. Trade or business expenses (a) In general There shall be allowed as a deduction all the ordinary and necessary expenses paid or in- curred during the taxable year in carrying on any trade or business, including- (1) a reasonable allowance for salaries or other compensation for personal services ac- tually rendered; (2) traveling expenses (including amounts expended for meals and lodging other than amounts which are lavish or extravagant under the circumstances) while away from home in the pursuit of a trade or business; and (3) rentals or other payments required to be made as a condition to the continued use or possession, for purposes of the trade or busi- ness, of property to which the taxpayer has not taken or is not taking title or in which he has no equity. For purposes of the preceding sentence, the place of residence of a Member of Congress (in- cluding any Delegate and Resident Commis- sioner) within the State, congressional district, or possession which he represents in Congress shall be considered his home, but amounts ex- pended by such Members within each taxable year for living expenses shall not be deductible for income tax purposes in excess of $3,000. (b) Charitable contributions and gifts excepted No deduction shall be allowed under subsec- tion (a) for any contribution or gift which would be allowable as a deduction under section 170 were it not for the percentage limitations, the dollar limitations, or the requirements as to the time of payment, set forth in such section. (c) Illegal bribes, kickbacks, and other payments (1) Illegal payments to government officials or em- ployees No deduction shall be allowed under subsec- tion (a) for any payment made, directly or in- directly, to an official or employee of any gov- ernment, or of any agency or instrumentality of any government, if the payment consti- tutes an illegal bribe or kickback or, if the payment is to an official or employee of a for- eign government, the payment would be un- lawful under the laws of the United States if such laws were applicable to such payment and to such official or employee. The burden of proof in respect of the issue, for the pur- poses of this paragraph, as to whether a pay- ment constitutes an illegal bribe or kickback (or would be unlawful under the laws of the United States) shall be upon the Secretary to the same extent as he bears the burden of proof under section 7454 (concerning the burden of proof when the issue relates to fraud). (2) Other illegal payments No deduction shall be allowed under subsec- tion (a) for any payment (other than a pay- ment described in paragraph (1)) made, di- rectly or indirectly, to any person, if the pay- ment constitutes an illegal bribe, illegal kick- back, or other illegal payment under any law of the United States, or under any law of a State (but only if such State law is generally enforced), which subjects the payor to a criminal penalty or the loss of license or privi- lege to engage in a trade or business. For pu:- poses of this paragraph, a kickback includes a payment in consideration of the referral of a client, patient, or customer. The burden of proof in respect of the issue, for purposes of this paragraph, as to whether a payment con- stitutes an illegal bribe, illegal kickback, or other illegal payment shall be upon the Sec- retary to the same extent as he bears the burden of proof under section 7454 (concern- ing the burden of proof when the issue re- lates to fraud). (3) Kickbacks, rebates, and bribes under medicare and medicaid No deduction shall be allowed under subsec- tion (a) for any kickback, rebate, or bribe made by any provider of services, supplier, physician, or other person who furnishes items or services for which payment is or may be made under the Social Security Act, or in whole or in part out of Federal funds under a State plan approved under such Act, if such kickback, rebate, or bribe is made in connec- tion with the furnishing of such itenwm or ser- vices or the making or receipt of such pay- ments. For purposes of this paragraph, a kick- back includes a payment in consideration of the referral of a client, patient, or customer. (d) Capital contributions to Federal National Mort- gage Association For purposes of this subtitle, whenever the amount of capital contributions evidenced by a share of stock issued pursuant to section 303(c) of the Federal National Mortgage Association Charter Act (12 U.S.C., sec. 1718) exceeis the fair market value of the stock as of th. issue date of such stock, the initial holder f the stock shall treat the excess as ordinary arid nec- essary expenses paid or incurred during the taxable year in carrying on a trade or business. Page 139
TITLE 26-INTERNAL REVENUE CODE (e) Appearances, etc., with respect to legislation (1) In general The deduction allowed by subsection (a) shall include all the ordinary and necessary expenses (including, but not limited to, travel- ing expenses described in subsection (a)(2) and the cost of preparing testimony) paid or incurred during the taxable year in carrying on any trade or business- (A) in direct connection with appearances before, submission of statements to, or sending communications to, the commit- tees, or individual members, of Congress or of any legislative body of a State, a posses- sion of the United States, or a political sub- division of any of the foregoing with respect to legislation or proposed legislation of direct interest to the taxpayer, or (B) in direct connection with communica- tion of information between the taxpayer and an organization of which he is a member with respect to legislation or pro- posed legislation of direct interest to the taxpayer and to such organization, and that portion of the dues so paid or in- curred with respect to any organization of which the taxpayer is a member which is at- tributable to the expenses of the activities de- scribed in subparagraphs (A) and (B) carried on by such organization. (2) Limitation The provisions of paragraph (1) shall not be construed as allowing the deduction of any amount paid or incurred (whether by way of contribution, gift, or otherwise)- (A) for participation in, or intervention in, any political campaign on behalf of any candidate for public office, or (B) in connection with any attempt to in- fluence the general public, or segments thereof, with respect to legislative matters, elections, or referendums. (f) Fines and penalties No deduction shall be allowed under subsec- tion (a) for any fine or similar penalty paid to a government for the violation of any law. (g) Treble damage payments under the antitrust laws If in a criminal proceeding a taxpayer is con- victed of a violation of the antitrust laws, or his plea of guilty or nolo contendere to an indict- ment or information charging such a violation is entered or accepted in such a proceeding, no deduction shall be allowed under subsection (a) for two-thirds of any amount paid or incurred- (1) on any Judgment for damages entered against the taxpayer under section 4 of the Act entitled "An Act to supplement existing laws against unlawful restraints and monopo- lies, and for other purposes", approved Octo- ber 15, 1914 (commonly known as the Clayton Act), on account of such violation or any re- lated violation of the antitrust laws which oc- curred prior to the date of the final judgment of such conviction, or (2) in settlement of any action brought under such section 4 on account of such viola- tion or related violation. The preceding sentence shall not apply with re- spect to any conviction or plea before January 1, 1970, or to any conviction or plea on or after such date in a new trial following an appeal of a conviction before such date. (h) Cross reference (1) For special rule relating to expenses in connection with subdividing real property for sale, see section 1237. (2) For special rule relating to the treatment of pay. ments by a transferee of a franchise, trademark, or trade name, see section 1253. (Aug. 16, 1954, ch. 736, 68A Stat. 45; Sept. 2, 1958, Pub. L. 85-866, title I, § 5(a), 72 Stat. 1608; Sept. 14, 1960, Pub. L. 86-779, §§ 7(b), 8(a), 74 Stat. 1002, 1003; Oct. 16, 1962, Pub. L. 87-834, §§ 3(a), 4(b), 76 Stat. 973, 976; Dec. 30, 1969, Pub. L. 91-172, title V, § 516(c)(2)(A), title IX, §902(a), (b), 83 Stat. 648, 710; Dec. 10, 1971, Pub. L. 92-178, title III, §301(a), 85 Stat. 525; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§1901(c)(4), 1906(b)(13)(A), 90 Stat. 1803, 1834.) REFERENCES IN TEXT The Social Security Act, referred to in subsec. (c)(3), is act Aug. 14, 1935, ch. 531, 49 Stat. 620, as amended, which is classified generally to chapter 7 § 301 et seq.) of Title 42, The Public Health and Welfare. For com- plete classification of this Act to the Code, see section 1305 of Title 42 and Tables volume. The antitrust laws, referred to in subsec. (g), are classified generally to section 1 et seq. of Title 15, Commerce and Trade. Section 4 of the Clayton Act, referred to in subsec. (g)(1), is classified to section 15 of Title 15, Commerce and Trade. AMENDMnrr S 1976-Subsec. (a). Pub. L. 94-455, § 1901(c)(4), struck out reference to Territory in provisions following par. (3). Subsee. (c). Pub. L. 94-455, § 1906(b)(13)(A), struck out in par.j. (1) and (2) "or his delegate" following "Secretary". 1971-Subsec. (c). Pub. L. 92-178, § 310(a)(2), substi- tuted "Illegal bribes, kickbacks, and other payments" for "Bribes and illegal kickbacks" as subsec. heading. Subsec. (c)(2). Pub. L. 92-178, § 310(a)(1), substituted provisions respecting "Other illegal payments" for former provisions on "Other bribes or kickbacks" reading "If in a criminal proceeding a taxpayer is con- victed of making a payment (other than a payment de- scribed in paragraph (1) which is an illegal bribe or kickback, or his plea of guilty or nolo contendere to an indictment or information charging the making of such a payment is entered or accepted in such a pro- ceeding, no deduction shall be allowed under subsec- tion (a) on account of such payment or any related payment made prior to the date of the final judgment in such proceeding." Subsec. (c)(3). Pub. L. 92-178, §310(a)(1), substituted provisions respecting kickbacks, rebates, and bribes under medicare and medicaid for former statute of limitations provisions. 1969-Subsec. (c). Pub. L. 91-172, § 902(b), designated existing provisions as par. (1), and in par. (1) so desig- nated, extended the applicability of nondeductible ex- penses for payments to any official or employee of any government, or of any agency or instrumentality of any government, and added pars. (2) and (3). Subsec. (f). Pub. L. 91-172, § 902(a). added subsec. (f). Former subsec. (f) redesignated (h). Subsec. (g). Pub. L. 91-172, §902(a), added subsec. (g). Subsec. (h). Pub. L. 91-172. H§516(c)(2)(A), 902(a), re- designated former subsec. (f) as (h) and, in subsec. (h) as so redesignated, substituted "() For" for "For" and added reference to section 1253 for special rule relat- ing to the treatment of payments by a transferee of a franchise, trademark, or trade name. § 162 Page 140
TITLE 26-INTERNAL REVENUE CODE Pub. L. 91-172, § 902(a), redesignated former subsec. (f) as (h). 1962-Subsec. (a)(2). Pub. L. 87-834, § 4(b), substitut- ed "(including amounts expended for meals and lodg- ing other than amounts which are lavish or extrava- gant under the circumstances)" for "including the entire amount expended for meals and lodging)". Subsec. (e). Pub. L. 87-834, § 3(a), added subsec. (e), and redesignated former subsec. (e) as (f). Subsec. (f). Pub. L. 87-834, § 3(a), redesignated former subsec. (e) as (f). 1960-Subsec. (b). Pub. L. 86-779, § 7(b), nserted "the dollar limitations," following "the prcentage limitations,". Subsec. (d). Pub. L. 86-779, § 8(a), added subsec. (d). Former subsec. (d) redesignated (e). Subsec. (e). Pub. L. 86-779, §t .ka), redesignated former subsec. (d) as (e). 1958-Subsee. (c). Pub. L. 85-866, § 5(a), added subsec. (c) and redesignated former subsec. (c) and (d). Subsec. d). Pub. L. 85-866, § 5(a), redesignated former subsec. (c) as (d). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (a) by section 1901(c)(4) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1971 AMENDMENT Section 310(b) of Pub. L. 92-178 provided that: "The amendments made by subsection (a) (to subsec. (c) heading and subsec. (c)(2) and (3) of this section] shall apply with respect to payments after December 30, 1969, except that section 162(c)(3) of the Internal Rev- enue Act of 1954 (as added by subsection (a)) (subsec. (c)(3) of this section] shall apply only with respect to kickbacks, rebates, and bribes payment of which is made on or after the date of the enactment of this Act [Dec. 10, 1971]." EFFECTIVE DATE OF 1969 AMENDMENT Section 902(c) of Pub. L. 91-172 provided that: "Sec- tion 162(f) of the Internal Revenue Code of 1954 [subsec. (f) of this section] (as added by subsection (a)) shall apply to all taxable years to which such Code [this title] applies. Section 162(g) of such Code (subsec. (g) of this section] (as added by subsection (a)) shall apply with respect to amounts paid or in- curred after December 31, 1969. Section 162(c)(1) of such Code (subsec. (c)(1) of this section] (as amended by subsection (b)) shall apply to all taxable years to which such Code applies. Sections 162(c)(2) and (3) of such Code [subsec. (c)(2) and (3) of this section] (as amended by subsection (b)) shall apply with respect to payments made after the date of the enactment of this Act [Dec. 30, 1969]." Amendment by section 516(c)(2)(A) of Pub. L. 91-172 applicable to transfers after Dec. 31, 1969, see section 516(d)(3) of Pub. L. 91-172, set out, as an Effective Date of 1969 Anendment note under section 1001 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Section 4(c) of Pub. L. 87-834 provided that: "The amendments made by this section [amending subsec. (a) of this section and adding section 274 of this title] shall apply with respect to taxable years ending after December 31, 1962, but only in respect of periods after such date." Section 3(b) of Pub. L. 87-834 provided that: "The amendments made by this section [adding subsec. (e) and redesignating former subsec. (e) as (f)] shall apply to taxable years beginning aftir December 31, 1962." EFFECTIVE DATE OF 1960 AMENDMENT Section 7(c) of Pub. L. 86-779 provided that: "The amendments made by subsections (a) and (b) [to sec- tion 170 of this title and subsec. (b) of this section] shall apply with respect to taxable years beginning after December 31, 1959." Section 8(d) of Pub. L. 86-779 provided that: "The amendments made by subsections Ca), (b), and (c) [adding subsec. (d) of this section and section 1054 of this title and amending table of sections for Part IV by adding item 1054 and numbering former item 1054 as 1055] shall apply with respect to taxable years be- ginning after December 31, 1959." EFFECTIVE DATE OF 1958 AMENDMENT Section 5(b) of Pub. L. 85-866 provided that: "The amendment made by subsection Ca) (to subsecs. (c) and (d) of this section] shall apply only with respect to expenses paid or incurred after the date of the en- actment of this Act [Sept. 2, 1958]. The determination as to whether any expense paid or incurred on or before the date of the enactment of this Act [Sept. 2, 1958] shall be allowed as a deduction shall be made as if this section had not been enacted and without infer- ence drawn from the fact that this section is not made applicable with respect to expenses paid or incurred on or before the date of the enactment of this Act (Sept. 2, 1958]." STATE LEGISLATORS' TRAVEL EXPENSES AWAY FROM HOME Section 604 of Pub. L. 94-455 provided that: "(a) In general.-For purposes of section 162(a) of the Internal Revenue Code of 1954 [subsec. (a) of this section], in the case of any individual who was a State legislator at any time during any taxable year begin- ning before January 1, 1976, and who elects the appli- cation of this section, for any period during such a taxable year in which he was a State legislator- "(1) the place of residence of such individual within the legislative district which he represented shall be considered his home, and "(2) he shall be deemed to have expended for living expenses (in connection with his trade or busi- ness as a legislator) an amount equal to the sum of the amounts determined by multiplying each legisla- tive day of such individual during the taxable year by the amount generally allowable with respect to such day to employees of the executive branch of the Federal Government for per diem while away from home but serving in the United States. "(b) Legislative days.-For purposes of subsection (a), a legislative day during any taxable year for any individual shall be any day during such year on which (1) the legislature was in session (including any day in which the legislature was not in session for a period of 4 consecutive days or less), or (2) the legislature was not in session but the physical presence of the individ- ual was formally recorded at a meeting of a committee of such legislature. "(c) Limitation.-The amount taken into account as living expenses attributable to a trade or business as a State legislator for any taxable year under an election made under this section shall not exceed the amount claimed for such purpose under a return (or amended return) filed before May 21, 1976. "(d) Making and effect of election.-An election under this section shall be made at such time and in such manner as the Secretary of the Treasury or his delegate shall by regulations prescribe. Any such elec- tion shall apply to all taxable years beginning before January 1, 1976, for which the period for assessing or collecting a deficiency has not expired before the date of the enactment of this Act (Oct. 4, 1976]." DENIAL OF DEDUCTION FOR AMOUNTS PAID OR INCURRED ON JUDGMENTS IN SUITS BROUGHT TO RECOVER PRICE INCREASES IN PURCHASE OF NEW PRINCIPAL RESIDENCE No deductions to be allowed in computing taxable income for two-thirds of any amount paid or incurred on a judgment entered against any person in a suit brought under section 208(b) of Pub. L. 94-12, see sec- tion 208(c) of Pub. L. 94-12, title II, Mar. 29, 1975, 89 Stat. 35, set out as a note under section 44 of this title. Page 141 § 162
TITLE 26-INTERNAL REVENUE CODE DEDUCTIBILITY OF AccRUED VACATION PAY Section 97 of Pub. L. 85-866, as amended by Pub. L. 86-496, §2, June 8, 1960, 74 Stat. 164; Pub. L. 88-153, Oct. 17, 1963, 77 Stat. 272; Pub. L. 88-554, 51, Aug. 31, 1964, 78 Stat. 761; Pub. L. 89-692, Oct. 15, 1966, 80 Stat. 1025; Pub. L. 91-172, title IX, § 903, Dec. 30, 1969, 83 Stat. 711; Pub. L. 92-580, §3, Oct. 27, 1972, 86 Stat. 1276, provided that deductions for accrued vacation pay under this section would not be denied for any taxable year ending before Jan. 1, 1973, so long as the employee at the time of accrual of pay has performed the necessary qualifying service under an appropriate plan. INVESTIGATION OF, AND REPORTS ON, TREATMENT or ENTERTAINMENT AND CERTAIN OTHER ExPENsEs Pub. L. 86-564, title III, § 301, June 30, 1960, 74 Stat. 291, authorized the Joint Committee on Internal Rev- enue Taxation to investigate and report on the use of entertainment and certain other expense deductions to the 87th Congress and authorized the Secretary of the Treasury to report to the 87th Congress on the en- forcement program of the Internal Revenue Service relating to such deductions. FILING OF CLAIMS FOR REFUNDS OF OVERPAYMENTS Extension of time for filing of claims for refunds or credit of overpayments of income tax resulting from application of this section, see section 96 of Pub. L. 85- 866, set out as a note under section 6511 of this title. CROSS REFERENCES Adjusted gross income as gross income minus, among others, trade and business deductions, see section 62 of this title. Capital expenditures not deductible, see section 263 of this title. Charitable contributions and gifts deductible, see section 170 of this title. Corporate organizational expenses as deferred ex- penses, see section 248 of this title. Employee stock options, disallowance of deduction under this section, see section 421 of this title. Employer contributions to employees' trust or annu- ity plan negotiated during government operation as deductible under this section, see section 404 of this title. Nontrade or nonbusiness expenses deductible, see section 212 of this title. Personal, living and family expenses not deductible, see section 262 of this title. Taxable year deductions to be taken, see section 461 of this title. Trade or business defined, see section 7701 of this title. SECTION REFERR-ED TO IN OTHER SECTIONS This section is referred to in sections 46, 57, 83, 114, 163, 183, 263, 267, 274, 404, 421, 463, 542, 543, 545, 556, 691, 707, 832, 952, 964, 995, 1054, 1253, 1402 of this title; title 2 section 31c; title 15 section 78kkk; title 42 section 403. § 163. Interest (a) General rule There shall be allowed as a deduction all in- terest paid or accrued within the taxable year on indebtedness. (b) Installment purchases where interest charge is not separately stated (1) General rule If personal property or educational services are purchased under a contract- (A) which provides that payment of part or all of the purchase price is to be made in installments, and (B) in which carrying charges are sepa- rately stated but the interest charge cannot be ascertained, then the payments made during the taxable year under the contract shall be treated for purposes of this section as if they included in- terest equal to 6 percent of the average unpaid balance under the contract during the taxable year. For purposes of the preceding sentence, the average unpaid balance is the sum of the unpaid balance outstanding on the first day of each month beginning during the taxable year, divided by 12. For purposes of this paragraph, the term "educational ser- vices" means any service (including lodging) which is purchased from an educational orga- nization described in section 170(b)(1)(A)(ii) and which is provided for a student of such organization. (2) Limitation In the case of any contract to which para- graph (1) applies, the amount treated as in- terest for any taxable year shall not exceed the aggregate carrying charges which are properly attributable to such taxable year. (c) Redeemable ground rents For purposes of this subtitle, any annual or periodic rental under a redeemable ground rent (excluding amounts in redemption thereof) shall be treated as interest on an indebtedness secured by a mortgage. (d) Limitation on interest on investment indebtedness (1) In general In the case of a taxpayer other than a cor- poration, the amount of investment interest (as defined in paragraph (3)(D)) otherwise al- lowable as a deduction under this chapter shall be limited, in the following order, to- (A) $10,000 ($5,000, in the case of a sepa- rate return by a married individual), plus (B) the amount of the net investment income (as defined in paragraph (3)(A)), plus the amount (if any) by which the de- ductions allowable under this section (deter- mined without regard to this subsection) and sections 162, 164(a) (1) or (2), or 212 at- tributable to property of the taxpayer sub- ject to a net lease exceeds the rental income produced by such property for the taxable year. In the case of a trust, the $10,000 amount specified in subparagraph (A) shall be zero. (2) Carryover of disallowed investment interest The amount of disallowed investment inter- est for any taxable year shall be treated as in- vestment interest paid or accrued in the suc- ceeding taxable year. (3) Definitions For purposes of this subsection- (A) Net investment income The term "net investment income" means the excess of investment income over in- vestment expenses. If the taxpayer has in- vestment interest for the taxable year to which this subsection (as in effect before the Tax Reform Act of 1976) applies, the amount of the net investment income taken into account under this subsection shall be § 163 Page 142
TITLE 26-INTERNAL REVENUE CODE the amount of such income (determined without regard to this sentence) multiplied by a fraction the numerator of which is the excess of the investment interest for the taxable year over the investment interest to which such prior provision applies, and the denominator of which is the investment in- terest for the taxable year. (B) Investment income The term "investment income" means- (1) the gross income from interest, divi- dends, rents, and royalties, (ii) the net short-term capital gain at- tributable to the disposition of property held for investment, and (iii) any amount treated under sections 1245, 1250, and 1254 as ordinary income, but only to the extent such income, gain, and amounts are not derived from the con- duct of a trade or business. (C) Investment expenses The term "investment expenses" means the deductions allowable under sections 162, 164(a)(1) or (2), 166, 167, 171, 212, or 611 di- rectly connected with the production of in- vestment income. For purposes of this sub- paragraph, the deduction allowable under section 167 with respect to any property may be treated as the amount which would have been allowable had the taxpayer de- preciated the property under the straight line method for each taxable year of its useful life for which the taxpayer has held the property, and the deduction allowable under section 611 with respect to any prop- erty may be treated as the amount which would have been allowable had the taxpay- er determined the deduction under section 611 without regard to section 613 for each taxable year for which the taxpayer has held the property. (D) Investment interest The term "investment interest" means in- terest paid or accrued on indebtedness in- curred or continued to purchase or carry property held for investment. (E) Disallowed investment interest The term "disallowed investment inter- est" means with respect to any taxable year, the amount not allowable as a deduc- tion solely by reason of the limitation in paragraph (1). (4) Special rules (A) Property subject to net lease For purposes of this subsection, property subject to a lease shall be treated as proper- ty held for investment, and not as property used in a trade or business, for a taxable year, if- (I) for such taxable year the sum of the deductions of the lessor with respect to such property which are allowable solely by reason of section 162 (other than rents and reimbursed amounts with respect to such property) is less than 15 percent of the rental income produced by such prop- erty, or (ii) the lessor is either guaranteed a specified return or is guaranteed in whole or in part against loss of income. (B) Partnerships In the case of a partnership, each partner shall, under regulations prescribed by the Secretary, take into account separately his distributive share of the partnership's in- vestment interest and the other items of income and expense taken into account under this subsection. (C) Shareholders of electing small business cor. porations In the case of an electing small business corporation (as defined in section 1371(b)), the investment interest paid or accrued by such corporation and the other items of income and expense which would be taken into account If this subsection applied to such corporation shall, under regulations prescribed by the Secretary, be treated as investment interest paid or accrued by the shareholders of such corporation and as items of such shareholders, and shall be ap- portioned pro rata among such sharehold- ers in a manner consistent with section 1374(c)(1). (D) Construction interest For purposes of this subsection, interest paid or accrued on indebtedness incurred or continued in the construction of property to be used in a trade or business shall not be treated as investment interest. (5) Exceptions This subsection shall not apply with respect to investment interest, investment income, and investment expenses attributable to a specific item of property, if the indebtedness with respect to such property- (A) is for a specified term, and (B) was incurred before December 17, 1969, or is incurred after December 16, 1969, pursuant to a written contract or commit- ment which, on such date and at all times thereafter prior to the incurring of such in- debtedness, is binding on the taxpayer. For taxable years beginning after December 31, 1975, this paragraph shall be applied on an allocation basis rather than a specific item basis. (6) Real property leases For purposes of paragraph (4)(A)- (A) if a parcel of real property of the tax- payer is leased under two or more leases, paragraph (4)(A)(i) shall, at the election of the taxpayer, be applied by treating all leased portions of such property as subject to a single lease; and (B) at the election of the taxpayer, para- graph (4)(A)(i) shall not apply with respect to real property of the taxpayer which has been in use for more than 5 years. An election under subparagraph (A) or (B) shall be made at such time and in such manner as the Secretary prescribes by regula- tions. Page 143 § 163
TITLE 26-INTERNAL REVENUE CODE (7) Special rule where taxpayer owns 50 percent or more of enterprise (A) General rule In the case of any 50 percent owned cor- poration or partnership, the $10,000 figure specified in paragraph (1) shall be increased by the lesser of- (i) $15,000, or (ii) the interest paid or accrued during the taxable year on investment indebted- ness incurred or continued in connection with the acquisition of the interest in such corporation or partnership. In the case of a separate return by a mar- ried individual, $7,500 shall be substituted for the $15,000 figure in clause (1). (B) Ownership requirements This paragraph shall apply with respect to indebtedness only if the taxpayer, his spouse, and his children own 50 percent or more of the total value of all classes of stock of the corporation or 50 percent or more of all capital interests in the partner- ship, as the case may be. (e) Cross references (1) For disallowance of certain amounts paid in con- nection with insurance, endowment, or annuity con- tracts, see section 264. (2) For disallowance of deduction for interest relating to tax-exempt income, see section 265(2). (3) For disallowance of deduction for carrying charges chargeable to capital account, see section 266. (4) For disallowance of interest with respect to trans. actions between related taxpayers, see section 267. (5) For treatment of redeemable ground rents and real property held subject to liabilities under redeemable ground rents, see section 1055. (Aug. 16, 1954, ch, 736, 68A Stat. 46; Apr. 10, 1963, Pub. L. 88-9, § l(a), (c), 77 Stat. 6, 7; Feb. 26, 1964, Pub. L. 88-272, title II, § 224(c), 78 Stat. 79; Dec. 30, 1969, Pub. L. 91-172, title II, § 221(a), 83 Stat. 574; Dec. 10, 1971, Pub. L. 92- 178, title III, § 304(a)(2), (b)(2), (d), 85 Stat. 523, 524; Oct. 4, 1976, Pub. L. 94-455, title II, §§ 205(c)(3), 209(a), title XIX, §§ 1901(b)(3)(K), (8)(C), 1906(b)(13)(A), 90 Stat. 1535, 1542, 1543, 1793, 1794, 1834.) REFERENCES IN TEXT The Tax Reform Act of 1976, referred to in subsec. (d)(3)(A), is Pub. L. 94-455, Oct. 4, 1976, 90 Stat. 1520. For complete classification of this Act to the Code, see Tables volume. CODIFICATION Amendment by section 205(c)(3) of Pub. L. 94-455 has been executed to subsec. (d)(3)(B)(iii) as the prob- able intent of Congress. Amendment to subsec. (d)(5) by Pub. L. 94-455, § 1901(b)(3)(K), which substituted "ordinary income" for "gain from the sale or exchange of property which is neither a capital asset nor property described in sec- tion 1231" was not executed in view of the striking out of subsec. (d)(5) by Pub. L. 94-455. § 209(a)(4) and the redesignation of subsec. (d)(6) as (d)(5). AMENDMENTS 1976-Subsec. (b)(l). Pub. L. 94-455, § 1901(b)(8)(C), substituted "organization described in section 170(b)(1)(A)(i) and which is provided for a student of such organization" for "institution (as defined in sec- tion 151(e)(4)) and which is provided for a student of such institution". Subsec. (d)(1). Pub. L. 94-455, § 209(a)(1), among other changes, substituted in subpar. (A) "$10,000" for "$25,000" and "$5,000" for "$12,500", struck out subpar. (C) relating to the excess of net long-term cap- ital gain over short-term capital loss and subpar. (D) relating to the excess of investment interest over amounts in subpar. (A), and in provisions following lettered paragraphs substituted "$10,000" for "$25,000" and struck out provisions relating to the de- termination of the amount referred to in subpar. (C). Subsec. (d)(2). Pub. L. 94-455, § 209(a)(1), among other changes, struck out provisions relating to the limitation on the amount of interest allowable by this par. and to reduction of disallowed investment interest for capital gain deduction purposes. Subsec. (d)(3)(A). Pub. L. 94-455, § 209(a)(2), added provision relating to determination of the amount of net investment income where taxpayer has investment interest for taxable year to which this subsection ap- plies. Subsec. (d)(3)(B)(iii). Pub. L. 94-455, §§ 205(c)(3), 1901(b)(3)(K), substituted "1250, and 1254" for "and 1250", and "ordinary income" for "gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231". Subsec. (d)(3)(E). Pub. L. 94-455, § 209(a)(3), substi- tuted "limitation in paragraph (1)" for "limitations in paragraphs (1) and (2)(A)". Subsec. (d)(4). Pub. L. 94-455, § 1906(b)(13)(A), struck out in subpars. (B) and (C) "or his delegate" following "Secretary". Subsec. (d)(5). Pub. L. 94-455, § 209(a) (4), (5), rede- signated former subsec. (d)(6) as (d)(5), and as so rede- signated, added provision relating to the application of this paragraph after Dec. 31, 1975 on an allocation basis rather than a specific item basis. Former subsec. (d)(5), relating to capital gains treatment of invest- ment interest, was struck out. Subsec. (d)(6). Pub. L. 94-455, §§ 209(a)(4), 1906(b)(13)(A), redesignated former subsec. (d)(7) as (d)(6), and as so redesignated, struck out in provision following subpar. (B) "or his delegate" following "Sec- retary". Former subsec. (d)(6) redesignated (d)(5). Subsec. (d)(7). Pub. L. 94-455, § 209(a)(6), added subsec. (d)(7). Former subsec. (d)(7) redesignated (d)(6). 1971-Subsec. (d)(1)(B). Pub. L. 92-178, § 304(b)(2), inserted following "plus" the following words "the amount (if any) by which the deductions allowable under this section (determined without regard to this subsection) and sections 162, 164(a)(1) or (2), or 212 at- tributable to property of the taxpayer subject to a net lease exceeds the rental income produced by such property for the property year, plus". Subsec. (d)(3)(C). Pub. L. 92-178, § 304(d), included reference to section 162. Subsec. (d)(4)(A)(i). Pub. L. 92-178, § 304(a)(2)(A), in- serted "of the lessor" following "deductions" and par- enthetical phrase "(other than rents and reimbursed amounts with respect to such property)" following "section 162". Subsec. (d)(7). Pub. L. 92-178, § 304(a)(2)(B), added par. (7). 1969-Pub. L. 91-172 added subsec. (d). Former subsec. (d) was redesignated as (e). 1964-Subsec. (b)(1). Pub. L. 88-272 included the purchase of educational services, and defined "educa- tional services". 1963-Subsec. (c). Pub. L. 88-9, § l(a), added subsec. (c). Former subsec. (c) redesignated (d). Subsec. (d). Pub. L. 88-9, § l(a), (c), redesignated former subsec. (c) as (d), and added par. (5). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (b)(1) and (d)(3)(B)(iii) by section 1901(b)(8)(C) and (3)(K) of Pub. L. 94-455 ap- plicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Section 209(b) of Pub. L. 94-455 provided that: Page 144 § 163
TITLE 26-INTERNAL REVENUE CODE "(1) In general.-Except as provided in paragraph (2), the amendments made by subsection (a) [to sub- secs. (d)(1), (2), (3)(A), (E), (5) to (7) of this section] shall apply to taxable years beginning after December 31, 1975. "(2) Indebtedness incurred before September 11, 1975.-In the case of indebtedness attributable to a specific item of property which- "(A) is for a specified term, and "(B) was incurred before September 11, 1975, or is Incurred after September 10, 1975, pursuant to a written contract or commitment which on Septem- ber 11, 1975, and at all times thereafter before the incurring of such indebtedness, is binding on the taxpayer, the amendments made by this section shall not apply, but section 163(d) of the Internal Revenue Code of 1954 [subsec. (d) of this section] (as in effect before the enactment of this Act [Oct. 4, 1976]) shall apply. For purposes of the preceding sentence, so much of the net Investment income (as defined in section 163(d)(3)(A) of such Code) [subsec. (d)(3)(A) of this section] for any taxable year as is not taken into ac- count under section 163(d) of such Code, as amended by this Act [subsec. (d) of this section], by reason of the last sentence of section 163(d)(3)(A) of such Code [subsec. (d)(3)(A) of this section], shall be taken into account for purposes of applying such section [this section] as in effect before the date of enactment of this Act [Oct. 4, 1976] with respect to interest on in- debtedness referred to in the preceding sentence." Amendment of subsec. (d)(3)(B)(ii) by section 205(c)(3) of Pub. L. 94-455 applicable with respect to taxable years ending after Dec. 31, 1975, see section 205(e) of Pub. L. 94-455, set out as an Effective Date note under section 1254 of this title. EFFECTIVE DATE OF 1971 AMENDMENT Amendment of subsec. (d)(1)(B), (3)(C), and (4)(A)(i) and enactment of subsec. (d)(7) by Pub, L. 92-178 ap- plicable to taxable years beginning after Dec. 31, 1971, see section 304(e) of Pub. L. 92-178, set out as an Ef- fective Date of 1971 Amendment note under section 57 of this title. ErFEcTIvE DATE OF 1969 AMENDMENT Section 221(b) of Pub. L. 91-172 provided that: "The amendments made by this section [adding subsec. (d) of this section] shall apply to taxable years beginning after December 31, 1971." EFFECTIvE DATE OF 1964 AMENDMENT Section 224(d) of Pub. L. 88-272 provided that: "The amendments made by subsections (a) [adding section 483 of this title] and (b) [to the analysis preceding sec- tion 481 of this title] shall apply to payments made after December 31, 1963, on account of sales or ex- changes of property occurring after June 30, 1963, other than any sale or exchange made pursuant to a binding written contract (including an irrevocable written option) entered into before July 1, 1963. The amendinents made by subsection (c) [to subsec, (b)(1) of this section] shall apply to payments made during taxable years beginning after December 31, 1963." EFcTivE DATE OF 1963 AMENDmENT Subsec. (c) effective as of Jan. 1, 1962, and applicable with respect to taxable years ending on or after such date, see section 2 of Pub. L. 88-9, set out as an Effec- tive Date note under section 1055 of this title. CROSS REFERENCES Expenses and interest relating to tax-exempt income, see section 265 of this title. Interest as income, see section 61 of this title. Interest deductions- Amortizable bond premium, see section 171 of this title. Cooperative housing corperation, tenant-stock- holder, see section 216 of tho title. Local benefit assessments, see section 164 of this title. Recipients of income in respect of decedents, see section 691 of this title. Tax-exempt income, see section 265 of this title. Tax-free, see section 284 of this title. Unpaid, see section 267 of this title. Taxable year deduction to be taken, see section 461 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 216, 267, 483, 691, 703, 809, 832 of this title. § 164. Taxes (a) General rule Except as otherwise provided in this section, the following taxes shall be allowed as a deduc- tion for the taxable year within which paid or accrued: (1) State and local, and foreign, real proper- ty taxes. (2) State and local personal property taxes. (3) State and local, and foreign, income, war profits, and excess profits taxes. (4) State and local general sales taxes. (5) State and local taxes on the sale of gaso- line, diesel fuel, and other motor fuels. In addition, there shall be allowed as a deduc- tion State and local, and foreign, taxes not de- scribed in the preceding sentence which are paid or accrued within the taxable year in car- rying on a trade or business or an activity de- scribed in section 212 (relating to expenses for production of income). (b) Definitions and special rules For purposes of this section- (1) Personal property taxes The term "personal property tax" means an ad valorem tax which is imposed on an annual basis in respect of personal property. (2) General sales taxes (A) In general The term "general sales tax" means a tax imposed at one rate in respect of the sale at retail of a broad range of classes of items. (B) Special rules for food, etc. In the case of items of fopd, clothing, medical supplies, and motor vehicles- (I) the fact that the tax does not apply in respect of some or all of such items shall not be taken into account in deter- mining whether the tax applies in respect of a broad range of classes of items, and (i) the fact that the rate of tax applica- ble in respect of some or all of such items is lower than the general rate of tax shall not be taken into account in determining whether the tax is imposed at one rate. (C) Items taxed at different rates Except in the case of a lower rate of tax applicable in respect of an item described in subparagraph (B), no deduction shall be al- lowed under this section for any general sales tax imposed in respect of an item at a rate other than the general rate of tax. (D) Compensating use taxes A compensating use tax in respect of an item shall be treated as a general sales tax. Page 145 § 164
TITLE 26-INTERNAL REVENUE CODE For purposes of the preceding sentence, the term "compensating use tax" means, in re- spect of any item, a tax which-- (I) is imposed on the use, storage, or consumption of such item, and (ii) is complementary to a general sales tax, but only if a deduction is allowable under subsection (a)(4) in respect of items sold at retail in the taxing jurisdiction which are similar to such item. (E) Special rules for motor vehicles In the case of motor vehicles, If the rate of tax exceeds the general rate, such excess shall be disregarded and the general rate shall be treated as the rate of tax. (3) State or local taxes A State or local tax includes only a tax im- posed by a State, a possession of the United States, or a political subdivision of any of the foregoing, or by the District of Columbia. (4) Foreign taxes A foreign tax includes only a tax imposed by the authority of a foreign country. (5) Separately stated general sales taxes and gaso- line taxes If the amount of any general sales tax or of any tax on the sale of gasoline, diesel fuel, or other motor fuel is separately stated, then, to the extent that the amoumt so stated is paid by the consumer (otherwise than in connec- tion with the consumer's trade or business) to his seller, such amount thall be treated as a tax imposed on, and paid by, such consumer. (c) Deduction denied in case of certain taxes No deduction shall be allowed for the follow- ing taxes: (1) Taxes assessed against local benefits of a kind tending to increase the value of the property assessed; but this paragraph shall not prevent the deduction of so much of such taxes as is properly allocable to maintenance or interest charges. (2) Taxes on real property, to the extent that subsection (d) requires such taxes to be treated as imposed on another taxpayer. (d) Apportionment of taxes on real property between seller and purchaser (1) General rule For purposes of subsection (a), if real prop- erty is sold during any real property tax year, then- (A) so much of the real property tax as is properly allocable to that part of such year which ends on the day before the date of the sale shall be treated as a tax imposed on the seller, and (B) so much of such tax as is properly al- locable to that part of such year which begins on the date of the sale shall be treat- ed as a tax imposed on the purchaser. (2) Special rules (A) in the case of any sale of real proper- ty, if- (I) a taxpayer may not, by reason of his method of accounting, deduct any amount for taxes unless paid, and (ii) the other party to the sale is (under the law impc3ing the real property tax) liable for the real property tax for the real property tax year, then for purposes of subsection (a) the tax- payer shall be treated as having paid, on the date of the sale, so much of such tax as, under paragraph (1) of this subsection, is treated as imposed on the taxpayer. For purposes of the preceding sentence, if nei- ther party is liable for the tax, then the party holding the property at the time the tax becomes a lien on the property shall be considered liable for the real property tax for the real property tax year. (B) In the case of any sale of real proper- ty, if the taxpayer's taxable income for the taxable year during which the sale occurs is computed under an accrual method of ac- counting, and if no election under section 461(c) (relating to the accrual of real prop- erty taxes) applies, then, for purposes of subsection (a), that portion of such tax which- (i) is treated, under paragraph (1) of this subsection, as imposed on the taxpay- er, and (ii) may not, by reason of the taxpayer's method of accounting, be deducted by the taxpayer for any taxable year, shall be treated as having accrued on the date of the sale. (e) Taxes of shareholder paid by corporation Where a corporation pays a tax imposed on a shareholder on his interest as a shareholder, and where the shareholder does not reimburse the corporation, then- (1) the deduction allowed by subsection (a) shall be allowed to the corporation; and (2) no deduction shall be allowed the share- holder for such tax. (f) Cross references (1) For provisions disallowing any deduction for the payment of the tax imposed by subchapter B of chapter 3 (relating to tax.free covenant bonds), see section 1451. (2) For provisions disallowing any deduction for cei- tain taxes, see section 275. (Aug. 16, 1954, ch. 736, 68A Stat. 47; Sept. 2, 1958, Pub. L. 85-866, title I, § 6(a), 72 Stat. 1608; Feb. 26, 1964, Pub. L. 88-272, title II, § 207(a), (b)(1), (2), 78 Stat. 40-42; Oct. 27, 1972, Pub. L. 92-580, § 4(a), 86 Stat. 1277; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(a)(25), 1951(b)(3)(A), 90 Stat. 1767, 1837.) AMENDMENTS 1976-Subsec. (d)(2). Pub. L. 94-455, § 1901(a)(25), re- designated former subpar. (D) as (B) and struck out former subpar. (B) which related to the taxable years that subsec. (d)(1) applied and former subpar. (C) which related to the limitations on subsec. (d)(1) where real property tax was allowable as a deduction under the Internal Revenue Code of 1939. Subsec. (f). Pub. L. 94-455, § 1951(b)(3)(A), redesig- nated former subsec. (g) as Cf). Former subsec. Cf), which related to payments for municipal services in atomic energy communities, was struck out. 1972-Subsec. (b)(2). Pub. L. 92-580 added subpar. CE). 1964-Subsec. (a). Pub. L. 88-272, § 207(a), limited the subsection to State, local and foreign real proper- ty, income, war profits, excess profits, and unspecified taxes, on a business or activity described in section 212, and to State and local personal property, general sales, gasoline, diesel fuel and other motor fuel taxes. Page 146 § 164
TITLE 26-INTERNAL REVENUE CODE Subsec. (b). Pub. L. 88-272, § 207(a), added subsec. (b), and omitted a prior subsec. (b) which denied the deduction for certain Federal income taxes, for Feder- al war profits and excess profits taxes, import duties, excise and stamp taxes, and estate, inheritance, legacy, succession and gift taxes, local assessments against benefits increasing property values, and cer. tain taxes imposed by any foreign country or posses- sion of the United States if the taxpayer chose to benefit by sectiov 901 relating to foreign tax credit, and for taxes on real property to the extent that they are treated as impos~d on another taxpayer. Subsec. (c). Pub. L. e8-272, § 207(a), substituted pro- visions denying the leduction for taxes assessed against local benefits -hich increase property value, except for so much as L, properly allocable to mainte- nance or interest charge: and for real property taxes to the extent they are ti, %ted as imposed on another taxpayer, for provisions relating to certain retail sales taxes and gasoline taxes, the extent to which they were deductible, and to the definition of "state or local sales tax". Subsec. (M). Pub. L. 88-272, § 207(b)(1), inserted "State" preceding "real property taxes". Subsec. (g). Pub. L. 88-272, § 207(b)(2), designated existing provisions as par. (1), substituted "1451" for '1451(f)" therein, and added par. (2). 1958-Subsec. f). Pub. L. 85-866. § 6(a), added subsec. (f) and redesignated former subsec. (f) as (g). Subsec. (g). Pub. L. 85-866, § 6(a), redesignated former subsec. f) as (g). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (a)(25) and (b)(3)(A) by Pub. L. 94-455 applicable with respect to taxable years be- ginning after Dec. 31, 1976, see sections 1901(d) and 1951(d) of Pub. L. 94-455, set out as Effective Date of 1976 Amendment notes under sections 2 and 72 of this title, respectively. EFFECTIVE DATE OF 1972 AMENDMENT Section 4(b) of Pub. L. 92-580 provided that: "The amendment made by subsection (a) [adding subpar. (E) to subsec. (b)(2) of this section] shall apply to tax- able years ending on or after January 1. 1971." EFFECTIVE DATE OF 964 AMENDMENT Section 207(c) of Pub. L. 88-272 provided that: "I() General rule.-Except as provided in paragraph (2), the amendments made by this section [adding sec- tion 275, and amending this section, and sections 535, 545(b)(1), 556(b)(1), 901 and 903 of this title] shall apply to taxable years beginning after December 31, 1963. "(2) Special taxing districts.-Section 164(c)(1) of the Internal Revenue Code of 1954 (as amended by subsection (a)) shall not prevent the deduction under section 164 of such Code (as so amended) of taxes levied by a special taxing district which is described in section 164(b)(5) of such Code (as in effect for a tax- able year ending on December 31, 1963) and which was in existence on December 31, 1963, for the purpose of retiring indebtedness existing on such date." EFFECTIVE DATE OF 1958 AMENDMENT Section 6(b) of Pub. L. 85-866 provided that: "The amendments made by subsection (a) [to subsecs. f) and (g) of this section] shall apply with respect to tax- able years beginning after December 31, 1957." SAVINGS PROVISION Section 1951(b)(3)(B) of Pub. L. 94-455 provided that: "Notwithstanding subparagraph (A) (repealing subsec. (f) of this section], any amount paid or accrued in a taxable year beginning after December 31, 1976, to the Atomic Energy Commission or its successors for municipal-type services shall be allowed as a deduction under section 164 (this section] if such amount would have been deductible by reason of section 164(f) [subscc. (f) of this section] (as in effect for a taxable year ending on December 31, 1976) and if the amount is paid or accrued with respect to real property n a community (within the meaning of section 21(b) of the Atomic Energy Community Act of 1955 (42 U.S.C. 2304(b))) in which the Commission on December 31, 1976, was rendering municipal-type services for which it received compensation from the owners of property within such community." CROSS REFERENCES Carrying charges not deductible, see section 266 of this title. Federal employment taxes not deductible, see sec- tion 3502 of this title. Nondeductibility of employment taxes in computing taxable income, see section 3502 of this title. Taxable year deduction to be taken, see section 461 of this title. Withholding tax not deductible by employer or em- ployee, see section 3502 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 57, 163, 216, 275, 542, 556, 691, 703, 804, 822, 832, 853, 901, 903, 905, 960, 1001, 1012, 6362 of this title; title 31 ( ,tion 1228, § 165. Losses (a) General rule There shall be allowed as a deduction any loss sustained during the taxable year and not com- pensated for by insurance or otherwise. (b) Amount of deduction For purposes of subsection (a), the basis for determining the amount of the deduction for any loss shall be the adjusted basis provided in section 1011 for determining the loss from the sale or other disposition of property. (c) Limitation on losses of individuals In the case of an individual, the deduction under subsection (a) shall be limited to- (1) losses incurred in a trade or business; (2) losses incurred in any transaction en- tered into for profit, though not connected with a trade or business; and (3) losses of property not connected with a trade or business, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft. A loss described in this paragraph shall be allowed only to the extent that the amount of loss to such individual arising from each casualty, or from each theft, exceeds $100. For purposes of the $100 limitation of the preceding sentence, a husband and wife making a joint return under section 6013 for the taxable year in which the loss is allowed as a deduction shall be treated as one individ- ual. No loss described in this paragraph shall be allowed if, at the time of filing the return, such loss has been claimed for estate tax pur- poses in the estate tax return. (d) Wagering losses Losses from wagering transactions shall be al- lowed only to the extent of the gains from such transactions. (e) Theft losses For purposes of subsection (a), any loss aris- ing from theft shall be treated as sustained during the taxable year in which the taxpayer discovers such loss. Page 147 § 165
TITLE 26-INTERNAL REVENUE CODE (f) Capital losses Losses from sales or exchanges of capital assets shall be allowed only to the extent al- lowed in sections 1211 and 1212. (g) Worthless securities (1) General rule If any security which is a capital asset be- comes worthless during the taxable year, the loss resulting therefrom shall, for purposes of this subtitle, be treated as a loss from the sale or exchange, on the last day of the taxable year, of a capital asset. (2) Security defined For purposes of this subsection, the term "security" means- (A) a share of stock in a corporation; (B) a right to subscribe for, or to receive, a share of stock in a corporation; or (C) a bond, debenture, note, or certificate, or other evidence of indebtedness, issued by a corporation or by a government or politi- cal subdivision thereof, with interest cou- pons or in registered form. (3) Securities in affiliated corporation For purposes of paragraph (1), any security in a corporation affiliated with a taxpayer which is a domestic corporation shall not be treated as a capital asset. For purposes of the preceding sentence, a corporation shall be treated as affiliated with the taxpayer only if- (A) stock possessing at least 80 percent of the voting power of all classes of its stock and at least 80 percent of each class of its nonvoting stock is owned directly by the taxpayer, and (B) more than 90 percent of the aggregate of its gross receipts for all taxable years has been from sources other than royalties, rents (except rents derived from rental of properties to employees of the corporation in the ordinary course of its operating busi- ness), dividends, interest (except interest re- ceived on deferred purchase price of operat- iiig assets sold), annuities, and gains from sales or exchanges of stocks and securities. In computing gross receipts for purposes of the preceding sentence, gross receipts from sales or exchanges of stocks and securities shall be taken into account only to the extent of gains therefrom. As used in subparagraph (A), the term "stock" does not include non- voting stock which is limited and preferred as to dividends. (h) Disaster losses Notwithstanding the provisions of subsection (a), any loss attributable to a disaster occurring in an area subsequently determined by the President of the United States to warrant assis- tance by the Federal Government under the Di- saster Relief Act of 1974 may, at the election of the taxpayer, be deducted for the taxable year immediately preceding the taxable year in which the disaster occurred. Such deduction shall not be in excess of so much of the loss as would have been deductible in the taxable year in which the casualty occurred, based on facts existing at the date the taxpayer claims the loss. If an election is made under this subsec- tion, the casualty resulting in the loss will be deemed to have occurred in the taxable year for which the deduction is claimed. (1) Cross references (1) For special rule for banks with respect to worthless securities, see section 582. (2) For disallowance of deduction for worthlessness of securities to which subsection (g)(2)(C) applies, if issued by a political party or similar organization, see section 271. (3) For special rule for losses on stock in a small busi- ness investment company, see section 1242. (4) For special rule for losses of a small business in- vestment company, see section 1243. (5) For special rule for losses on small business stock, see section 1244. (Aug. 16, 1954, ch. 736, 68A Stat. 49; Sept. 2, 1958, Pub. L. 85-866, title I, §§7, 57(c)(1), title II, § 202(a), 72 Stat. 1608, 1646, 1676; Mar. 31, 1962, Pub. L. 87-426, § 2(a), 76 Stat. 51; Feb. 26, 1964, Pub. L. 88-272, title II, §§ 208(a), 238, 78 Stat. 43, 128; June 30, 1964, Pub. L. 88-348, § 3(a), 78 Stat. 237; Dec. 31, 1970, Pub. L. 91-606, title III, §301(h), 84 Stat. 1759; Jan. 12, 1971, Pub. L. 91-677, § l(a), 84 Stat. 2061; Jan. 12, 1971, Pub. L. 91-687, § 1, 84 Stat. 2071; July 1, 1972, Pub. L. 92-336, § 2(a), 86 Stat. 406; Aug. 29, 1972, Pub. L. 92-418, § 2(a), 86 Stat. 656, 657; May 22, 1974, Pub. L. 93-288, title VI, § 602(h), 88 Stat. 164; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(a)(26), 90 Stat. 1767.) REFERENCES IN TEXT The Disaster Relief Act of 1974, referred to in subsec. (h), is Pub. L. 93-288, May 22, 1974, 88 Stat. 143, as amended, which is classified principally to chapter 68 (§5121 et seq.) of Title 42, The Public wHealth and Welfare. For complete plassification. of *this Act to the Code, see Short Title note under sec- tion 5121 of Title V and Ta~ies volume. AMENDMENTS 1976-Subsec. (I). Pub. L. 94-455 redesignated former subsec. (J) as subsec. (I). Former subsec. (i), which re- lated to property confiscated by Cuba, was struck out. 1974-Subsec. (h). Pub. L. 93-288 substituted "Disas- ter Relief Act of 1974" for "Disaster Relief Act of 1970". 1972-Subsec. (h). Pub. L. 92-418 struck out par. (1) provisions relating to the losses attributable to a disas- ter occurring during the period following the close of the taxable year and on or before the time prescribed by law for filing the income tax return for the taxable year without regard to any extension of time, elimi- nated par. (2) designation, and inserted "attributable to a disaster" preceding "occurring In an area", and at the end of the second sentence, added "based on facts existing at the date the taxpayer claims the loss". Subsec. (h)(1). Pub. L. 92-336 substituted provisions relating to losses attributable to a disaster which occurs during the period after the close of the taxable year and on or before the last day of the 6th calendar month beginning after the close of the taxable year, for provisions relating to losses attributable to a disas- ter which occurs during the period following the close of the taxable year and on or before the time pre- scribed by law for filing the income tax return for the taxable year, determined without regard to any exten- sion of time. 1971-Subsee. (g)(3). Pub. L. 91-687 substituted "stock possessing at least 80 percent of the voting power of all classes of its stock and at least 80 percent of each class of its nonvoting stock" for "at least 95 percent of each class of its stock" in subpar. (A), and inserted at the end of the subsection the sentence pro- viding that the term "stock", as used in subpar. (A), does not include nonvoting stock which is limited and preferred as to dividends. § 165 Page 148
TITLE 26-INTERNAL REVENUE CODE Subsec. (i)(1). Pub. L. 91-677, § 1(a) (1), (2), struck out "or (2)" following "paragraph (1)" in cl. (B), and substituted "one or more days in the period beginning on December 31, 1958, and ending on May 16, 1959" for "December 31, 1958". Subsec. (i)(2)(B). Pub. L. 91-677, § 1(a)(3), substitut- ed "one or more days during the period beginning on December 31, 1958, and ending on May 16, 1959" for "December 31, 1958" and "the first day in such period on which the property was held by the taxpayer" for "December 31, 1958". Subsec. (i)(3). Pub. L, 91-677, § 1(a)(4), struck out subsec. (i)(3) which authorized a refund or credit to be given for any overpayment attributable to the applica- tion of par, (1), provided that a claim was filed for such refund or credit before Jan. 1, 1965. 1970-Subsec. (h)(2). Pub. L. 91-606 substituted "the Disaster Relief Act of 1970" for "sections 1855-1855g of title 42", 1964-Subsec. (c)(3). Pub. L. 88-272, § 208(a), insert- ed the requirement that losses must exceed $100 to be deductible. Subsec. (i). Pub. L. 88-348 designated existing provi- sions as par. (1), substituted provisions permitting in- dividuals w'ho were citizens of the United States or resident aliens on Dec. 31, 1958, who sustained any loss of pioperty prior to Jan. 1, 1964, and which was not a loss described in par. (1) or (2) of subsec. (c), to treat such loss as a loss under subsec. (c)(3), except that in cases of tangible property, the property had to be held by the taxpayer, and located in Cuba, on Dec. 31, 1958, Tor frovisions which permitted any loss of tangible property to be treated as a loss from a casual- ty within subsec, (c)(3), therein, and added pars. (2) and (3). Pub. L. 88-272, § 238, added subsec. (i). Former subsec. (i), redesignated (J). Subsec. (J). Pub. L. 88-272, § 238, redesignated former subsec. (I) as (j). 1962-Subsec. (h). Pub. L. 87-426, § 2(a)(2), added subsec. (h), and redesignated former subsec. (h) as (i). Subsec. (i). Pub. L. 87-426, § 2(a)(1), redesignated former subsec. (h) as (I). 1958-Subsec. (g)(3)(B). Pub. L. 85-866, § 7, substitut- ed "rental of" for "rental from". Subsec. (h)(3), (4). Pub. L. 85-866, § 57(c)(1), added subsec. (h)(3), (4). Subsec. (h)(5). Pub. L. 85-866, § 202(a), added subsec. (h)(5). EFFECTIVE DATE OF 1976 AMENDMENT Amendment by Pub. L. 94-455 applicable with re- spect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1972 AMENDMENT Section 2(c) of Pub. L. 92-418 provided in part that: "The amendment made by subsection (a) [amending this section] shall apply to disasters occurring after December 31, 1971, in taxable years ending after such date." Section 2(b) of Pub. L. 92-336 provided that: "The amendment made by subsection (a) [amending subsec. (h)(1) of this section] shall apply to disasters occur- ring after December 31, 1971, in taxable years ending after such date." EFFECTIVE DATE OF 1971 AMENDMENT Section 2 of Pub. L. 91-687 provided that: "The amendments made by this Act [to subsec. (g)(3) of this section] shall apply with respect to taxable years be- ginning on or after January 1, 1970." Section l(b)(1) of Pub. L. 91-677 provided that: "The amendments made by subsection (a) of this section [amending subsec, (i) of this section] shall apply in re- spect of losses sustained in taxable years ending after December 31, 1958." EFFECTIVE DATE OF 1970 AMENDMENT Section 304 of Pub. L. 91-606 provided that: "This Act [enacting sections 4401 to 4485 of Title 42, The Public Health and Welfare, amending sections 165, 5064, and 5708 of this title, sections 1706e, 1709, 17151 of Title 12, Banks and Banking, sections 241-1, 646 and 758 of Title 20 Education, section 1820 of Title 38, Veterans' Benefits, section 461 of Title 40, Public Buildings, Property, and Works, section 1681 note of Title 42, repealing sections 1855 to 1855g, 1855aa, 1855 aa note, 1855bb to 1855it, 1855aaa, 1855aaa note, 1855bbb to 1855nnn of Title 42, and section 1926(c) of Title 7, Agriculture, and enacting provisions set out as notes under section 4401 and section 4434 of Title 42] shall take effect immediately upon its enactment [Dec. 31, 1970], except that sections 226(b), 237, 241, 252(a), and 254 [sections 4436(b), 4456, 4460, 4482(a), and 4484 of Title 42, respectively] shall take effect as of August 1, 1969, and sections 231, 232, and 233 [sec- tions 4451, 4452 of Title 42 and amendments to section 1820 of Title 38, respectively] shall take effect as of April 1, 1970." EFFECTIVE DATE OF 1964 AMENDMENT Section 208(b) of Pub. L. 88-272 provided that: "The amendment made by subsection (a) [to subsec. (c)(3) of this section] shall apply to losses sustained after December 31, 1963, in taxable years ending after such date." Section 3(b) of Pub. L. 88-348 provided that: "The amendment made by subsection (a) [to subsec. (i) of this section] shall apply in respect of losses sustained in taxable years ending after December 31, 1958." EFFECTIVE DATE OF 1962 AMENDMENT Section 2(b) of Pub. L. 87-426 provided that: "The amendments made by this section [adding subsec. (h) of this section and redesignating former subsec. (h) as (i)] shall be effective with respect to any disaster oc- curring after December 31, 1961." EFFECTIVE DATE OF 1958 AMENDMENT Section 1(c) of Pub. L. 85-866 provided that: "Except as otherwise expressly provided- "(1) amendments made by this title to subtitle A of the Internal Revenue Code of 1954 [this title] (relat- ing to income taxes) [adding section 558 of this title and amending sections 152(a)(9), (b)(5), 165(g)(3)(B), 166(d)(2)(A), 168(e)(2)(A), (B), (C), 170(b)(3), 172(f)(3), (4), (g)(3), (4), 213(d)(2)(A), 337(d), 404(a), 421(a), 535(b)(2). (6)(B), 545(b)(2), 556(b)(2), 582(c), 611(b)(4), 613(d), 851(e)(1), (2), 1015(d), 1031(d), 1033(a)(2), (g), (h), (t)(2), (3), 1034, 1053, 1232(c), 1233(a), (g), 1234, 1237(a)(1), 1341(a5, 1341(b)(2) (last sentence), 1341(b)(3). 1347 (last sentence), 2501(b), 3121(l)(3) and 3122 of this title] shall apply to taxable years begin- ning after December 31, 1953, and ending after August 16, 1954; and "(2) amendments made by this title to subtitle F of such Code [this title] (relating to procedure and ad. ministration) [adding sections 7513 and 7514 of this title and amending sections 6013(b)(2)(C), 6015(f), 6212(b)(1), 6325(a)(1), (c) to (e), 6338(c), 6339(b)(2), 6501(d), (g)(2), (h), (i), 6504(15), 6511(a), (b)(2), (d)(2)(A), 6601(b), (h), 6652(a), 6653(c)(1), 6851(d), 6871(a), (b), 7213(c), (d), 7324(3), 7325(3) and 7422(f)(2) of this title] shall take effect as of August 17, 1954, and such subtitle, as so amended, shall apply as provided in section 7851 of the Internal Revenue Code of 1954". Amendment by Pub. L. 85-866, § 57(c)(1), which added subsec. (h)(3)(4), as applicable with respect to taxable years beginning after Sept. 2, 1958, see section 57(d) of Pub. L. 85-866, set out as an Effective Date of 1958 Amendment note under section 243 of this title. TAx TREATMENT OF CERTAIN 1972 DISASTER LOANS Section 2103 of Pub. L. 94-455 provided that: "(a) Application of section.-This section shall apply to any individual- 71-999 0 - 78 - 12 (Vol, 7) Page 149 § 165
TITLE 26-INTERNAL REVENUE CODE "(1) who was allowed a deduction under section 165 of the Internal Revenue Code of 1954 (relating to losses) [this section] for a loss attributable to a di- saster occurring during calendar year 1972 which was determined by the President, under section 102 of the Disaster Relief Act of 1970, to warrant disas- ter assistance by the Federal Government. "(2) who in connection with such disaster- "(A) received income in the form of cancellation of a disaster loan under section 7 of the Small Business Act (section 636 cf Title 15, Commerce and Trade] or an emergency loan under subtitle C of the Consolidated Farm and Rural Development Act [section 1961 et seq. of Title 7, Agriculture], or "(B) received income in the form of compensa- tion (not taken into account in computing the amount of the deduction) for such loss in settle- ment of any claim of the taxpayer against a person for that person's liability In tort for the damage or destruction of that taxpayer's property in connec- tion with the disaster, and "(3) who elects (at such time and in such manner as the Secretary of the Treasury or his delegate may by regulations prescribe) to take the benefits of this section. "(b) Effect of election.-In the case of any individual to whom this section applies- "(1) the tax imposed by chapter 1 of the Internal Revenue Code of 1954 [this title] for the taxable year in which the income taken into account is re- ceived or accrued which is attributable to such income shall not exceed the additional tax under such chapter which would have been payable for the year in which the deduction for the loss was taken if such deduction had not been taken for such year, "(2) any amount of tax imposed by chapter 1 at- tributable to the income taken into account which, on October 1, 1975, was unpaid may be paid in 3 equal annual installments (with the first such in- stallment due and payable on April 15, 1977), and "(3) no interest on any deficiency shall be payable for any period before April 16, 1977, to the extent such deficiency is attributable to the receipt of such compensation, and no interest on any installment re- ferred to in paragraph (2) shall be payable for any period before the due date of such installment. "(c) Income taken into account.-For purposes of this section, the income taken into account is- "(1) in the case of an individual described in sub- section (a)(2)(A), the amount of income (not in excess of $5,000) attributable to the cancellation of a disaster loan under section 7 of the Small Business Act or an emergency loan under subtitle C of the Consolidated Farm and Rural Development Act re- ceived by reason of the disaster described in subsec- tion (a)(1), or "(2) in the case of an individual described in sub- section (a)(2)(B), the amount of compensation (not in excess of $5,000) for the loss in settlement of any claim of the taxpayer against a person for that per- son's liability in tort for the damage or destruction of that taxpayer's property in connection with the disaster described in subsection (a)(1). "(d) Phaseout where adjusted gross income exceeds $15,000.-If for the taxable year for which the deduc- tion for the loss was taken the individual's adjusted gross income exceeded $15,000, the $5,000 limit set forth In paragraph (1) or (2) of subsection (c) (which- ever applies) shall be reduced by one dollar for each full dollar that such adjusted gross income exceeds $15,000. In the case of a married individual filing a separate return, the preceding sentence shall be ap- plied by substituting '$7,500' for '$15,000'. "(e) Statute of limitations.-If refund or credit of any overpayment of income tax resulting from an elec- tion made under this section is prevented on the date of the enactment of this Act [Oct. 4, 1976], or at any time within one year after such date, by the operation of any law. or rule of law, refund or credit of such overpayment (to the extent attributable to such elec- tion) may, nevertheless, be made or allowed if claim therefor is filed within one year after such date. If the taxpayer makes an election under this section and if assessment of any deficiency for any taxable year re- sulting from such election is prevented on the date of the enactment of this Act (Oct. 4, 1976], or at any time within one year after such date, by the operation of any law or rule of law, such assessment (to the extent attributable to such election) may, neverthe- less, be made if made within one year after such date." REUND OR CREDIT Or OVERPAYMENT; TIME FOR FILING CLAIM; INTEREST Section l(b)(2) of Pub, L. 91-677 authorized refund or credit of overpayment attributable to the amend- ments made by subsec. (a) to subsec. (i) of this section if claim therefor was filed after Jan. 12, 1971, and before July 1, 1971, without interest for any period before Jan. 1, 1972. CROSS REFERENCES Adjusted gross income as gross income minus, among others, losses from sale or exchange of property, see section 62 of this title. General rules for determining capital losses, see sec- tion 1221 et seq. of this title. Loss deductions for nonresident alien individuals, see section 873 of this title. Losses in transactions between related taxpayers not deductible, see section 267 of this title. Special rules for determining capital losses, see sec- tion 1231 et seq. of this title. Treatment of capital losses, see section 1211 et seq. of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 44, 57, 62, 80, 103, 166, 172, 271, 272, 585, 593, 709, 873, 877, 931, 934, 1212, 1351, 6405, 6511 of this title. § 166. Bad debts (a) General rule (1) Wholly worthless debts There shall be allowed as a deduction any debt which becomes worthless within the tax- able year. (2) Partially worthless debts When satisfied that a debt is recoverable only in part, the Secretary may allow such debt, in an amount not in excess of the part charged off within the taxable year, as a de- duction. (b) Amount of deduction For purposes of subsection (a), the basis for determining the amount of the deduction for any bad debt shall be the adjusted basis pro- vided in section 1011 for determining the loss from the sale or other disposition of property. (c) Reserve for bad debts In lieu of any deduction under subsection (a), there shall be allowed (in the discretion of the Secretary) a deduction for a reasonable addi- tion to a reserve for bad debts. (d) Nonbusiness debts (1) General rule In the case of a taxpayer other than a cor- poration- (A) subsections (a) and (c) shall not apply to any nonbusiness debt; and (B) where any nonbusiness debt becomes worthless within the taxable year, the loss resulting therefrom shall be considered a loss from the sale or exchange, during the § 166 Page 150
TITLE 26-INTERNAL REVENUE CODE taxable year, of a capital asset held for not more than 9 months. (2) Nonbusiness debt defined For purposes of paragraph (1), the term "nonbusiness debt" means a debt other than- (A) a debt created or acquired (as the case may be) in connection with a trade or busi- ness of the taxpayer; or (B) a debt the loss from the worthlessness of which is incurred in the taxpayer's trade or business. (e) Worthless securities This section shall not apply to a debt which is evidenced by a security as defined in section 165(g)(2)(C). (f) Reserve for certain guaranteed debt obligations (1) Allowance of deduction In the case of a taxpayer who is a dealer in property, in lieu of any deduction under sub- section (a), there shall be allowed (in the dis- cretion of the Secretary) for any taxable year ending after October 21, 1965, a deduction- (A) for a reasonable addition to a reserve for bad debts which may arise out of his li- ability as a guarantor, endorser, or indemni- tor of debt obligations arising out of the sale by him of real property or tangible per- sonal property (including related services) in the ordinary course of his trade or busi- ness; and (B) for the amount of any reduction in the suspense account required by paragraph (4)(B)(i). (2) Deduction disallowed in other cases Except as provided in paragraph (1), no de- duction shall be allowed to a taxpayer for any addition to a reserve for bad debts which may arise out of his liability as guarantor, endors- er, or indemnitor of debt obligations. (3) Opening balance The opening balance of a reserve described in paragraph (1)(A) for the first taxable year ending after October 21, 1965, for which a taxpayer maintains such reserve shall, under regulations prescribed by the Secretary, be determined as if the taxpayer had maintained such reserve for the preceding taxable years. (4) Suspense account (A) Requirement Except as provided by subparagraph (C), each taxpayer who maintains a reserve de- scribed in paragraph (1)(A) shall, for pur- poses of this subsection and section 81, es- tablish and maintain a suspense account. The initial balance of such account shall be equal to the opening balance described in paragraph (3). (B) Adjustments At the close of each taxable year the sus- pense account shall be- (I) reduced by the excess of the sus- pense account at the beginning of the year over the reserve described in para- graph (1)(A) (after making the addition for such year provided in such para- graph), or (i) increased (but not to an amount greater than the initial balance of the sus- pense account) by the excess of the re- serve described in paragraph (1)(A) (after making the addition for such year pro- vided in such paragraph) over the sus- pense account at the beginning of such year. (C) Limitations Subparagraphs (A) and (B) shall not apply in the case of the taxpayer who main- tained for his last taxable year ending before October 22, 1965, a reserve for bad debts under subsection (c) which included debt obligations described in paragraph (1)(A). (D) Section 381 acquisitions The application of this paragraph in any acquisition to which section 381(a) applies shall be determined under regulations pre- scribed by the Secretary. (g) Cross references (1) For disallowance of deduction for worthlessness of debts owed by political parties and similar organizations, see section 271. (2) For special rule for banks with respect to worthless securities, see section 582. (3) For special rule for bad debt reserves of certain mutual savings banks, domebtic building and loan associ- ations, and cooperative banks, see section 593. (4) For special rule for bad debt reserves of banks, small business investment-companies, etc., see sections 585 and 586. (Aug. 16, 1954, ch. 736, 68A Stat. 50; Sept. 2, 1958, Pub. L. 85-866, title I, § 8, 72 Stat. 1608; Nov. 2, 1966, Pub. L. 89-722, § l(a), 80 Stat. 1151; Dcc. 30, 1969, Pub. L. 91-172, title IV, § 431(c)(1), 83 Stat. 619; Oct. 4, 1976, Pub. L. 94- 455, title VI, § 605(a), title XIV, § 1402(b)(1)(A), title XIX, § 1906(b)(13)(A), 90 Stat. 1575, 1731, 1834.) TAXABLE YEARS AFTER 1977 Subsec. (d)(1)(B) of this section amended by Pub. L. 94-455, Title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, effective for tax- able years beginning after Dec. 31, 1977, by substituting "1 year"for "9 months". AMENDMENTS 1976-Subsec. (a)(2). Pub. L. 94-455. § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (d)(1)(B). Pub. L. 94-455, § 1401(b)(1)(A). provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977. Subsec. (f). Pub. L. 94-455, §§ 605(a), 1906(b)(13)(A). redesignated former subsec. (g) as (f), and as so rede- signated, struck out in pars. (1), (3) and (4)(D) "or his delegate" following "Secretary". Former subsec. (f), which related to treatment of pryments made by guar- antors of certain noncorporate obligations, was struck out. Subscc. (g). Pub. L. 94-455, § 605(a), redesignated former subsec. (h) as (g). Former subsec. (g) redesig- nated f). 1969-Subsec. (h). Pub. L. 91-172 added par. (4). 1966-Subsec. (g). Pub. L. 89-722 added subsec. (g) and redesignated former subsec. (g) as (h). Subsec. (h). Pub. L. 89-722 redesignated former subsec. (g) as (h). Page 151 § 166
TITLE 26-INTERNAL REVENUE CODE 1958-Subsec. (d)(2)(A). Pub. L. 85-866 substituted "a trade or business of the taxpayer" for "a taxpayer's trade or business". EFFEcTIVE DAT O 1976 AMENDMENT Section 605(c) of Pub. L. 94-455 provided that: "The amendments made by this section [repealing subsec. () of this section, redeslgnating subsecs. (g) and (h) as () and (e), and amending section 81(1) of this title] shall apply to guarantees made after December 31, 1975, in taxable years beginning after such date." Section 1402(b)(1), (2), of Pub. L. 94-455 provided In part that the substitution of "9 months" for "6 months" in subsec. (d)(1)(B) of this section by section 1402(b)(1)(A) of Pub. L. 94-455 is effective with re- spect to taxable years beginning in 1977, and that the substitution thereafter of "1 year" for "9 months" is effective with respect to taxable years beginning after Dec. 31, 1977. EFFECTIVE DAT OF 1969 AMENDMENT Amendment by Pub. L. 91-172 applicable to taxable years beginning after July 11, 1969, see section 431(d) of Pub. L. 91-172, set out as an Effective Date note under section 585 of this title. EFEcTivz DATE o 1966 AMENDMENT Section 2 of Pub. L. 89-722 provided that: "(a) Except as provided in subsections (b) and (c), the amendments made by the first section of this Act [enacting subsec. (g) of this section and section 81 of this title] shall apply to taxable years ending after Oc- tober 21, 1965. "(b) If- "(1) the taxpayer before October 22, 1965. claimed a deduction, for a taxable year ending before such date, under section 166(c) of the Internal Revenue Code of 1954 [subsec. (c) of this section] for an addi- tion to a reserve for bad debts on account of debt ob- ligations described In section 166(g)(1)(A) of such Code (as amended by the first section of this Act) (subsec. (g)(1)(A) of this section], and "(2) the assessment of a deficiency of the tax im- posed by chapter 1 of such Code for such taxable year and each subsequent taxable year ending before October 22, 1965, Is not prevented on Decem- ber 31, 1966, by the operation of any law or rule of law, then such deduction on account of such debt obliga- tions shall be allowed for each such taxable yeax under such section 166(c) to the extent that the de- duction would have been allowable under the provi- sions of such section 166(g)(1)(A) if such provisions ap- plied to such taxable years. "c) Section 166(g)(2) of the Internal Revenue Code of 1954 (as amended by the first section of this Act) [subsec. (g)(2) of this section] shall apply to taxable years beginning after December 31, 1953, and ending after August 16, 1954." EFFECTIVE DATE or 1958 AMENDMENT Amendment of subsec. (d)(2)(A) by Pub. L. 85-866 applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section l(c) of Pub. L. 85-866, set out as an Effective Date of 1958 Amendment note under section 165 of this title. ESTABLISHMENT OF RESERVE FOR TAXABLE YEAR ENDING AFTER OCT. 21, 1965, AND BEGINNING BEORE Auu. 2, 1966 Section l(c) of Pub. L. 89-722 provided that: "If the taxpayer establishes a reserve described in section 166(g)(1) of the Internal Revenue Code of 1954 (as amended by subsection (a) of this section) (subsec. (g)(1) of this section] for a taxable year ending after October 21, 1965, and beginning before August 2, 1966, the establishment of such reserve shall not be consid- ered as a change in method of accounting for purposes of section 446(e) of such Code." CRoss REFERENCES Bad debts- Addition to reserve, see section 593 of this title. Carryover, see section 381 of this title. Limitation of claim for credit or refund, see section 6511 of this title. Debts owed political parties not deductible, see sec- tion 271 of this title. Time for taking deduction, see section 461 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 57, 81, 163, 172, 271. 582, 585, 586, 593, 595, 809, 1351, 6511 of this title. § 167. Depreciation (a) General rule There shall be allowed as a depreciation de- duction a reasonable allowance for the exhaus- tion, wear and tear (including a reasonable allowance for obsolescence)- (1) of property used in the trade or busi- ness, or (2) of property held for the production of income. (b) Use of certain methods and rates For taxable years ending after December 31, 1953, the term "reasonable allowance" as used in subsection (a) shall include (but shall not be limited to) an allowance computed in accor- dance with regulations prescribed by the Secre- tary, under any of the following methods: (1) the straight line method, (2) the declining balance method, using a rate not exceeding twice the rate which would have been used had the annual allowance been computed under the method described in paragraph (1), (3) the sum of the years-digits method, and (4) any other consistent method productive of an annual allowance which, when added to all allowances for the period commencing with the taxpayer's use of the property and including the taxable year, does not, during the first two-thirds of the useful life of the property, exceed the total of such allowances which would have been used had such allowances been computed under the method described in paragraph (2). Nothing in this subsection shall be construed to limit or reduce an allowance otherwise allowa- ble under subsection (a). () Limitations on use of certain methods and rates Paragraphs (2), (3), and (4) of subsection (b) shall apply only in the case of property (other than intangible property) described in subsec- tion (a) with a useful life of 3 years or more- (1) the construction, reconstruction, or erec- tion of which is completed after December 31, 1953, and then only to that portion of the basis which is properly attributable to such construction, reconstruction, or erection after December 31, 1953, or (2) acquired after December 31, 1953, if the original use of such property commences with the taxpayer and commences after such date. (d) Agreement as to useful life on which depreciation rate is based Where, under regulations prescribed by the Secretary, the taxpayer and the Secretary have, after August 16, 1954, entered into an Page 152 § 167
TITLE 26-INTERNAL REVENUE CODE agreement in writing specifically dealing with the useful life and rate of depreciation of any property, the rate so agreed upon shall be bind- ing on both the taxpayer and the Secretary in the absence of facts or circumstances not taken into consideration in the adoption of such agreement. The responsibility of establishing the existence of such facts and circumstances shall rest with the party initiating the modifi- cation. Any change in the agreed rate and useful life specified in the agreement shall not be effective for taxable years before the tax- able year in which notice in writing by certified mail or registered mail is served by the party to the agreement initiating such change. (e) Change in method (1) Change from declining balance method In the absence of an agreement under sub- section (d) containing a provision to the con- trary, a taxpayer may at any time elect in ac- cordance with regulations prescribed by the Secretary to change from the method of de- preciation described in subsection (b)(2) to the method described in subsection (b)(1). (2) Change with respect to section 1245 property A taxpayer may, on or before the last day prescribed by law (including extensions there- of) for filing his return for his first taxable year beginning after December 31, 1962, and in such manner as the Secretary shall by reg- ulations prescribe, elect to change his method of depreciation in respect of section 1245 property (as defined in section 1245(a)(3)) from any declining balance or sum of the years-digits method to the straight line method. An election may be made under this paragraph notwithstanding any provision to the contrary in an agreement under subsec- tion (d). (3) Change with respect to section 1250 property A taxpayer may, on or before the last day prescribed by law (including extensions there- of) for filing his return for his first taxable year beginning after December 31, 1975, and in such manner as the Secretary shall by reg- ulation prescribe, elect to change his method of depreciation in respect of section 1250 property (as defined in section 1250(c)) from any declining balance or sum of the years- digits method to the straight line method. An election may be made under this paragraph notwithstanding any provision to the con- trary in an agreement under subsection (d). (f) Salvage value (1) General rule Under regulations prescribed by the Secre- tary, a taxpayer may, for purposes of comput- ing the allowance under subsection (a) with respect to personal property, reduce the amount taken into account as salvage value by an amount which does not exceed 10 per- cent of the basis of such property (as deter- mined under subsection (g) as of the time as of which such salvage value is required to be determined). (2) Personal property defined For purposes of this subsection, the term "personal property" means depreciable per- sonal property (other than livestock) with a useful life of 3 years or more acquired after October 16, 1962. (g) Basis for depreciation The basis on which exhaustion, wear and tear, and obsolescence are to be allowed in re- spect of any property shall be the adjusted basis provided in section 1011 for the purpose of determining the gain on the sale or other disposition of such property. (h) Life tenants and beneficiaries of trusts and es- tates In the case of property held by one person for life with remainder to another person, the de- duction shall be computed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. In the case of property held in trust, the allowable deduc- tion shall be apportioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument cre- ating the trust, or, In the absence of such provi- sions, on the basis of the trust income allocable to each. In the case of an estate, the allowable deduction shall be apportioned between the estate and the heirs, legatees, and devisees on the basis of the income of the estate allocable to each. (I) Limitation in case of property constructed or ac- quired during the suspension period (1) In general Under regulations prescribed by the Secre- tary, paragraphs (2), (3), and (4) of subsection (b) shall not apply in the case of real proper- ty which is not section 38 property (as de- fined in section 48(a)) if the physical con- struction, reconstruction, or erection of such property by any person begins during the sus- pension period, or begins, pursuant to an order placed during such period, before May 24, 1967. Under regulations prescribed by the Secretary, rules similar to the rules provided by paragraphs (3), (4), (7), (8), (9), and (10) of section 48(h) shall be applied for purposes of the preceding sentence. In applyng this para- graph to any property, there shall be taken into account only that portion of the basis which is properly attributable to construc- tion, reconstruction, or erection before May 24, 1967. (2) Exception Paragraph (1) shall not apply to any item of real property selected by the taxpayer if the cost of such property (when added to the cost of all other items of real property select- ed by the taxpayer under this paragraph) does not exceed $50,000. Under regulations prescribed by the Secretary, rules similar to the rules provided by paragraph (2) of section 48(c) shall be applied for purposes of this paragraph. (3) Suspension period For purposes of this subsection, the term "suspension period" means the period begin- ning on October 10, 1966, and ending on March 9, 1967. (j) Special rules for section 1250 property (1) General rule Except as provided in paragraphs (2) and (3), in the case of section 1250 property, sub- Page 153 § 167
TITLE 26-INTERNAL REVENUE CODE section (b) shall not apply and the term "rea- sonable allowance" as used in subsection (a) shall include an allowance computed in accor- dance with regulations prescribed by the Sec- retary, under any of the following methods: (A) the straight line method, (B) the declining balance method, using a rate not exceeding 150 percent of the rate which would have been used had the annual allowance been computed under the method described in subparagraph (A), or (C) any other consistent method produc- tive of an annual allowance which, when added to all allowances for the period com- mencing with the taxpayer's use of the property and including the taxable year, does not, during the first two-thirds of the useful life of the property, exceed the total of such allowances which would have been used had such allowances been computed under the method described in subpara- graph (B). Nothing in this paragraph shall be construed to limit or reduce an allowance otherwise al- lowable under subsection (a) except where al- lowable solely by reason of paragraph (2), (3), or (4) of subsection (b). (2) Residential rental property (A) In general Paragraph (1) of this subsection shall not apply, and subsection (b) shall apply in any taxable year, to a building or structure- (I) which is residential rental property located within the United States or any of its possessions, or located within a foreign country if a method of depreciation for such property comparable to the method provided in subsection (b)(2) or (3) is pro- vided by the laws of such country, and (ii) the original use of which commences with the taxpayer. In the case of residential rental property lo- cated within a foreign country, the original use of which commences with the taxpayer, if the allowance for depreciation provided under the laws of such country for such property is greater than that provided under paragraph (1) of this subsection, but less than that provided under subsection (b), the allowance for depreciation under subsection (b) shall be limited to the amount provided under the laws of such country. (B) Definition For purposes of subparagraph (A), a building or structure shall be considered to be residential rental property for any tax- able year only if 80 percent or more of the gross rental income from such building or structure for such year is rental income from dwelling units (within the meaning of subsection (k)(3)(C)). For purposes of the preceding sentence, if any portion of such building or structure is occupied by the tax- payer, the gross rental income from such building or structure shall include the rental value of the portion so occupied. (C) Change in method of depreciation Any change in the computation of the allowance for depreciation for any taxable year, permitted or required by reason of the application of subparagraph (A), shall not be considered a change in a method of ac- counting. (3) Property constructed, etc., before July 25, 1969 Paragraph (1) of this subsection shall not apply, and subsection (b) shall apply, in the case of property- (A) the construction, reconstruction, or erection of which was begun before July 25, 1969, or (B) for which a written contract entered into before July 25, 1969, with respect to any part of the construction, reconstruc- tion, or erection or for the permanent fi- nancing thereof, was on July 25, 1969, and at all times thereafter, binding on the tax- payer. (4) Used section 1250 property Except as provided in paragraph (5), in the case of section 1250 property acquired after July 24, 1969, the original use of which does not commence with the taxpayer, the allowance for depreciation under this section shall be limited to an amount computed under- (A) the straight line method, or (B) any other method determined by the Secretary to result in a reasonable allowance under subsection (a), not includ- ing- (i) any declining balance method, (ii) the sum of the years-digits method, or (iii) any other method allowable solely by reason of the application of subsection (b)(4) or paragraph (1)(C) of this subsec- tion. (5) Used residential rental property In the case of section 1250 property which is residential rental property (as defined in paragraph (2)(B)) acquired after July 24, 1969, having a useful life of 20 years or more, the original use of which does not commence with the taxpayer, the allowance for depreci- ation under this section shall be limited to an amount computed under- (A) the straight line method, (B) the declining balance method, using a rate not exceeding 125 percent of the rate which would have been used had the annual allowance been computed under the method described in subparagraph (A), or (C) any other method determined by the Secretary to result in a reasonable allowance under subsection (a), not includ- ing- (i) the sum of the years-digits method, (ii) any declining balance method using a rate in excess of the rate permitted under subparagraph (B), or (iii) any other method allowable solely by reason of the application of subsection (b)(4) or paragraph (1)(C) of this subsec- tion. (6) Special rules (A) Under regulations prescribed by the Secretary, rules similar to the rules pro- vided in paragraphs (5), (9), (10), and (13) of Page 154
TITLE 26-INTERNAL REVENUE CODE section 48(h) shall be applied for purposes of paragraphs (3), (4), and (5) of this subsec- tion. (B) For purposes of paragraphs (2), (4), and (5), if section 1250 property which is not property described in subsection (a) when its original use commences, becomes property described in subsection (a) after July 24, 1969, such property shall not be treated as property the original use of which commences with the taxpayer. (C) Paragraphs (4) and (5) shall not apply in the case of section 1250 property ac- quired after July 24, 1969, pursuant to a written contract for the acquisition of such property or for the permanent financing thereof, which was, on July 24, 1969, and at all times thereafter, binding on the taxpay- er. (k) Depreciation of expenditures to rehabilitate low- income rental housing (1) 60-month rule The taxpayer may elect, in accordance with regulations prescribed by the Secretary, to compute the depreciation deduction provided by subsection (a) attributable to rehabilita- tion expenditures incurred with respect to low-income rental housing after July 24, 1969, and before January 1, 1978, under the straight line method using a useful life of 60 months and no salvage value. Such method shall be in lieu of any other method of com- puting the depreciation deduction under sub- section (a), and in lieu of any deduction for amortization, for such expenditures. (2) Limitations (A) The aggregate amount of rehabilita- tion expenditures paid or incurred by the taxpayer with respect to any dwelling unit in any low-income rental housing which may be taken into account under paragraph (1) shall not exceed $20,000. (B) Rehabilitation expenditures paid or incurred by the taxpayer in any taxable year with respect to any dwelling unit in any low-income rental housing shall be taken into account under paragraph (1) only if over a period of two consecutive years, including the taxable year, the aggre- gate amount of such expenditures exceeds $3,000. (3) Definitions For purposes of this subsection- (A) Rehabilitation expenditures The term "rehabilitation expenditures" means amounts chargeable to capital ac- count and incurred for property or addi- tions or improvements to property (or relat- ed facilities) with a useful life of 5 years or more, in connection with the rehabilitation of an existing building for low-income rental housing; but such term does not in- clude the cost of acquisition of such build- ing or any interest therein. (B) Low-income rental housing The term "low-income rental housing" means any building the dwelling units in which are held for occupancy on a rental basis by families and individuals of low or moderate income, as determined by the Sec- retary in a manner consistent with the Leased Housing Program under section 8 of the United States Housing Act of 1937 pur- suant to regulations prescribed under this subsection. (C) Dwelling unit The term "dwelling unit" means a house or an apartment used to provide living ac- commodations in a building or structure, but does not include a unit in a hotel, motel, inn, or other establishment more than one-half of the units in which are used on a transient basis. (D) Rehabilitation expenditures incurred Rehabilitation expenditures incurred pur- suant to a binding contract entered into before January 1, 1978, and rehabilitation expenditures incurred with respect to low- income rental housing the rehabilitation of which has begun before January 1, 1978, shall be deemed incurred before January 1, 1978. (1) Reasonable allowance in case of property of cer- tain utilities (1) Pre-1970 public utility property (A) In general In the case of any pre-1970 public utility property, the term "reasonable allowance" as used in subsection (a) means an allowance computed under- (I) a subsection (1) method, or (ii) the applicable 1968 method for such property. Except as provided in subparagraph (B), clause (ii) shall apply only if the taxpayer uses a normalization method of accounting. (B) Flow-through method of accounting in cer- tain cases In the case of any pre-1970 public utility property, the taxpayer may use the applica- ble 1968 method for such property if- (i) the taxpayer used a flow-through method of accounting for such property for its July 1969 accounting period, or (ii) the first accounting period with re- spect to such property is after the July 1969 accounting period, and the taxpayer used a flow-through method of account- ing for its July 1969 accounting period for the property on the basis of which the ap- plicable 1968 method for the property in question is established. (2) Post-1969 public utility property In the case of any post-1969 public utility property, the term "reasonable allowance" as used in subsection (a) means an allowance computed under- (A) a subsection (1) method, (B) a method otherwise allowable under this section if the taxpayer uses a normal- ization method of accounting, or (C) the applicable 1968 method, if, with respect to its pre-1970 public utility proper- ty of the same (or similar) kind most recent- ly placed in service, the taxpayer used a Page 155 § 167
TITLE 26-INTERNAL REVENUE CODE flow-through method of accounting for its July 1969 accounting period. (3) Definitions For purposes of this subsection- (A) Public utility property The term "public utility property" means property used predominantly in the trade or business of the furnishing or sale of- (I) electrical energy, water, or sewage disposal services, (i) gas or steam through a local distri- bution system, (iII) telephone services, or other commu- nication services if furnished or sold by the Communications Satellite Corpora- tion for purposes authorized by the Com- munications Satellite Act of 1962 (47 U.S.C. 701), or (iv) transportation of gas or steam by pipeline, if the rates for such furnishing or sale, as the case may be, have been established or approved by a State or political subdivision thereof, by any agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof. (B) Pre-1970 public utility property The term "pre-1970 public utility proper- ty" means property which was public utility property in the hands of any person at any time before January 1, 1970. (C) Post-1969 public utility property The term "post-1969 public utility proper- ty" means any public utility property which is not pre-1970 public utility property, (D) Applicable 1968 method The term "applicable 1968 method" means, with respect to any public utility property- (i) the method of depreciation used on a return with respect to such property for the latest taxable year for which a return was filed before August 1, 1969, (ii) if clause (1) does not apply, the method used by the taxpayer on a return for the latest taxable year for which a return was filed before August 1, 1969, with respect to its public utility property of the same kind (or if there is no proper- ty of the same kind, property of the most similar kind) most recently placed in ser- vice, or (iii) if neither clause (i) nor (ii) applies, a subsection (1) method. In the case of any section 1250 property to which subsection (j) applies, the term "ap- plicable 1968 method" means the method permitted under subsection (j) which is most nearly comparable to the applicable 1968 method determined under the preced- ing sentence. (E) Applicable 1968 method in certain cases If the taxpayer evidenced the intent to use a method of depreciation (other than its applicable 1968 method or a subsection (1) method) with respect to any public utility property in a timely application for change of accounting method filed before August 1, 1969, or in the computation of its tax ex- pense for purposes of reflecting operating results in its regulated books of account for its July 1969 accounting period, such other method shall be deemed to be its applicable 1968 method with respect to such property and public utility property of the same (or similar) kind subsequently placed in service. (F) Subsection (1) method The term "subsection (1) method" means any method determined by the Secretary to result in a reasonable allowance under sub- section (a), other than (I) a declining bal- ance method, (ii) the sum of the years-digits method, or (iII) any other method allowable solely by reason of the application of sub- section (b)(4) or (J)(1)(C). (G) Normalization methpd of accounting In order to use a normalization method of accounting with respect to any public util- ity property- (1) the taxpayer must use the same method of depreciation to compute both its tax expense and its depreciation ex- pense for purposes of establishing its cost of service for ratemaking purposes and for reflecting operating results in its regulat- ed books of account, and (ii) if, to compute its allowance for de- preciation under this section, it uses a method of depreciation other than the method it used for the purposes described in clause (i), the taxpayer must make ad- Justments to a reserve to reflect the defer- ral of taxes resulting from the use of such different methods of depreciation. (H) Flow-through method of accounting The taxpayer used a "flow-through method of accounting" with respect to any public utility property if it used the same method of depreciation (other than a sub- section (1) method) to compute its allowance for depreciation under this section and to compute its tax expense for purposes of re- flecting operating results in its regulated books of account. () July 1969 accounting period The term "July 1969 accounting period" means the taxpayers latest accounting period ending before August 1, 1969, for which it computed its tax expense for pur- poses of reflecting operating results in its regulated books of account. For purposes of this paragraph, different de- clining balance rates shall be treated as dif- ferent methods of depreciation. (4) Special rules as to flow-through method (A) Election as to new property representing growth in capacity If the taxpayer makes an election under this subparagraph before June 29, 1970, in the manner prescribed by the Secretary, in the case of taxable years beginning after §167 Page 156
TITLE 26-INTERNAL REVENUE CODE December 31, 1970, paragraph (2)(C) shall not apply with respect to any post-1969 public utility property, to the extent that such property constitutes property which increases the productive or operational ca- pacity of the taxpayer with respect to the goods or services described in paragraph (3)(A) and does not represent the replace- ment of existing capacity. (B) Certain pending applications for changes in method In applying paragraph (1)(B), the taxpay- er shall be deemed to have used a flow- through method of accounting for its July 1969 accounting period with respect to any pre-1970 public utility property for which it filed a timely application for change of ac- counting method before August 1, 1969, if with respect to public utility property of the same (or similar) kind most recently placed in service, it used a flow-through method of accounting for its July 1969 ac- counting period. (5) Reorganizations, assets acquisitions, etc. If by reason of a corporate reorganization, by reason of any other acquisition of the assets of one taxpayer by another taxpayer, by reason of the fact that any trade or busi- ness of the taxpayer is subject to ratemaking by more than one body, or by reason of other circumstances, the application of any provi- sions of this subsection to any public utility property does not carry out the purposes of this subsection, the Secretary shall provide by regulations for the application of such pro- visions in a manner consistent with the pur- poses of this subsection. (i) Class lives (1) In general In the case of a taxpayer who has made an election under this subsection for the taxable year, the term "reasonable allowance" as used in subsection (a) means (with respect to prop- erty which is placed in service during the tax- able year and which is included in any class for which a class life has been prescribed) only an allowance based on the class life pre- scribed by the Secretary which reasonably re- flects the anticipated useful life of that class of property to the industry or other group. The allowance so prescribed may (under regu- lations prescribed by the Secretary) permit a variance from any class life by not more than 20 percent (rounded to the nearest half year) of such life. (2) Certain first-year conventions not permitted No convention with respect to the time at which assets are deemed placed in service shall be permitted under this section which generally would provide greater depreciation allowances during the taxable year in which the assets are placed in service than would be permitted if all assets were placed in service ratably throughout the year and if depreci- ation allowances were computed without regard to any convention. (3) Making of election An election under this subsection for any taxable year shall be made at such time, in such manner, and subject to such conditions as may be prescribed by the Secretary by reg- ulations. (n) Straight line method in certain cases (1) In general In the case of any property in whole or in part constructed, reconstructed, erected, or used on a site which was, on or after June 30, 1976, occupied by a certified historic struc- ture (as defined in section 191(d)(1)) which is demolished or substantially altered (other than by virtue of a certified rehabilitation as defined in section 191(d)(3)) after such date- (A) subsections (b), (J), (k), and (1) shall not apply, (B) the term "reasonable allowance" as used in subsection (a) shall mean only an allowance computed under the straight line method. (2) Exception The limitations imposed by this subsection shall not apply to personal property. (o) Substantially rehabilitated historic property (1) General rule Pursuant to regulations prescribed by the Secretary, the taxpayer may elect to compute the depreciation deduction attributable to substantially rehabilitated historic property as though the original use of such property commenced with him. The election shall be effective with respect to the taxable year re- ferred to in paragraph (2) and all succeeding taxable years. (2) Substantially rehabilitated property For purposes of paragraph (1), the term "substantially rehabilitated historic proper- ty" means any certified historic structure (as defined in section 191(d)(1)) with respect to which the additions to capital account for any certified rehabilitation (as defined in sec- tion 191(d)(3)) during the 24-month period ending on the last day of any taxable year, re- duced by any amounts allowed or allowable as depreciation or amortization with respect thereto, exceeds the greater of- (A) the adjusted basis of such property, or (B) $5,000. The adjusted basis of the property .shall be determined as of the beginning of the first day of such 24-month period, or of the hold- ing period of the property (within the mean- ing of section 1250(e)), whichever is later. (p) Depreciation of improvements in the case of mines, etc. For additional rule applicable to depreciation of im. provements in the case of mines, oil and gas wells, other natural deposits, and timber, see section 611. (Aug. 16, 1954, ch. 736, 68A Stat. 51; Sept. 2, 1958, Pub. L. 85-866, title I, §89(b), 72 Stat. 1665; Oct. 16, 1962, Pub. L. 87-834, §13(b), (c)(1), 76 Stat. 1034; Nov. 8, 1966, Pub. L. 89- 800, § 2, 80 Stat. 1513; June 13, 1967, Pub. L. 90- 26, §§ 1, 2(b), 81 Stat. 57, 58; Dec. 30, 1969, Pub. L. 91-172, title IV, § 441(a), title V, § 521(a), (d), 83 Stat. 625, 649, 653; Dec. 10, 1971, Pub. L. 92- 178, title I, § 109(a), 85 Stat. 508; Jan. 3, 1975, Pub. L. 93-625, § 3(c), 88 Stat. 2109; Oct. 4, 1976, Pub. L. 94-455, title II, §§ 202(c)(3), 203(a), title XIX, §§ 1901(a)(27), 1906(b)(13)(A), title XXI, Page 157 § 167
TITLE 26-INTERNAL REVENUE CODE § 2124(c)(1), (d)(1), 90 Stat. 1530, 1768, 1834, 1918.) RErERNcEs IN TExT Section 8 of the United States Housing Act of 1937, referred to in subsec. (kX3)(B), is classified to section 1437f of Title 42, The Public Health and Welfare. The Communications Satellite Act of 1962 (47 U.S.C. 701), referred to in subsec. (1)(3)(A)(ill), is Pub. L. 87- 624, Aug. 31, 1962, 76 Stat. 419, as amended, which is classified geneially to chapter 6 (§ 701 et seq.) of Title 47, Telegraphs, Telephones, and Radiotelegraphs. For complete classification of this Act to the Code, see Short Title note under section 701 of Title 47 and Tables volume. AmENDmENTs 1976-Subsec. (b). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (d). Pub. L. 94-455, §§ 1901(a)(27)(A), 1906(b)(13)(A), substituted "after August 16, 1954" for "after the date of enactment of this title" and struck out "or his delegate" following "Secretary" in first sentence preceding "shall be binding". Subsec. (e). Pub. L. 94-455, §§ 202(c)(3), 1906(b)(13)(A), substituted in par. (3) "beginning after December 31, 1975" for "beginning after July 24, 1969" and in pars. (1) to (3) struck out "or his delegate" fol- lowing "Secretary". Subsec. (f)(1). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (f)(2). Pub. L. 94-455, § 1901(a)(27)(B), sub. stituted "October 16, 1962" for "the date of enactment of the Revenue Act of 1962". Subsec. (I). Pub. L. 94-455, § 1906(b)(13)(A), struck out in pars. (1) and (2) "or his delegate" following "Secretary". Subsec. Cj). Pub. L. 94-455, § 1906(b)(13)(A), struck out in pars. (1), (4)(B), (5)(C), and (6)(A) "or his dele. gate" following "Secretary". Subsec. (k)(1). Pub. L. 94-455, §§ 203(a)(1), 1906(b)(13)(A), substituted reference to January 1, 1978 for reference to January 1, 1976 and struck out "or his delegate" following "Secretary". Subsec. (k)(2)(A). Pub. L. 94-455, § 203(a)(2), substi. tuted "$20,000" for "$15,000". Subsec. (k)(3)(B). Pub. L. 94-455, §§ 203(a)(3), 1906(b)(13)(A), substituted "the Leased Housing Pro. gram under section 8 of the United States Housing Act of 1937" for "the policies of the Housing and Urban Development Act of 1968" and struck out "or his dele. gate" following "Secretary". Subsec. (k)(3)(D). Pub. L. 94-455, § 203(a)(4), added subsec. (k)(3)(D). Subsec. (1)(3)(F). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (1)(4)(A). Pub. L. 94-455, §§ 1901(a)(27)(C), 1906(b)(13)(A), substituted "before June 29, 1970," for "within 180 days after the date of the enactment of this subparagraph" and struck out "or his delegate" following "Secretary". Subsec. (l)(5). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (m). Pub. L. 94-455, § 1906(b)(13)(A), struck out in pars. (1) and (3) "or his delegate" following "Secretary". Subsee. (n). Pub. L. 94455, § 2124(c)(1), added subsec. (n). Former subsec. (n) redesignated (p). Subsec. (o). Pub. L. 94455, § 2124(d)(1), added subsec. Co). Subsec. (p). Pub. L. 94-455, § 2124(c)(1), redesignated former subsec. (n) as (p). 1975--Subsec. (k)(1). Pub. L. 93-625 substituted "January 1, 1976" for "January 1, 1975". 1971--Subsec. (m). Pub. L. 92-178 added subsec. (m). Former subsec. (m) redesignated (n). Subsec. (n). Pub. L. 92-178 redesignated former subsec. (m) as (n). 1969-Subsec. (e). Pub. L. 91-172, § 521(d), added par. (3). Subsecs. (), (k). Pub. L. 91-172, § 521(a), added sub- secs. Wi) and (k). Former subsec. Wi) redesignated (m). Subsec. (1). Pub. L. 91-172. § 441(a), added subsec. (1). Subsec. (m). Pub. L. 91-172, §521(a), redesignated former subsec. (J) as (in). 1967-Subsec. (i)(1). Pub. L. 90-26, § 2(b), provided that accelerated depreciation was not to apply if the physical construction, reconstruction or erection by any person was begun during the suspension period or begun, pursuant to an order placed during such period, before May 24, 1967, subject to the proviso that only that portion of the basis which was properly attributabta to construction, reconstruction or erec- tion before May 24, 1967, shall be affected by the ap- plicability of the suspension period. Subsec. (1)(3). Pub. L. 90-26, § 1, substituted "March 9, 1967" for "December 31, 1967". 1966-Subsec. (i). Pub. L. 89-800 added subsec. (1). Former subsec. (1) redesignated W5. Subsec. (j). Pub. L. 89-800 redesignated former subsec. (i) as C). 1962-Subsec. (e). Pub. L. 87-834. § 13(b), designated existing provisions as par. (1) and added par. (2). Subsec. (f). Pub, L. 87-834, § 13(c)(1). added subsec. (f) and redesignated former subsec. (f) and (g). Subsecs. (g)-(i). Pub. L. 87-834, § 13(c)(1), redesignat- ed former subsecs. (f), (g) and (h) as (g), (h) and (1), re- spectively. 1958-Subsee. (d). Pub. L. 85-866 Inserted "certified mail or" preceding "registered mall". EmcTz DATE or 1976 AbdENDMENT Amendment of subsec. (d) by section 1901(a)(27)(A) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31. 1976. see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Amendment of subsec. (e)(3) by section 202(c)(3) of Pub. L. 94-455 applicable for taxable years ending after Dec. 31, 1975. see section 202(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 1250 of this title. Section 203(b) of Pub. L. 94-455 provided that: "The amendments made by paragraphs (1), (3), and (4) of subsection (a) [to subsecs. (k)(1), (3)(B), (D) of this section] shall apply to expenditures paid or inc.-ed after December 31, 1975, and before Janurry 1, 19';8, and expenditures made pursuant to a binding contract entered into before January 1, 1978. The amendment made by paragraph (2) of subsection Ca) [to subsec. (k)(2)(A) of this section] shall apply to expenditures incurred after December 31, 1975." Section 2124(c)(2) of Pub. L. 94-455 provided that: "The amendment made by this subsection [enacting subsec. (n) of this section] shall apply to that portion of the basis which is attributable to construction, re- construction, or erection after December 31, 1975, and before January 1, 1981." Section 2124(d)(2) of Pub. L. 94-455 provided that: "The amendment made by this subsection [enacting subsec. (o) of this section] shall apply with respect to additions to capital account occurring after June 30, 1976, and before July 1, 1981." ETc-rIvE DATE OF 1975 AMENDMENT Section 5(d) of Pub. L. 93-625 provided that: "The amendments made by this section [amending section 1250(a)(1)(C)(ii), of this title and enacting and repeal- ing provisions set out as notes under this section] shall apply with respect to property placed in service after December 31, 1973." EFcrvE DAT OF 1971 A MEN TENr Section 109(d)(1) of Pub. L. 92. 178 provided that: "The amendments made by subsection (a) [enacting subsec. (m) of this section] shall apply to property placed in service ifter December 31, 1970." EmcnvE DATE or 1969 Armmromr Section 441(b) of Pub. L. 91-172 provided that: "The amendment made by subsection (a) [adding subsec. (1) Page 158 § 167
TITLE 26-INTERNAL REVENUE CODE to this section] shall apply with respect to all taxable years for which a return has not been filed before August 1, 1969." Section 521(g) of Pub. L. 91-172 provided that: "The amendments made by this section [amending sections 167, 381, and 1250 of this title] shall apply with re- spect to taxable years ending after July 24, 1969." EFFECTIVE DATE OF 1967 AMENDMENT Amendment of subsec. (i) by sections 1 and 2(b) of Pub, L. 90-26 applicable with respect to taxable years ending after March 9, 1967, see section 4 of Pub. L. 90- 26, set out as an Effective Date of 1967 Amendment note under section 48 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-800 applicable to taxable years ending after Oct. 9, 1966, see section 4 of Pub. L. 89-800, set out as an Effective Date of 1966 Amend- ment note under section 48 of this title. ErrECTivE DATE OF 1962 AMENDMENT Amendment of subsec. (e) by Pub. L. 87-834 applica- ble to taxable years beginning after Dec. 31. 1962, and of subsec. (f) applicable to taxable years beginning after Dec. 31, 1961, and ending after Oct. 16, 1962, see section 13(g) of Pub. L. 87-834, set out as an Effective Date note under section 1245 of this title. EFFECTIVE DATE OF 1958 AMENDMENT Amendment of subsec. (d) by Pub. L. 85-866 applica- ble only if mailing occurred after Sept. 2, 1058, see sec- tion 89(d) of Pub. L, 85-866, set out as an Effective Date of 1958 Amendment note under section 7502 of this title. CLASS LIFE SYSTEM; APPLICATION TO REAL PROPERTY; GENERAL RULE Section 5(a) of Pub. L. 93-625 provided that: "In the case of buildings and other items of section 1250 property (within the meaning of section 1250(c) of the Internal Revenue Code of 1954) [section 1250(c) of this title] placed in service before the effective date of the class lives first prescribed by the Secretary of the Treasury or his delegate under section 167(m) of such Code (subsec. (m) of this section] for the class in which such property falls, if an election under such section 167(m) applies to the taxpayer for the taxable year in which such property is placed in service, the taxpayer may, in accordance with regulations pre- scribed by the Secretary of the Treasury or his dele- gate, elect to determine the useful life of such proper- ty- "(1) under Revenue Procedure 62-21 (as amended and supplemented) Ps in effect on December 31, 1970, or "(2) on the facts and circumstances." TRANSITIONAL RULES FOR REASONABLE ALLOWANCE FOR DEPREcIATION Section 109(e) of Pub. L. 92-178, as amended Pub. L. 93-625, § 5(b), Jan. 3, 1975, 88 Stat. 2112, provided that: "(1) [Repealed. Pub. L. 93-625, § 5(b), Jan. 3, 1975, 88 Stat. 2112.] "(2) Subsidiary asset.-If a significant portion of a class of property first prescribed by the Secretary of the Treasury or his delegate under section 167(m) of the Internal Revenue Code of 1954 [subsec. (m) of this section] consists of subsidiary assets, all such subsid- iary assets in such class placed in service by the tax- payer during the period beginning on January 1, 1971, and ending on December 31, 1973 (or such earlier date on which a class which includes such subsidiary assets subsequently prescribed by the Secretary of the Trea- sury or his delegate under such section becomes effec- tive), may, in accordance with regulations prescribed by the Secretary of the Treasury or his delegate, be excluded by the taxpayer from an election under such section." REHABIIJTATION EXPENDITURES FOR LOW INCOME RENTAL HoUsING INCURRED AFTER DECEMBER 31, 1974, AND BEFORE JANUARY 1, 1978, PURSUANT TO CONTRACT ENTERED BEFORE DECEMBER 31, 1974 Pub. L. 93-482, § 4, Oct. 26, 1974, 88 Stat. 1456, pro- vided that: "Notwithstanding the provisions of section 167(k)(1) of the Internal Revenue Code of 1954 (subsec. (k)(1) of this section] (relating to depreciation of expenditures to rehabilitate low Income rental housing), the provisions of section 167(k) [subsec. (k) of this section] shall apply with respect to rehabilita- tion expenditures incurred with respect to low income rental houslin after December 31, 1974, and before January 1, 19GW. if such expenditures are incurred pur- suant to a binding contract entered into before De- cember 31, 1974." CROSS REFERENCES Adjusted gross income as gross income minus, among others, depreciation deduction, see section 62 of this title, Allowance of deduction for depletion, see section 611 of this title, Capital expenditures not deductible, see section 263 of this title. Depreciation- Adjustments to basis for determining gain or loss, see section 1016 of this title. Allocation among partners, see section 704 of this title. Development expenses, see section 616 of this title. Estates or trusts, see section 642 of this title. Payments to encourage exploration, development and mining for defense purposes, see section 621 of this title. Property used in trade or business as property sub- ject to depreciation allowance, see section 1231 of this title. Undivided interest in property contributed to part- nership, see section 704 of this title. Taxable year deductions to be taken, see section 461 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 46, 47, 48, 57, 62, 163, 169, 172, 174, 175, 179, 182, 184, 189, 191, 216, 312, 381, 404, 542, 543, 545. 556, 616, 617, 642, 804, 817, 822, 832, 1016, 1071, 1082, 1221, 1231, 1239, 1245, 1250, 49410 of this title; title 33 sections 1316, 1326; title 46 section 1177. [§ 168. Repealed. Pub. L. 94-455, title XIX, § 1951(b)(4)(A), Oct. 4, 1976, 90 Stat. 1837] Section, acts Aug. 16, 1954, ch. 746, 68A Stat. 52; Aug. 26, 1957, Pub. L. 85-165, § 4, 71 Stat. 414; Sept. 2, 1958, Pub. L. 85-866, title I, § 9(a), (b), 72 Stat. 1608, 1609, related to deductions with respect to amortiza- tion of emergency facilities. SAVINGS PROVISION Section 1951(b)(4)(B) of Pub. L. 94-455 provided that: "Nctwithstanding the repeal made by subpara- graph (A) [repealing this section], if a certificate was issued before January 1, 1960, with respect to an emer- gency facility which is or has been placed In service before the date of the enactment of this Act [Oct. 4, 1976], the provisions of section 168 shall not, with re- spect to such facility, be considered repealed, The benefit of deductions by reason of the preceding sen- tence shall be allowed to estates and trusts in the same manner as in the case of an individual. The al- lowable deduction shall be apportioned between the income beneficiaries and the fiduciary in accordance with regulations prescribed under section 642(f)." AVAILABILITY OF EMERGENCY AMORTIZATION DEDUCTION Section 9(c) of Pub. L. 85-866 exempted facilities for primary processing of uranium ore or uranium concen- Page 159 § 168
TITLE 26-INTERNAL REVENUE CODE trate under a development program of the former Atomic Energy Commission from denial of an amorti- zation deduction for failure to meet certain certifica- tion time requirements of section 168 of this title. § 169. Amortization of pollution control facilities (a) Allowance of deduction Every person, at his election, shall be entitled to a deduction with respect to the amortization of the amortizable basis of any certified pollu- tion control facility (as defined in subsection (d)), based on a period of 60 months. Such am- ortization deduction shall be an amount, with respect to each month of such period within the taxable year, equal to the amortizable basis of the pollution control facility at the end of such month divided by the number of months (including the month for which the deduction is computed) remaining in the period. Such amortizable basis at the end of the month shall be computed without regard to the amortiza- tion deduction for such month. The amortiza- tion deduction provided by this section with re- spect to any month shall be in lieu of the de- preciation deduction with respect to such pollu- tion control facility for such month provided by section 167. The 60-month period shall begin, as to any pollution control facility, at the election of the taxpayer, with the month following the month in which such facility was completed or acquired, or with the succeeding taxable year. (b) Election of amortization The election of the taxpayer to take the am- ortization deduction and to begin the 60-month period with the month following the month in which the facility is completed or acquired, or with the taxable year succeeding the taxable year in which such facility is completed or ac- quired, shall be made by filing with the Secre- tary, in such manner, in such form, and within such time, as the Secretary may by regulations prescribe, a statement of such election. (c) Termination of amortization deduction A taxpayer which has elected under subsec- tion (b) to take the amortization deduction pro- vided in subsection (a) may, at any time after making such election, discontinue the amortiza- tion deduction with respect to the remainder of the amortization period, such discontinuance to begin as of the beginning of any month speci- fied by the taxpayer in a notice in writing filed with the Secretary before the beginning of such month. The depreciation deduction pro- vided under section 167 shall be allowed, begin- ning with the first month as to which the am- ortization deduction does not apply, and the taxpayer shall not be entitled to any further amortization deduction under this section with respect to such pollution control facility. (d) Definitions For purposes of this section- (1) Certified pollution control facility The term "certified pollution control facili- ty" means a new identifiable treatment facili- ty which is used, in connection with a plant or other property in operation before Janu- ary 1, 1976, to abate or control water or atmo- spheric pollution or contamination by remov- ing, altering, disposing, storing, or preventing the creation or omission of pollutants, con- taminants, wastes, or heat and which- (A) the State certifying authority having Jurisdiction with respect to such facility has certified to the Federal certifying authority as having been constructed, reconstructed, erected, or acquired in conformity with the State program or requirements for abate- ment or control of water or atmospheric pollution or contamination; (B) the Federal certifying authority has certified to the Secretary (i) as being in compliance with the applicable regulations of Federal agencies and (ii) as being in fur- therance of the general policy of the United States for cooperation with the States in the prevention and abatement of water pol- lution under the Federal Water Pollution Control Act, as amended (33 U.S.C. 466 et seq.), or in the prevention and abatement of atmospheric pollution ad contamination under the Clean Air Act, as amended (42 U.S.C. 1857 et seq.); and (C) does not significantly- (I) increase the output or capacity, extend the useful life, or reduce the total operating costs of such plant or other property (or any unit thereof), or (ii) alter the nature of the manufactur- ing or production process or facility. (2) State certifying authority The term "State certifying authority" means, in the case of water pollution, the State water pollution control agency as de- fined in section 13(a) of the Federal Water Pollution Control Act and, in the case of air pollution, the air pollution control agency as defined in section 302(b) of the Clean Air Act. The term "State certifying authority" in- cludes any interstate agency authorized to act in place of a certifying authority of the State. (3) Federal certifying authority The term "Federal certifying authority" means, in the case of water pollution, the Sec- retary of the Interior and, in the case of air pollution, the Secretary of Health, Education, and Welfare. (4) New identifiable treatment facility (A) In general For purposes of paragraph (1), the term "new identifiable treatment facility" in- cludes only tangible property (not including a building and its structural components, other than a building which is exclusively a treatment facility) which is of a character subject to the allowance for depreciation provided in section 167, which is identifiable as a treatment facility, and which is proper- ty- (i) the construction, reconstruction, or erection of which is completed by the tax- payer after December 31, 1968, or (ii) acquired after December 31, 1968, if the original use of the property com- mences with the taxpayer and commences after such date. In applying this section in the case of prop- erty described in clause (i) there shall be taken into account only that portion of the basis which is properly attributable to con- struction, reconstruction, or erection after December 31, 1968. Page 160 § 169
TITLE 26-INTERNAL REVENUE CODE (B) Certain plants, etc., placed in operation after 1968 In the case of any treatment facility used in connection with any plant or other prop- erty not in operation before January 1, 1969, the preceding sentence shall be ap- plied by substituting December 31, 1975, for December 31, 1968. (e) Profitmaking abatement works, etc. The Federal certifying authority shall not certify any property under subsection (d)(1)(B) to the extent it appears that by reason of prof- its derived through the recovery of wastes or otherwise in the operation of such property, its costs will be recovered over its actual useful life. (f) Amortizable basis (1) Defined For purposes of this section, the term "amortizable basis" means that portion of the adjusted basis (for determining gain) of a cer- tified pollution control facility which may be amortized under this section. (2) Special rules (A) If a certified pollution control facility has a useful life (determined as of the first day of the first month for which a deduc- tion is allowable under this section) in excess of 15 years, the amortizable basis of such facility shall be equal to an amount which bears the same ratio to the portion of the adjusted basis of such facility, which would be eligible for amortization but for the application of this subparagraph, as 15 bears to the number of years of useful life of such facility. (B) The amortizable basis of a certified pollution control facility with respect to which an election under this section is in effect shall not be increased, for purposes of this section, for additions or improve- ments after the amortization period has begun. (g) Depreciation deduction The depreciation deduction provided by sec- tion 167 shall, despite the provisions of subsec- tion (a), be allowed with respect to the portion of the adjusted basis which is not the amortiza- ble basis. [(h) Repealed. Pub. L. 92-178, title I, § 104(f)(2), Dec. 10, 1971, 85 Stat. 5021 (i) Life tenant and remainderman In the case of property held by one person for life with remainder to another person, the de- duction under this section shall be computed as if the life tenant were the absolute owner of the property and shall be allowable to the life tenant. () Cross reference For special rule with respect to certain gain derived from the disposition of property the adjusted basis of which is determined with regard to this section, see sec- tion 1245. (Added Pub. L. 91-172, title VII, § 704(a), Dec. 30, 1969, 83 Stat. 667, and amended Pub. L. 92- 178, title I, § 104(f)(2), Dec. 10, 1971, 85 Stat. 502; Pub. L. 93-625, § 3(a), Jan. 3, 1975, 88 Stat. 2109; Pub. L. 94-455, title XIX, § 1906(b)(13)(A), title XXI, § 2112(b), (c), Oct. 4, 1976, 90 Stat. 1834, 1906.) REFERENCES IN TEXT The Federal Water Pollution Control Act, as amend. ed (33 U.S.C. 466 et seq.), referred to in subsec. (d)(1)(B), is act June 30, 1948, ch. 758, as amended gen- erally by Pub. L. 92-500, § 2, Oct. 18, 1972, 86 Stat. 816, which is now classified generally to chapter 26 (§ 1251 et seq.) of Title 33, Navigation and Navigable Waters. Section 13(a) of the act, referred to in subsec. (d)(2), is now covered in section 1362(1) of Title 33. For com- plete classification of this Act to the Code, see Short Title note set out under section 1251 of Title 33 and Tables volume. The Clean Air Act, as amended (42 U.S.C. 1857 et seq.), referred to in subsee. (d)(1)(B), is act July 14, 1955, ch. 360, as amended generally by Pub. L. 88-206, Dec. 17, 1963, 77 Stat. 392, which is now classified gen- erally to chapter 15B (§ 1857 et seq.) of Title 42, The Public Health and Welfare. Section 302(b) of the act, referred to in subsec. (d)(2), is classified to section 1857h(b) of Title 42. For complete classification of this Act to the Code, see Short Title note set out under section 1857 of Title 42 and Tables volume. Paxoa PROVISIONS A pr1ar section 169, act Aug. 16, 1954, ch. 736, 68A Stat. 55, dealing with the amortization of grain-stor- age facilities, was stricken in the reorganization of part VI of subchapter B of chapter 1 of this title by Pub. L. 91-172. AMENDMENTS 1976-Subsec. (b). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (d)(1). Pub. L. 94-455, §§ 1906(b)(13)(A), 2112(b), substituted in provisions preceding subpar. (A) "January 1, 1976," for "January 1, 1969," and "storing, or preventing the creation or emission of" for "or storing", struck out in subpar. (B) "or his dele- gate" following "Secretary", and added subpar. (C). Subsec. (d)(4). Pub. L. 94-455, § 2112(c), among other changes, struck out provisions relating to treatment facilities placed in service by taxpayer before Jan. 1, 1976, and added provisions that in case of treatment facilities used in connection with any plan or other property not in operation before Jan. 1, 1969, Dec. 31, 1975, shall be substituted for Dec. 31, 1968, as the cut- off date for taking into account that portion of the basis which is attributable to construction, reconstruc- tion, or erection. 1975-Subsec. (d)(4)(B). Pub. L. 93-625 substituted "January 1, 1976" for "January 1, 1975". 1971-Subsec. (h). Pub. L. 92-178 struck out subsec. (h) provision that investment credit not be allowed, now covered in section 48(a)(8) of this title. EFFECTIVE DATE OF 1976 AMENDMENT Section 2112(d)(2) of Pub. L. 94-455 provided that: "The amendments made by subsection (b) [amending subsec. (d)(1) of this section] shall apply to taxable years beginning after December 31, 1975. Such amend- ments shall not apply in the case of any property with respect to which the amortization period under section 169 of the Internal Revenue Code of 1954 has begun before January 1, 1976." EFFECTIVE DATE Section 704(c) of Pub. L. 91-172 provided that: "The amendments made by this section [adding this section and amending sections 642, 1082, 1245, and 1250 of this title] shall apply with respect to taxable years ending after December 31, 1968." TRANSFER OF FUNCTIONS The functions vested in the Secretary of the Interior and the Secretary of Health, Education, and Welfare § 169 Page 181
TITLE 26-INTERNAL REVENUE CODE by subsec. (d)(1)(B) and (3) of this section were trans- ferred to the Administrator of the Environmental Pro. tection Agency by Reorg. Plan No. 3, of 1970, § 2(a)(9), elf. Dec. 2, 1970, 35 P.R. 15623, 84 Stat. 2086, set out In the Appendix to Title 5, Government Organization and Employees. SECTION REFERRM TO IN OhIM SECTIoNs This section is referred to in sections 57, 642, 1082, 1245, 1250 of this title; title 33 sections 1316, 1326. § 170. Charitable, etc., contributions and gifts (a) Allowance of deduction (1) General rule There shall be allowed as a deduction any charitable contribution (as defined in subsec- tion (c)) payment of which is made within the taxable year. A charitable contribution shall be allowable as a deduction only if verified under regulat'ons prescribed by the Secre- tary. (2) Corporations on accrual basis In the case of a corporation reporting its taxable income on the accrual basis, if- (A) the board of directors authorizes a charitable contribution during any taxable year, and (B) payment of such contribution is made after the close of such taxable year and on or before the 15th day of the third month following the close of such taxable year, then the taxpayer may elect to treat such contribution as paid during such taxable year. The election may be made only at the time of the filing of the return for such taxable year, and shall be signified in such manner as the Secretary shall by regulations prescribe. (3) Future interests in tangible personal property For purposes of this section, payment of a charitable contribution which consists of a future interest in tangible personal property shall be treated as made only when all inter- vening interests in, and rights to the actual possession or enjoyment of, the property have expired or are held by persons other than the taxpayer or those standing in a rela- tionship to the taxpayer described in section 267(b). For purposes of the preceding sen- tence, a fixture which is intended to be sev- ered from the real property shall be treated as tangible personal property. (b) Percentage limitations (1) Individuals In the case of an individual, the deduction provided in subsection (a) shall be limited as provided in the succeeding subparagraphs. (A) General rule Any charitable contribution to- (I) a church or a convention or associ- ation of churches, (ii) an educational organization which normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of pupils or students in at- tendance at the place where its education- al activities are regularly carried on, (iii) an organization the principal pur- pose or functions of which are the provid- ing of medical or hospital care or medical education or medical research, if the orga- nization is a hospital, or if the organiza- tion is a medical research organization di- rectly engaged in the continuous active conduct of medical research In conjunc- tion with a hospital, and during the calen- dar year in which the contribution is made such organization is committed to spend such contributions for such re- search before January 1 of the fifth cal- endar year which begins after the date such contribution is made, (iv) an organization which normally re- ceives a substantial part of its support (exclusive of income received in the eyer- cise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501(a)) from the United States or any State or political subdivision thereof or from direct or indirect contributions from the general public, and which Is organized and operated exclusively to receive, hold, invest, and administer property and to make expenditures to or for the benefit of a college or university which is an organi- zation referred to in clause (ii) of this sub- paragraph and which is an agency or in- strumentality of a 10tate or political subdi- vision thereof, or which is owned or oper- ated by a State or political subdivision thereof or by an agency or instrumental- ity of one or more States or political sub- divisions, (v) a governmental unit referred to in subsection (c)(1), (vi) an organization referred to in sub- section (c)(2) which normally receives a substantial part of its support (exclusive of income received In the exercise or per- formance by such organization of its charitable, educational, or other purpose or function constituting the basis for its exemption under section 501(a)) from a governmental unit referred to in subsec- tion (c)(1) or from direct or indirect con- tributions from the general public, (vii) a private foundation described in subparagraph (D), or (viii) an organization described in sec- tion 509(a)(2) or (3), shall be allowed to the extent that the ag- gregate of such contributions does not exceed 50 percent of the taxpayer's contri- bution base for the taxable year. (B) Other contributions Any charitable contribution other than a charitable contribution to which subpara- graph (A) applies shall be allowed to the extent that the aggregate of such contribu- tions does not exceed the lesser of- (1) 20 percent of the taxpayer's contri- bution base for the taxable year, or (ii) the excess of 50 percent of the tax- payer's contribution base for the taxable year over the amount of charitable contri- butions allowable under subparagraph (A) (determined without regard to subpara- graph (C)). §170 Page 162
TITLE 26-INTERNAL REVENUE CODE (C) Special limitation with respect to contribu- tions of certain capital gain property (i) In the case of charitable contribu- tions of capital gain property to which subsection (e)(1)(B) does not apply, the total amount of contributions of such property which may be taken into ac- count under subsection (a) for any tax- able year shall not exceed 30 percent of the taxpayer's contribution base for such year. For purposes of this subsection, con- tributions of capital gain property to which this paragraph applies shall be taken into account after all other charita- ble contributions. (ii) If charitable contributions described in subparagraph (A) of capital gain prop- erty to which clause (I) applies exceeds 30 percent of the taxpayer's contribution base for any taxable year, such excess shall be treated, in a manner consistent with the rules of subsection (d)(1), as a charitable contribution of capital gain property to which clause (i) applies in each of the 5 succeeding taxable years in order of time. (iii) At the election of the taxpayer (made at such time and in such manner as the Secretary prescribes by regulations), subsection (e)(1) shall apply to all contri- butions of capital gain property (to which subsection (e)(1)(B) does rot otherwise apply) made by the taxpayer during the taxable year. If such an election is made, clauses (i) and ii) shall not apply to con- tributions of capital gain property made during the taxable year, and, in applying subsection (d)(1) for such taxable year with respect to contributions of capital gain property made in any prior contribu- tion year for which an election was not made under this clause, such contribu- tions shall be reduced as if subsection (e)(1) had applied to such contributions in the year in which made. (iv) For purposes of this subparagraph, the term "capital gain property" means with respect to any contribution, any cap- ital asset the sale of which at its fair market value at the time of the contribu- tion would have resulted in gain which would have been long-term capital gain. For purposes of the preceding sentence, any property which is property used in the trade or business (as defined in sec- tion 1231(b)) shall be treated as a capital asset. (D) Certain private foundations The private foundations referred to in subparagraph (A)(vii) and subsection (e)(1)(B) are- (i) a private operating foundation (as defined in section 4942(j)(3)), (ii) any other private foundation (as de- fined in se,'t-on 509(a)) which, not later than the Abth day of the third month after the close of the found.',tion's taxable year in which contributions are received, makes qualifying distributions (as defined in section 4942(g), without regard to para- graph (3) thereof), which are treated, after the application of section 4942(g)(3), as distributions out of corpus (in accor- dance with section 4942(h)) in an amount equal to 100 percent of such contribu- tions, and with respect to which the tax- payer obtains adequate records or other sufficient evidence from the foundation showing that the foundation made such qualifying distributions, and (iii) a private foundation all of the con- tributions to which are pooled in a common fund and which would be de- scribed in section 509(a)(3) but for the right of any substantial contributor (here- after in this clause called "donor") or his spouse to designate annually the recipi- ents, from among organizations described in paragraph (1) of section 509(a), of the income attributable to the donor's contri- bution to the fund and to direct (by deed or by will) the payment, to an organiza- tion described in such paragraph (1), of the corpus in the common fund attribut- able to the donor's contribution; but this clause shall apply only if all of the income of the common fund is required to be (and is) distributed to one or more organiza- tions described in such paragraph (1) not later than the 15th day of the third month after the close of the taxable year in which the income is realized by the fund and only if all of the corpus attribut- able to any donor's contribution to the fund is required to be (and is) distributed to one or more of such organizations not later than one year after his death or after the death of his surviving spouse if she has the right to designate the recipi- ents of such corpus. (E) Contribution base defined For purposes of this section, the term "contribution base" means adjusted gross income (computed without regard to any net operating loss carryback to the taxable year under section 172). (2) Corporations In the case of a corporation, the total de- ductions under subsection (a) for any taxable year shall not exceed 5 percent of the taxpay- er's taxable income computed without regard to- (A) this section, (B) part VIII (except section 248), (C) any net operating loss carryback to the taxable year under section 172, (D) section 922 (special deduction for Western Hemisphere trade corporations), and (E) any capital loss carryback to the tax- able year under section 1212(a)(1). (c) Charitable contribution defined For purposes of this section, the term "chari- table contribution" means a contribution or gift to or for the use of- (1) A State, a possession of the United States, or any political subdivision of any of the foregoing, or the United States or the District of Columbia, but only if the uontribu tion or gift is made for exclusively public pur- poses. Page 163 § 170
TITLE 26-INTERNAL REVENUE CODE (2) A corporation, trust, or community chest, fund, or foundation- (A) created or organized in the United States or in any possession thereof, or under the law of the United States, any State, the District of Columbia, or any pos- session of the United States; (B) organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equip- ment), or for the prevention of cruelty to children or animals; (C) no part of the net earnings of which inures to the benefit of any private share- holder or individual; and (D) which is not disqualified for tax ex- emption under section 501(c)(3) by reason of attempting to influence legislation, and which does not participate in, or intervene In (including the publishing or distributing of statements), any political campaign on behalf of any candidate for public office. A contribution or gift by a corporation to a trust, chest, fund, or foundation shall be de- ductible by reason of this paragraph only if it is to be used within the United States or any of its possessions exclusively for purposes specified in subparagraph (B). (3) A post or organization of war veterans, or an auxiliary unit or society of, or trust or foundation for, any such post or organiza- tion- (A) organized in the United States or any of its possessions, and (B) no part of the net earnings of which inures to the benefit of any private share- holder or individual. (4) In the case of a contribution or gift by an individual, a domestic fraternal society, order, or association, operating under the lodge system, but only if such contribution or gift is to be used exclusively for religious, charitable, scientific, literary, or educational purposes, or for the prevention of cruelty to children or animals. (5) A cemetery company owned and operat- ed exclusively for the benefit of its members, or any corporation chartered solely for burial purposes as a cemetery corporation and not permitted by its charter to engage in any business not necessarily incident to that pur- pose, if such company or corporation is not operated for profit and no part of the net earnings of such company or corporation inures to the benefit of any private share- holder or individual. For purposes of this section, the term "charita- ble contribution" also means an amount treated under subsection (g) as paid for the use of an organization described in paragraph (2), (3), or (4). (d) Carryovers of excess contributions (1) Individuals (A) In general In the case of an individual, if the amount of charitable contributions described in sub- section (b)(1)(A) payment of which Is made within a taxable year (hereinafter in this paragraph referred to as the "contribution year") exceeds 50 percent of the taxpayer's contribution base for such year, such excess shall be treated as a charitable contribution described in subsection (b)(1)(A) paid in each of the 5 succeeding taxable years in order of time, but, with respect to any such succeeding taxable year, only to the extent of the lesser of the two following amounts: (I) the amount by which 50 percent of the taxpayer's contribution base for such succeeding taxable year exceeds the sum of the charitable contributions described in subsection (b)(1)(A) payment of which is made by the taxpayer within such suc- ceeding taxable year (determined without regard to this subparagraph) and the charitable contributions described in sub- section (b)(1)(A) payment of which was made in taxable years before the contri- bution year which are treated under this subparagraph as having been paid In such succeeding taxable year; or (i) in the case of the first succeeding taxable year, the amount of such excess, and in the case of the second, third, fourth, or fifth succeeding taxable year, the portion of such excess not treated under this subparagraph as a charitable contribution described in subsection (b)(1)(A) paid in any taxable year inter- vening between the contribution year and such succeeding taxable year. (B) Special rule for net operating loss carryovers In applying subparagraph (A), the excess determined under subparagraph (A) for the contribution year shall be reduced to the extent that such excess reduces taxable income (as computed for purposes of the second sentence of section 172(b)(2)) and in- creases the net operating loss deduction for a taxable year succeeding the contribution year. (2) Corporations (A) In general Any contribution made by a corporation in a taxable year (hereinafter in this para- graph referred to as the "contribution year") in excess of the amount deductible for such year under subsection (b)(2) shall be deductible for each of the 5 succeeding taxable years in order of time, but only to the extent of the lesser of the two following amounts: (I) the excess of the maximum amount deductible for such succeeding tax- able year under subsection (b)(2) over the sum of the contributions made in such year plus the aggregate of the excess contribu- tions which were made in taxable years before the contribution year and which are deductible under this subparagraph for such succeeding taxable year; or (ii) in the case of the first succeeding taxable year, the amount of such excess contribution, and in the case of the second, third, fourth, or fifth succeeding taxable year, the portion of such excess contribution not deductible under this subparagraph for any taxable § 170 Page 164
TITLE 26-INTERNAL REVENUE CODE year intervening between the contribution year and such succeeding taxable year. (B) Special rule for net operating loss carryovers For purposes of subparagraph (A), the excess of- (I) the contributions made by a corpora- tion in a taxable year to which this sec- tion applies, over (ii) the amount deductible in such year under the limitation in subsection (b)(2), shall be reduced to the extent that such excess reduces taxable income (as computed for purposes of the second sentence of sec- tion 172(b)(2)) and increases a net operating loss carryover under section 172 to a suc- ceeding taxable year. (e) Certain contributions of ordinary income and capital gain property (1) General rule The amount of any charitable contribution of property otherwise taken into account under this section shall be reduced by the sum of- (A) the amount of gain which would not have been long-term capital gain if the property contributed had been sold by the taxpayer at its fair market value (deter- mined at the time of such contribution), and (B) in the case of a charitable contribu- tion- (I) of tangible personal property, if the use by the donee is unrelated to the pur- pose or function constituting the basis for its exemption under section 501 (or, in the case of a governmental unit, to any pur- pose or function described in subsection (c)), or (ii) to or for the use of a private founda- tion (as defined in section 509(a)L other than a private foundation described in subsection (b)(1)(D), 50 percent (62'/2 percent, in the case of a corporation) of the amount of gain which would have been long-term capital gain if the property contributed had been sold by the taxpayer at its fair market value (deter- mined at the time of such contribution). For purposes of applying this paragraph (other than in the case of gain to which sec- tion 617(d)(1), 1245(a), 1250(a), 1251(c), 1252(a) or 1254(a) applies), property which is property used in the trade or business (as de- fined in section 1231(b)) shall be treated as a capital asset. (2) Allocation of basis For purposes of paragraph (1), in the case of a charitable contribution of less than the taxpayer's entire interest in the property con- tributed, the taxpayer's adjusted basis in such property shall be allocated between the inter- est contributed and any interest not contrib- uted in accordance with regulations pre- scribed by the Secretary. (3) Special rule for certain contributions of inven- tory and other property (A) Qualified contributions For purposes of this paragraph, a quali- fied contribution shall mean a charitable contribution of property described in para. graph (1) or (2) of section 1221, by a corpo. ration (other than a corporation which is an electing small business corporation within the meaning of section 1371(b)) to an organization which is described in sec- tion 501(c)(3) and is exempt under section 501(a) (other than a private foundation, as defined in section 509(a), which is not an operating foundation, as defined in section 4942(j)(3)), but only if- (I) the use of the property by the donee is related to the purpose or function con- stituting the basis for its exemption under section 501 and the property is to be used by the donee solely for the care of the ill, the needy, or infants; (ii) the property is not transferred by the donee in exchange for money, other property, or services; (iii) the taxpayer receives from the donee a written statement representing that its use and disposition of the proper- ty will be in accordance with the provi- sions of clauses (I) and (ii); and (iv) in the case where the property is subject to regulatlcn under the Federal Food, Drug, and Cosmetic Act, as amend- ed, such property must fully satisfy the applicable requirements of such Act and regulations promulgated thereunder on the date of transfer and for one hundred and eighty days prior thereto. (B) Amount of reduction The reduction under paragraph ()(A) for any qualified contribution (as defined in subparagraph (A)) shall be no greater than the sum of- (i) one-half of the amount computed under paragraph (1)(A (computed with- out regard to this paragraph), and (ii) the amount (if any) by which the charitable contribution deduction under this section for any qualified contribution (computed by taking into account the amount determined in clause (I), but with- out regard to this clause) exceeds twice the basis of sucl: property. (C) This paragraph shall not apply to so much of the amount of the gain described in paragraph (1)(A) which would be long- term capital gain but for the application of sections 617, 1245, 1250, 1251, or 1252. (f) Disallowance of deduction in certain cases and special rules (1) In general No deduction shall be allowed under this section for a contribution to or for the use of an organization or trust described in section 508(d) or 4948(c)(4) subject to the conditions specified in such sections. (2) Contributions of property placed in trust (A) Remainder interest In the case of property transferred in trust, no deduction shall be allowed under this section for the value of a contribution of a remainder interest unless the trust is a 71-999 0 - 78 - 13 (Vol. 7) Page 165 § 170
TITLE 26-INTERNAL REVENUE CODE charitable remainder annuity trust or a charitable remainder unitrust (described in section 664), or a pooled income fund (de- scribed in section 642(c)(5)). (B) Income interests, etc. No deduction shall be allowed under this section for the value of any interest in prop- erty (other than a remainder interest) transferred in trust unless the interest is in the form of a guaranteed annuity or the trust instrument specifies that the interest is a fixed percentage distributed yearly of the fair market value of the trust property (to be determined yearly) and the grantor is treated as the owner of such interest for purposes of applying section 671. If the donor ceases to be treated as the owner of such an interest for purposes of applying section 671, at the time the donor ceases to be so treated, the donor shall for purposes of this chapter be considered as having re- ceived an amount of income equal to the amount of any deduction he received under this section for the contribution reduced by the discounted value of all amounts of income earned by the trust and taxable to him before the time at which he ceases to be treated as the owner of the interest. Such amounts of income shall be discount- ed to the date of the contribution. The Sec- retary shall prescribe such regulations as may be necessary to carry out the purposes of this subparagraph. (C) Denial of deduction in case of payments in certain trusts In any case in which a deduction is al- lowed under this section for the value of an interest in property described in subpara- graph (B), transferred in trust, no deduc- tion shall be allowed under this section to the grantor or any other person for the amount of any contribution made by the trust with respect to such interest. (D) Exception This paragraph shall not apply in a case in which the value of all interests in proper- ty transferred in trust are deductible under subsection (a). (3) Denial of deduction in case of certain contribu- tions of partial interests in property (A) In general In the case of a contribution (not made by a transfer in trust) of an interest in proper- ty which consists of less than the taxpayer's entire interest in such property, a deduction shall be allowed under this section only to the extent that the value of the interest contributed would be allowable as a deduc- tion under this section if such interest had been transferred in trust. For purposes of this subparagraph, a contribution by a tax- payer of the right to use property shall be treated as a contribution of less than the taxpayer's entire interest in such property. (B) Exceptions Subparagraph (A) shall not apply to a contribution of- (I) a remainder interest in a personal residence or farm, (ii) an undivided portion of the taxpay- er's entire interest in property, (iII) a lease on, option to purchase, or easement with respect to real property of not less than 30 years' duration granted to an organization described in subsection (b)(1)(A) exclusively for conservation pur- poses, or (iv) a remainder interest in real proper- ty which is granted to an organization de- scribed in subsection (b)(1)(A) exclusively for conservation purposes. (C) Conservation purposes defined For purposes of subparagraph (B), the term "conservation purposes" means- (I) the preservation of land areas for public outdoor recreation or education, or scenic enjoyment; (ii) the preservation of historically im- portant land areas or structures; or (iII) the protection of natural environ- mental systems. (4) Valuation of remainder interests in real prop- erty For purposes of this section, in determining the value of a remainder interest in real prop- erty, depreciation (computed on the straight line method) and depletion of such property shall be taken into account, and such value shall be discounted at a rate of 6 percent per annum, except that the Secretary may pre- scribe a different rate. (5) Reduction for certain interest If, in connection with any charitable contri- bution, a liability is assumed by the recipient or by any other person, or if a charitable con- tribution is of property which is subject to a liability, then, to the extent necessary to avoid the duplication of amounts, the amount taken into account for purposes of this sec- tion as the amount of the charitable contribu- tion- (A) shall be reduced for interest (I) which has been paid (or is to be paid) by the tax- payer, (ii) which is attributable to the liabil- ity, and (fii) which is attributable to any period after the making of the contribution, and (B) in the case of a bond, shall be further reduced for interest (i) which has been paid (or is to be paid) by the taxpayer on indebt- edness incurred or continued to purchase or carry such bond, and (ii) which is attribut- able to any period before the making of the contribution. The reduction pursuant to subparagraph (B) shall not exceed the interest (including inter- est equivalent) on the bond which is attribut- able to any period before the making of the contribution and which is not (under the tax- payer's method of accounting) includible in the gross income of the taxpayer for any tax- able year. For purposes of this paragraph, the term "bond" means any bond, debenture, note, or certificate or other evidence of in- debtedness. Page 166 § 170
TITLE 26-INTERNAL REVENUE CODE (6) Deductions for out.of-pocket expenditures No deduction shall be allowed under this section for an out-of-pocket expenditure made by any person on behalf of an organiza- tion described in subsection (c) (other than an organization described in section 501(h)(5) (relating to churches, etc.)) if the expenditure is made for the purpose of influencing legisla- tion (within the meaning of section 501(c)(3)). (g) Amounts paid to maintain certain students as members of taxpayer's household (1) In general Subject to the limitations provided by para- graph (2), amounts paid by the taxpayer to maintain an individual (other than a depen- dent, as defined in section 152, or a relative of the taxpayer) as a member of his household during the period that such individual is- (A) a member of the taxpayer's household under a written agreement between the tax- payer and an organization described in paragraph (2), (3), or (4) of subsection (c) to implement a program of the organization to provide educational opportunities for pupils or students in private homes, and (B) a full-time pupil or student in the twelfth or any lower grade at an education- al organization described in section 170(b)(1)(A)(ii) located in the United States, shall be treated as amounts paid for the use of the organization. (2) Limitations (A) Amount Paragraph (1) shall apply to amounts paid within the taxable year only to the extent that such amounts do not exceed $50 multi- plied oy the number of full calendar months during the taxable year which fall within the period described in paragraph (1). For purposes of the preceding sentence, if 15 or more days of a calendar month fall within such period such month shall be con- sidered as a full calendar month. (B) Compensation or reimbursement Paragraph (1) shall not apply to any amount paid by the taxpayer within the taxable year if the taxpayer receives any money or other property as compensation or reimbursement for maintaining the indi- vidual in his household during the period described in paragraph (1). (3) Relative defined For purposes of paragraph (1), the term "relative of the taxpayer" means an individ- ual who, with respect to the taxpayer, bears any of the relationships described in para- graphs (1) through (8) of section 152(a). (4) No other amount allowed as deduction No deduction shall be allowed under subsec- tion (a) for any amount paid by a taxpayer to maintain an individual as a member of his household under a program described in para- graph (1)(A) except as provided in this sub- section. (h) Disallowance of deductions in certain cases For disallowance of deductions for contributions to or for the use of communist controlled organizations, see section 11(a) of the Internal Security Act of 1950 (50 U.S.C. 790). (I) Other cross references (1) For charitable contributions of estates and trists, see section 642(c). (2) For nondeductibility of contributions by common trust funds, see section 584. (3) For charitable contributions of partners, see sec. tion 702. (4) For charitable contributions of nonresident aliens, see section 873. (5) For treatment of gifts for benefit of or use in con- nection with the Naval Academy as gifts to or for the use of the United States, see section 6973 of title 10, United States Code. (6) For treatment of gifts accepted by the Secretary of State under the Foreign Service Act of 1946 as gifts to or for the use of the United States, see section 1021(e) of that Act (22 U.S.C. 809(e)). (7) For treatment of gifts of money accepted by the At. torney General for credit to the "Commissary Funds Federal Prisons" as gifts to or for the use of the United States, see section 2 of the Act of May 15, 1952, as amended by the Act of July 9, 1952 (31 U.S.C. 725s-4). (Aug. 16, 1954, ch. 736, 68A Stat. 58; Aug. 7, 1956, ch. 1031, § 1, 70 Stat. 1117; Sept. 2, 1958, Pub. L. 85-866, title I, §§ 10(a), 11, 12(a), 72 Stat. 1609, 1610; Sept. 14, 1960, Pub. L. 86-779, § 7(a), . 74 Stat. 1002; Oct. 16, 1962, Pub. L. 87-834, § 13(d), 76 Stat. 1034; Oct. 23, 1962, Pub. L. 87- 858, § 2(a), (b), 76 Stat. 1134; Feb. 26, 1964, Pub. L. 88-272, title II, §§ 209(a), (b), (c)(1), (d)(1), (e), 231(b)(1), 78 Stat.43, 45-47, 105; Sept. 12, 1966, Pub. L. 89-570, § 1(b)(1), 80 Stat. 762; Dec. 30, 1969, Pub. L. 91-172, title I, § 101(j)(2), title II, § 201(a)(1), (2)(A), (h)(1), 83 Stat. 526, 549, 558, 565; Oct. 4, 1976, Pub. L. 94-455, title II, § 205(c)(1)(A), title XIII, §§ 1307(c), (d)(1)(B)(i), 1313(b)(1), title XIX, §§ 1901(a)(28), (b)(8)(A), 1906(b)(13)(A), title XXI, §§ 2124(e)(1), 2135(a), 90 Stat. 1535, 1726, 1727, 1730, 1768, 1794, 1834, 1919, 1928.) AMENDMENT OF SUBSEC. (b)2) Subsec. (b)(2) of this section was amended by Pub. L. 94-455, title X, § 1052(c)(2), (d), Oct. 4, 1976, 90 Stat. 1648, applicable with respect to taxable years beginning after Dec. 31, 1979, by striking out paragraph (D) and redesignating paragraph (E) as (D). REFERENCES IN TEXT The Federal Food, Drug, and Cosmetic Act, as amended, referred to in subsec. (e)(3)(A)(iv), Is act June 25, 1938, ch. 675, 52 Stat. 1040, as amended, which is classified generally to chapter 9 (Q 301 et seq.) of Title 21, Food and Drugs. For complete classifica- tion of this Act to the Code, see section 301 of Title 21 and Tables volume. The Foreign Service Act of 1946, referred to in subsec. (i)(6), is act Aug. 13, 1946, ch. 957, titles I to X, 60 Stat. 999, as amended, which is classified principal- ly to chapter 14 (§ 801 et seq.) of Title 22, Foreign Re- lations and Intercourse. For complete classification of this Act to the Code, see Short Title note set out under section 801 of Title 22 and Tables volume. AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (b)(1)(A)(vii). Pub. L. 94-455, § 1901(a)(28)(A)(iii), substituted "subparagraph (D)" for "subparagraph (E)" following "described in". Subsec. (b)(1)(B)(ii). Pub. L. 94-455, § 1901(a)(28)(A)(iv), substituted "subparagraph (C)" for "subparagraph (D)" following "without regard to". Page 167 § 170
TITLE 26-INTERNAL REVENUE CODE Subsec. (b)(1)(C). Pub. L. 94-455, § 1901(a)(28)(A)(ii), struck out subpar. (C), which related to unlimited de- ductions for certain individuals and redesignated subpar. (D) as (C) and, as so redesignated, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" in cl. (ii). Subsec. (b)(1)(D). Pub. L. 94-455, § 1901(a)(28)CA)(ii). redesignated former subpar. (E) as (D). Subsec (b)(1)(E). Pub. L. 94-445, § 1901(a)(28)(A)Cii), redesignated former subpar. (F) as (E). Subset. (c). Pub. L. 94-455, § 1901(a)(28)(A)(v), sub- stituted "subsection (g)" for "subsection (h)" following "an.ount treated under". Subsec. (c)(2)(B). Pub. L. 94-455, § 1313(b)(1), added "or to foster national or international amateur sports competition (but only if no part of its activities in- volves the provision of athletic facilities or equip- inent)" following "or educational purposes". Subsec. (c)(2)(D), Pub. L. 94-445, § 1307(d)(1)(B)(i), substituted 4'which is not disqualified for tax exemp- tion under st'ction 501(c)(3) by reason of attempting to Influence legislation" for "no substantial part of the activities of which is carrying on propaganda, or oth- erwise attempting to influence legislation" following "(D)". Subsec. (d)(1)(A). Pub. L. 94-455, § 1901(a)(28)(B), struck out "(30 percent in the case of a contribution year beginning before January 1, 1970)" following "ex- ceeds 50 percent". Subsec. (e)(1). Pub. L. 94-455, § 205(c)(1)(A), substi- tuted "1252(a), or 1254(a)" for "or 1252(a)" following "1251(c)". Subsec. (e)(1)(B)(ii). Pub. L. 94-455, § 1901(a)(28)(A)(vi), substituted "subsection (b)(1)(D)" for "subsection (b)(1)(E)" following "foundation de- scribed in". Subsec. (e)(2). Pub. L. 94-455, § 1906(b)(13)(A). struck out "or his delegate" following "Secretary". Subsec. (e)(3). Pub. L. 94-455, § 2135(a), added par. (3). Subsec. (f)(2). Pub. I. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (f)(3). Pub. L. 94-455, § 2124(e)(1), added sub- pars. (B)(iii), Civ), and (C). Subsec. (f)(4). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (f)(6). Pub. L. 94-455, §§ 1307(c), 1901(a)(28)(A)(i), added subsec. (f)(6); former subsec. (f)(6), which related to the partial reduction of unlim- ited deduction and definitions for transitional income and deduction percentages, was stricken. Section 1901(a)(28)(A)(i) of Pub. L. 94-455 struck out former subsec. (f)(6) a second time, execution of which was unnecessary. Subsec. (g). Pub. L. 94-455, § 1901(a)(28)(A)(i), struck out subsec. (g) which related to application of unlimit- ed charitable contribution deductions allowed for tax- able years beginning before January 1, 1975, and rede- signated subsecs. (h), (i), and (j) as (g), (h), and (i), re- spectively. Section 1901(a)(28)(A)(i) also struck out former subsec. (f)(6) but this direction was not execut- ed as such former subsec. (f)(6) had previously been stricken by section 1307(c) of Pub. L. 94-455. Subsec. (g)l()(B). Pub. L. 94-455, § 1901(b)(8)(A), substituted "educational organization described in sec- tion 170(b)(1)(A)(W)" for "educational institution (as defined in section 151(e)(4)" following "grade at an". Subsec. Ch). Pub. L. 94-455, § 1901(a)(28)(A)(i), (C), redesignated former subsec. (i) as (h), and struck out "64 Stat. 996" following "Act of 1950". Former subsec. (h) redesignated (g). Subsec. (i). Pub. L. 94-455, § 1901(a)(28)(A)(i), (D), redesignated former subsec. (j) as (i), and substituted "6973 of title 10, United States Code" for "3 of the Act of March 31, 1944 (58 Stat. 135; 34 U.S.C. lllSb)" fol- lowing "see section" in par. (5); struck out par. (6) re- lating to gifts to library of Post Office Department; struck out "60 Stat. 924" following "1946" in par. (7); substituted "as amended by the Act of July 9, 1952 (3 U.S.C. 725s-4)" for "(66 Stat. 73, as amended by Act of July 9, 1952, 66 Stat. 479, 31 U.S.C. 725s-4)" following "May 15, 1952" in par. (8); and redesignated pars. (7) and (8) as pars. (6) and (7), respectively. Former subsec. (i) redesignated h). Subsec. (j). Pub. L. 94-455, § 1901(a)(28)(A)(i), rede- signated former subsec. (j) as (i). 1969-Subsec. (a). Pub. L. 91-172, § 201(a)(1)(B), added par. (3). Subsec. (b). Pub. L. 91-172, § 201(a)(1)(B), (h)(1). in- creased the general limitation on the charitable con- tributions deduction for individual taxpayers from 30 percent of adjusted gross income to 50 percent of his contribution base and provided that where a taxpayer makes a contribution to a public charity of property which has appreciated in value the taxpayer could deduct such contributions of property under the 50 percent limitation if he elects to take the unrealized appreciation in value into account for the tax pur- poses, the unlimited charitable deduction is phased out over a 5-year period and contributions to a private operating foundation and contributions to a private nonoperating foundation distributing such contribu- tions to public charities or private operating founda- tions within two and half months following the year of receipt are also subjected to 50 percent limitation (30 percent in the case of gifts of aupreciated proper- ty), and, in par. (I)(C), added provisions relating to the determination of the amount of charitable contribu. tions and taxes paid by a married individual who pre- viously filed a joint return with a former decease, spouse. Subsec. (c). Pub. L. 91-172, § 201(a)(1)(B), struck out references to "Territory" in pars, (1) and (2)(A), and inserted reference to participation in or intervention in any political campaign on behalf of any candidate for public office in par. (2)(D). Subsec. d). Pub. L. 91-172, §201(a)(1)(B), added subsec. (d) consisting of provisions substantially trans- ferred from subsec. (b) in the general amendment of subsec. (b) by Pub. L. 91-172. Former subsec. (d) rede- ignated as subset. b). Subsec. (e). Pub. L. 91-172, §§ 201(a)(1)(B), substitut- ed provisions covering certain contributions of ordi- nary income and capital gain property for provisions setting out a special rule for charitable contributions. Subsec. (f). Pub. L. 91-172, § 201(a)(1)(B), substituted provisions for the disallowance of the deduction in specified cases for provision covering future interests in tangible personal property. Subsec. (g). Pub. L. 91-172, § 201(a)(2)(A), substitut- ed "subsection (d)(1)" for "subsection (b)(5)" in two places in par. (1) and struck out par. (2)(B) covering contributions to organizations substantially more than half of the assets and the total income were devoted to charitable purposes. Subsec. (h). Pub. L. 91-172, §201(a)(1)(A), redesig- nated subsec. (d) as (h). Former subsec. (h) redesignat- ed (i). Subsec. (i). Pub. L. 91-172, § 101J)(2), 201(a)(1)(A), redesignated former subsec. (h) as (i), and, in subsec. (i) as so redesignated struck out former par. (1) cover- ing disallowance of deductions for gifts to charitable organizations engaging in prohibited transactions, and removed the par. (2) designation from the provisions covering disallowance of deductions for use of commu- nist controlled organizations. Former subsec. (i) rede. signated as subsec. (j). Subsec. (j). Pub. L. 91-172, § 201(a)(1)(A), redesignat- ed former subsec. (i) as (j). 1966-Subsec. Ce). Pub. L. 89-570 included reference to section 617(d)(1). 1964-Subsec. (b)(1)(A)(v), (vi), (2), (5). Pub. L. 88- 272. §209 (a), (c)(1), (d)(1), added clauses (v) and (vi) in par. (1)(A), and par. (5), and in par. (2), extended the 2-year carryforward of unused charitable contribu- tions to 5 years and changed the method of computa- tion by including the aggregate of the excess contribu- tions made in taxable years before the contribution year, in clause (i), and the references to the third, fourth or fifth succeeding years in clause (ii). Subsec. (e). Pub. L. 88-272, § 231(b)(1), substituted "certain property" for "section 1245 property" in the Page 168 § 170
TITLE 26-INTERNAL REVENUE CODE subsection catchline, and inserted the reference to sec- tion 1250(a) in the text. Subsec. (f). Pub. L. 88-272, § 209(e), added subsec. Mf). Former subsec. (fM redesignated (h. Subsec. (g). Pub. L. 88-272, § 209(b), added subsec. (g). Former subsec. (g) redesignated (i). Subsec. (h). Pub. L. 88-272, § 209(e), redesignated former subsec. () as (h). Subsec. (i). Pub. L. 88-272, § 209(e), redesignated former subsec. (g) as (i). 1962-Subsec. (b)(1)(AM(iv). Pub. L. 87-858. § 2(a), added clause iv). Subsec. (b)(1)(B). Pub. L. 87-858, § 2b', substituted "any charitable contributions described in subpara- graph (A)" for "any charitable contributions to the or- ganizations described in clauses (I), (i), and (li)". Subsec. (e). Pub. L. 87-834 added subsec. (e) and re- designated former subsec. (e) as Cf). Subsecs. (fM, (g). Pub. L. 87-834 redesignated former subsecs. (e) and () as Cf) and (g), respectively. 1960-Subsec. (c). Pub. L. 86-779, § 7(a)(1), added the sentence additionally defining the term "charitable contribution" for the purposes of the soction. Subsec. Cd). Pub. L. 86-779. § 7(a)(2), added subsec. d). Former subsec. (d) redesignated (e). Subsecs. (e) and Cf). Pub. L. 86-779, § 7(a)(2), redesig- nated former subsecs. (d) and (e) as (e) and f). 1958-Subsec. (b)(1)(C). Pub. L. 85-866, § 10(a). added sentence allowing substitution, in lieu of amount of tax paid during year, amount of tax paid in respect of such year, provided amount so included in the year in respect of which payment was made be not included in any other year. Subsec. (b)(3). Pub. L. 85-866, § 11, added subsec. (b)(3). Subsec. (b)(4). Put'. L. 85-866, § 12, added subsec. (b)(4). 1956-Subsec. (b)(1)(A)Ciii). Act Aug. 7, 1956, § 1, pro- vided for the allowance, as deductions, of contribu- tions to medical research organizations. EFFECTIVE DATE OF 1976 AMENDMENT Amendment of section by section 1901(a)(28) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Amendment of subsec. (c)(2)(B) by section 1313(b)(1) of Pub. L. 94-455 effective Oct. 5, 197G, see section 1313(e) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 501 of this title. Amendment of subsecs. (c)(2)(D), (f)(6) by section 1307 (d)(1)(B)(i), c) of Pub. L. 94-455, respectively, ef- fective for taxable years beginning after Dec. 31, 1976, see section 1307(e) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 501 of this title. Section 2135(b) of Pub. L. 94-455 provided that, "The amendment made by this section [enacting subsec. (e)(3) of this section] applies to charitable con- tributions made after the date of enactment of this Act [Oct. 4, 1976], in taxable years ending after such date." Section 2124(e)(4) of Pub. L. 94-455 provided that: "The amendments made by this subsection [amending subsec. Cf) of this section and sections 2055(e)(2) and 2522(c)(2) of this title] shall apply with respect to con. tributions or transfers made after June 13, 1976, and before June 14, 1977." EFFECTIVE DATE OF 1969 AMENDMENT Section 201(g) of Pub. L. 91-172 provided that: "(1)(A) Except as provided in subparagraphs (B) and (C), the amendments made by subsection (a) [amend- ing this section and sections 545, 556, and 809 of this title] shall apply to taxable years beginning after De- cember 31, 1969. "(B) Subsections (e) and (f)(1) of section 170 of the Internal Revenue Code of 1954 [subsecs. (c) and (f)(1) of this section] (as amended by subsection Ca)) shall apply to contributions paid after December 31, 1969 except that, with respect to a letter or memorandum or similar property described in section 1221(3) of such Code [section 1221(3) of this title] (as amended by sec- tion 514 of this Act), such subsection (e) shall apply to contributions paid after July 25, 1969. "(C) Paragraphs (2), (3), and (4) of section 170(f) of such Code [subsecs. (f)(2), (3), and (4) of this section] (as amended by subsection (a)) shall apply to transfers in trust and contributions made after July 31, 1969. "(D) For purposes of applying section 170(d) of such Code [subsec. (d) of this section] (as amended by sub- section (a)) with respect to contributions paid in a tax- able year beginning before January 1, 1970, subsection (b)(1)(D), subsection (e), and paragraphs (1), (2), (3), and (4) of subsection Cf) of section 170 of such Code [subsec. (b)(1), Cd), (e), and (f)(1), (2), (3), and (4) of this section] shall not apply. "(2) The amendments made by subsection (b) [amending section 642(c) of this title] shall apply with respect to amounts paid, permanently set aside, or to be used for a charitable purpose in taxable years be- ginnlng after December 31, 1969, except that section 642(c)(5) of the Internal Revenue Code of 1954 [sec- tion 642(c)(5) of this title] (as added by subsection b)) shall apply to transfers in trust made after July 31, 1969. "(3) The amendment made by subsection (c) [amending section 673 of this title] shall apply to transfers in trust made after April 22, 1969. "(4)(A) Except as provided in subparagraphs (B) and (C), the amendments made by paragraphs (1) and (2) of subsection Cd) [amending sections 2055(e) and 2126 of this title] shall apply in the case of decedents dying after December 31, 1969. "(B) Such amendments shall not apply in the case of property passing under the terms of a will executed on or before October 9, 1969- "Ci) if the decedent dies before October 9, 1972, without having republished the will after October 9, 1969, by codicil or otherwise., "(ii) if the decedent at no time after October 9, 1969, had the right to change the portions of the will which pertain to the passing of the property to, or for the use of, an organization described in sec- tion 2055(a) [section 2055(a) of this title], or "(iII) if the will is not republished by codicil or oth- erwise before October 9, 1972, and the decedent is on such date and at all times thereafter under a mental disability to republish the will by codicil or other- wise. "(C) Such amendments shall not apply in the case of property transferred in trust on or before October 9. 1969- "Ci) if the decedent dies before October 9, 1972, without having amended after October 9, 1969, the instrument governing the disposition of the proper- ty, "(ii) if the property transferred was an irrevocable interest to, or for the use of, an organization de- scribed in section 2055(a), or "(iII) if the instrument governing the disposition of the property was not amended by the decedent before October 9, 1972, and the decedent is on such date and at all times thereafter under a mental dis- ability to change the disposition of the property. "(D) The amendment made by paragraph (3) of sub- section (d) [amending section 2522(c) of this title] shall apply to gifts made after December 31, 1969, except that the amendments made to section 2522(c)(2) of the Internal Revenue Code of 1954 [sec- tion 2522(c)(2) of this title] shall apply to gifts made after July 31, 1969. "CE) The amendments made by paragraph (4) of sub- section (d) [amending sections 2055(a)(2), 2055(a)(3), 2106(a)(2)(A), 2522(a)(2), and 2522(b)(2), (3), of this title] shall apply to gifts and transfers made after De- cember 31, 1969. "(5) The amendment made by subsection (e) [enact- ing section 664 of this title] shall apply to transfers in trust made after July 31, 1969. § 170 Page 169
TITLE 26-INTERNAL REVENUE CODE "(6) The amendments made by subsection (f) [amending section 1011(a) of this title] shall apply with respect to sales made after December 19, 1969." Section 201(h)(2) of Pub. L. 91-172 provided that: "The amendment made by this subsection [amending subsec. (b)(1)(C) of this section] shall apply to taxable years beginning after December 31, 1968." Amendment by section 101(j)(2) of Pub. L. 91-172 to take effect on Jan. 1, 1970, see section 101(k)(1) of Pub. L. 91-172, set out as an Effedtive Date note under section 4940 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-570 applicable to taxable years ending after Sept. 12, 1966, but only in respect of expenditures paid or incurred after such date, see section 3 of Pub. L. 89-570. set out as an Effective Date note under section 617 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Section 209(f) of Pub. L. 88-272 provided that: "(1) The amendments made by subsections (a), (b), and (c) [to this section, and sections 545(b)(2) and 556(b)(2) of this title], shall apply with respecA to con- tributions which are paid in taxable years beginning after December 31, 1963. "(2) The amendments made by subsection (d) (to subsec. (b)(2) of this section, and section 381 of this title] shall apply to taxable years beginning after De- cember 31, 1963, with respect to contributions which are paid (or treated as paid under section 170(a)(2) of the Internal Revenue Code of 1954) in taxable years beginning after December 31, 1961. "(3) The amendments made by subsection (e) [to subsec. (f) of this title] shall apply to transfers of future interests made after December 31, 1963, in tax- able years ending after such date, except that such amendments shall not apply to any transfer of a future interest made before July 1, 1964. where- "(A) the sole intervening interest or right is a non- transferable life interest reserved by the donor, or "(B) in the case of a Joint gift by husband and wife, the sole intervening interest or right is a non- transferable life interest reserved by the donors which expires not later than the death of whichever of such donors dies later. For purposes of the exception contained in the preced- ing sentence, a right to make a transfer of the re- served life interest to the donee of the future interest shall not be treated as making a life interest transfer- able." Amendment of subsec. (e) by Pub. L. 88-272 applica- ble to dispositions after Dec. 31, 1963, in taxable years ending after such date, see section 231(c) of Pub. L. 88-272, set out as an Effective Date note under section 1250 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Section 2(c) of Pub. L. 87-858 provided that: "The amendments made by subsections (a) and (b) [to subsec. (b)(1)(A) and (B) of this section] shall apply to taxable years beginning after December 31, 1960." Subsec. (e) of this section applicable to taxable years beginning after Dec. 31, 1962, see section 13(g) of Pub. L. 87-834, set out as an Effective Date note under sec- tion 1245 of this title. EFFECTIVE DATE OF 1960 AMENDMENT Amendment by Pub. L. 86-779 applicable with re- spect to taxable years beginning after Dec. 31, 1959, see section 7(c) of Pub. L. 86-779, set out as an Effec- tive Date of 1960 Amendment note under section 162 of this title. EFFECTIVE DATE OF 1958 AMENDMENT Section 10(b) of Pub. L. 85-866 provided that: "The amendment made by subsection (a) [to subsec. (b)(1)(C) of this section] shall apply with respect to taxable years beginning after December 31, 1957." Subsec. (b)(3) of this section applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 1(c) of Pub. L. 85-866, set out as an Effective Date of 1958 Amendment note under section 165 of this title. Section 12(b) of Pub. L. 85-866 provided that: "The amendment made by subsection (a) [which added subsec. (b)(4) of this section] shall apply to taxable years ending after December 31, 1957, but only with respect to charitable contributions made after such date." EFFECTIVE DATE OF 1956 AMENDMENT Section 2 of act Aug. 7, 1956, provided that: "The amendment made by this Act [to subsec. (b)(1)(A)(iii)] shall apply only with respect to taxable years begin- ning after December 31, 1955." DEDUCTION OF CONTRIBUTIONS TO CERTAIN ORGANIZATIONS FOR JUDICIAL REFORM Section 29 of Pub. L. 87-834 provided that: "For purposes of section 170 of the Internal Rev- enue Code of 1954 [this section] (relating to deduction for charitable, etc., contributions and gifts), a contri- bution or gift made after December 31, 1961, with re- spect to a referendum occurring during the calendar year 1962 to or for the use of any nonprofit organiza- tion created and operated exclusively- "(1) to consider proposals for the reorganization of the judicial branch of the government of any State of the United States or political subdivision of such State, and "(2) to provide information, make recommenda- tions, and seek public support or opposition as to such proposals, shall be treated as a charitable contribution if no part of the net earnings of such organization inures to the benefit of any private shareholder or individual. The provisions of the preceding sentence shall not apply to any organization which participates in, or intervenes in, any political campaign on behalf of any candidate for public office." CROSS RENENCES Application of subsec. (b)(5) of this section to chari- table contributions paid in a taxable year in which taxpayer elects to compute income from an employ- ment under former sections 1301 and 1307 of the In- ternal Revenue Code of 1954, see section 232(g) of Pub. L. 88-272, set out as an Effective Date note under section 1301 of this title. Charitable and similar gifts deductible from amount of gift, see section 2522 of this title. Charitable deduction for nonresident alien individ- ual, see section 873 of this title. Contributions and gifts excepted as business ex- pense, see section 162 of this title. Contributions by employer to employees' pension plan, see section 404 of this title. Gifts and bequests accepted by Secretary of Com- merce under Bureau of Standards Act as gifts and be- quests to United States, see section 1522 of Title 15, Commerce and Trade. Taxable year deduction to be taken, see section 461 of this title. Transfers to charitable uses deductible from gross estate, see section 2106 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 44A, 79, 101, 103, 117, 151, 152, 162, 381, 410, 501, 507 to 509, 512, 535, 545, 556, 584, 642, 664, 674, 677, 702, 703, 809, 873, 882, 931, 1011, 2039, 2055, 2517, 4041, 4221, 4253, 4911, 4941, 4942, 4944, 4945, 4947, 4948, 5214, 6033, 7428 of this title; title 2 section 439a; title 16 section 1285; title 20 sections 76m, 954; title 22 section 2876; title 29 sec- tion 1052; title 42 section 2996b. Page 170 § 170
TITLE 26-INTERNAL REVENUE CODE § 171. Amortizable bond premium (a) General rule In the case of any bond, as defined in subsec- tion (d), the following rules shall apply to the amortizable bond premium (determined under subsection (b)) on the bond: (1) Taxable bonds In the case of a bond (other than a bond the interest on which is excludable from gross income), the amount of the amortizable bond premium for the taxable year shall be al- lowed as a deduction. (2) Tax-exempt bonds In the case of any bond the interest on which is excludable from gross income, no de- duction shall be allowed for the amortizable bond premium for the taxable year. (3) Cross reference For adjustment to basis on account of amortizable bond premium, see section 1016(a)(5). (b) Amortizable bond premium (1) Amount of bond premium For purposes of paragraph (2), the amount of bond premium, in the case of the holder of any bond, shall be determined- (A) with reference to the amount of the basis (for determining loss on sale or ex- change) of such bond, (B)(i) with reference to the amount pay- able on maturity or on earlier call date, in the case of any bond other than a bond to which clause (ii) applies, or and (ii) with reference to the amount payable on maturity (or if it results in a smaller amortizable bond premium attributable to the period to earlier call date, with refer- ence to the amount payable on earlier call date), in the case of any bond described in subsection (a)(1) which is acquired after De- cember 31, 1957, and (C) with adjustments proper to reflect un- amortized bond premium, with respect to the bond, for the period before the date as of which subsection (a) becomes applicable with respect to the taxpayer with respect to such bond. In no case shall the amount of bond premium on a convertible bond include any amount at- tributable to the conversion features of the bond. (2) Amount amortizable The amortizable bond premium of the tax- able year shall be the amount of the bond premium attributable to such year. In the case of a bond to which paragraph (1)(B)(ii) applies and which has a call date, the amount of bond premium attributable to the taxable year in which the bond is called shall include an amount equal to the excess of the amount of the adjusted basis (for determining loss on sale or exchange) of such bond as of the be- ginning of the taxable year over the amount received on redemption of the bond or (if greater) the amount payable on maturity. (3) Method of determination The determinations required under para- graphs (1) and (2) shall be made- (A) in accordance with the method of am- ortizing bond premium regularly employed by the holder of the bond, if such method is reasonable; (B) in all other cases, in accordance with regulations prescribing reasonable methods of amortizing bond premium prescribed by the Secretary. (c) Election as to taxable bonds (1) Eligibility to elect; bonds with respect to which election permitted In the case of bonds the interest on which is not excludible from gross income, this sec- tion shall apply only if the taxpayer has so elected. (2) Manner and effect of election The election authorized under this .ubsec- tion shall be made in accordance with such regulations as the Secretary shall prescribe. If such election is made with respect to any bond (described in paragraph (1)) of the tax- payer, it shall also apply to all such bonds held by the taxpayer at the beginning of the first taxable year to which the election ap- plies and to all such bonds thereafter ac- quired by him and shall be binding for all subsequent taxable years with respect to all such bonds of the taxpayer, unless, on appli- cation by the taxpayer, the Secretary permits him, subject to such conditions as the Secre- tary deems necessary, to revoke such election. In the case of bonds held by a common trust fund, as defined in section 584(a), or by a for- eign personal holding company, as defined in section 552, the election authorized under this subsection shall be exercisable with re- spect to such bonds only by the common trust fund or foreign personal holding company. In case of bonds held by an estate or trust, the election authorized under this subsection shall be exercisable with respect to such bonds only by the fiduciary. (d) Bond defined For purposes of this section, the term "bond" means any bond, debenture, note, or certificate or other evidence of indebtedness, issued by any corporation and bearing interest (including any like obligation issued by a government or political subdivision thereof), but does not in- clude any such obligation which constitutes stock in trade of the taxpayer or any such obli- gation of a kind which would properly be in- cluded in the inventory of the taxpayer if on hand at the close of the taxable year, or any such obligation held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business. (e) Dealers in tax-exempt securities For special rules applicable, in the case of dealers in securities, with respect to premium attributable to cer- tain wholly tax-exempt securities, see section 75. (Aug. 16, 1954, ch. 736, 68A Stat. 61; Sept. 2, 1958, Pub. L. 85-866, title I, § 13(a), 72 Stat. 1610; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(b)(1)(E), 1906(b)(13)(A), 1951(b)(5)(A), 90 Stat. 1790, 1834, 1837.) AMENDMENTS 1976-Subsec. (a)(1). Pub. L. 94-455, § 1901(b)(1)(E)(1), substituted "Taxable bonds" for "In- Page 171
TITLE 26-INTERNAL REVENUE CODE terest wholly or partially taxable" following "(1)" in par. (1). Subsec. (a)(2). Pub. L. 94-455. § 1901(b)(l)(E)(ii), sub- stituted "Tax-exempt bonds" for "Interest wholly tax- exempt" following "(2)" in par. (2). Subsec. (a)(3). Pub. L. 94-455, § 1901(b)(1)(E)(ii), struck out par. (3) relating to adjustment of credit or deduction for interest partially tax-exempt and rede- signated par. (4) as par. (3). Subsec. (a)(4). Pub. L. 94-455, § 1901(b)(1)(E)(iii), re- designated former par. (4) as par. (3). Subsec. (b)(1)(B)(i). Pub. L. 94-455. § 1951(b)(5)(A)(ii), substituted "clause (ii) applies, or" for "clause (ii) or (iii) applies" following "bond to which" and inserted "and" at the end thereof. Subsec. (b)(1)(B)(ii). Pub. L. 94-455, §§ 1901(b)(1)(E)(Iv), 1951(b)(5)(A)(iii), substituted "subsection (a)(1)" for "subsection (c)(1)(B)" following "bond described in" and "and" for "or" following "1957". Subsec. (b)(1)(B)(iii). Pub. L. 94-455, 4 1951(b)(5)(A)(i), struck out cl. (iii) relating to certain bonds acquired before 1958. Subsec. (b)(2). Pub. L. 94-455, § 1951(b)(5)(A)(iv), struck out "or (iii)" following "paragraph (1)(B)(ii)". Subsec. (b)(3)(B). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c)(1). Pub. L. 94-455, § 1901(b)(1)(E)(v), sub- stituted "In the case of bonds the interest on which is not excludible from gross income, this section shall apply only if the taxpayer has so elected" for "This section shall apply with respect to the following classes of taxpayers with respect to the following classes of bonds only if the taxpayer has elected to have this section apply" following "election permit. ted", and struck out subpars. (A) and (B) relating to partially tax-exempt, and wholly taxable, bonds. Subsec. (c)(2). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" in three places following "Secretary". 1958-Subsec. (b)(1)(B). Pub. L. 85-866, § 13(a)(1), substituted ". in the case of any bond other than a bond to which clause (ii) or (i) applies" for "(but in the case of bonds described in subsection (c)(1)(B) issued after January 22, 1951, and acquired after Janu- ary 22, 1954, only if such earlier call date is a date more than 3 years after the date of such issue), and", designated such provision as cl. (i), and added cl. (ii) and (iii). Subsec. (b)(2). Pub. L. 85-866, § 13(a)(2), substituted "In the case of a bond to which paragraph (1)(B)(ii) or (iii) applies and which has a call date," for "In the case of a bond described in subsection (c)(1)(B) issued after January 22, 1951, and acquired after January 22, 1954, which has a call date not more than 3 years after the date of such issue," in the second sentence. EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs,(.,)(3), (b)(1)(B)(ii), and (c)(1) by section 1901(b)(1)(E)(iii) to (v) of Pub. L. 94-455, re- spectively, effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment under section 2 of this title. Amendment of subsec. (b)(1)(B)(iii) by section 1951(b)(5)(A)(i) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31. 1976, see section 1951(d) of Pib. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 72 of this title. EFFECTIVE DATE OF 1958 AMENDMENT Section 13(b) of Pub. L. 85-866 provided that: "The amendments made by subsection (a) [to subsecs. (b)(1)(B), (2) of this section] shall apply with respect to taxable years ending after December 31, 1957." SAVINGS PROVISION Section 1951(b)(5)(B) of Pub. L. 94-455 provided that: "Notwithstanding the amendments made by sub- paragraph (A) [repealing subsec. (b)(1)(B)(iii) of this section], in the case of a bond the interest on which is not excludable from gross income- "(I) which was issued after January 22, 1951, with a call date not more than 3 years after the date of such issue, and "(ii) which was acquired by the taxpayer after Jan- uary 22, 1954, and before January 1, 1958, the bond premium for a taxable year beginning after December 31, 1975, shall not be determined under sec- tion 171(b)(1)(B)(i) but shall be determined with refer- ence to the amount payable on maturity, and if the bond is called before its maturity, the bond premium for the year in which the bond is called shall be deter- mined in accordance with the provisions of section 171(b)(2)." SECTION REFERRED TO IN OTHEN SECTIONS This section is referred to in sections 75, 163, 809, 818, 822, 1016 of this title. § 172. Net operating loss deduction (a) Deduction allowed There shall be allowed as a deduction for the taxable year an amount equal to the aggregate of (1) the net operating loss carryovers to such year, plus (2) the net operating loss carrybacks to such year. For purposes of this subtitle, the term "net operating loss deduction" means the deduction allowed by this subsection. (b) Net operating loss carrybacks and carryovers (1) Years to which loss may be carried (A)(i) Except as provided in clause (ii) and in subparagraphs (D), (E), (F), and (G), a net operating loss for any taxable year ending after December 31, 1957, shall be a net operating loss carryback to each of the 3 taxable years preceding the taxable year of such loss. (ii) In the case of a taxpayer with respect to a taxable year ending on or after Decem- ber 31, 1962, for which a certification has been issued under section 317 of the Trade Expansion Act of 1962, a net operating loss for such taxable year shall be a net operat- ing loss carryback to each of the 5 taxable years preceding the taxable year of such loss. (B) Except as provided in subparagraphs (C), (D), and (E), a net operating loss for any taxable year ending after December 31, 1955, shall be a net operating loss carryover to each of the 5 taxable years following the taxable year of such loss. Except as pro- vided in subparagraphs (C), (D), (E), and F), a net operating loss for any taxable year ending after December 31, 1975, shall be a net operating loss carryover to each of the 7 taxable years following the taxable year of such loss. (C) In the case of a taxpayer which is a regulated transportation corporation (as de- fined in subsection (g)(1)), a net operating loss for any taxable year ending after De- cember 31, 1955, shall (except as provided in subsection (g)) be a net operating loss car- ryover to each of the 7 taxable years follow- ing the taxable year of such loss. For any taxable year ending after December 31, 1975, the preceding sentence shall be ap- plied by substituting "9 taxable years" for "7 taxable years". (D) In the case of a taxpayer which has a foreign expropriation loss (as defined in Page 172 § 172
TITLE 26-INTERNAL REVENUE CODE subsection (h)) for any taxable year ending after December 31, 1958, the portion of the net operating loss for such year attributable to such foreign expropriation loss shall not be a net operating loss carryback to any taxable year preceding the taxable year of such loss and shall be a net operating loss carryover to each of the 10 taxable years following the taxable year of such loss (or, with respect to that portion of the net oper- ating loss for such year attributable to a Cuban expropriation loss, to each of the 20 taxable years following the taxable year of such loss). (E) In the case of a taxpayer which has a net operating loss for any taxable year for which the provisions of part II of sub- chapter M (relating to real estate invest- ment trusts) apply to such taxpayer, such loss shall not be a net operating loss carry- back to any taxable year preceding the tax- able year of such loss and shall be a net op- erating loss carryover to each of the 8 Lax- able years following the taxable year of such loss, except, In the case of a net oper- ating loss for a taxable year ending before January 1, 1976, such loss shall not be car- ried to the 6th, 7th, or 8th taxable year fol- lowing the taxable year of such loss unless part II of subchapter M applied to the tax- payer for the taxable year to which the loss is carried and for all intervening taxable years following the year of loss. A net oper- .ating loss shall not be carried back to a tax- able year for which part II of subchapter M applied to the taxpayer. (F) In the case of a financial institution to which section 585, 586, or 593 applies, a net operating loss for any taxable year begin- ning after December 31, 1975, shall be a net operating loss carryback to each of the 10 taxable years preceding the taxable year of such loss and shall be a net operating loss carryover to each of the 5 taxable years fol- lowing the taxable year of such loss. (G) In the case of a Bank for Coopera- tives (organized and chartered pursuant to section 2 of the Farm Credit Act of 1933 (12 U.S.C. 1134)), a net operating loss for any taxable year beginning after December 31, 1969, shall be a net operating loss carryback to each of the 10 taxable years preceding the taxable year of such loss and shall be a net operating loss carryover to each of the 5 taxable years following the taxable year of such loss. (2) Amount of carrybacks and carryovers Except as provided in subsection (g), the entire amount of the net operating loss for any taxable year (hereinafter in this section referred to as the "loss year") shall be carried to the earliest of the taxable years to which (by reason of paragraph (1)) such loss may be carried. The portion of such loss which shall be carried to each of the other taxable years shall be the excess, if any, of the amount of such loss over the sum of the taxable income for each of the prior taxable years to which such loss niay be carried. For purposes of the preceding sentence, the taxable income for any such prior taxable year shall be comput- ed- (A) with the modifications specified in subsection (d) other than paragraphs (1), (4), and (6) thereof; and (B) by determining the amount of the net operating loss deduction- (I) without regard to the net operating loss for the loss year or for any taxable year thereafter, and (ii) without regard to that portion, if any, of a net operating loss for a taxable year attributable to a foreign expropri- ation loss, if such portion may not, under paragraph (1)(D), be carried back to such prior taxable year, and the taxable income so computed shall not be considered to be less than zero. For pur- poses of this paragraph, if a portion of the net operating loss for the loss year is attribut- able to a foreign expropriation loss to which paragraph (1)(D) applies, such portion shall be considered to be a separate net operating loss for such year to be applied after the other portion of such net operating loss, and, if a portion of a foreign expropriation loss for the loss year is attributable to a Cuban expro- priation loss, such portion shall be considered to be a separate foreign expropriation loss for such year to be applied after the other por- tion of such foreign expropriation loss. (3) Special rules (A) Paragraph (1)(A)(ii) shall apply only if- (I) there has been filed, at such time and in such manner as may be prescribed by the Secretary, a notice of filing of the application under section 317 of the Trade Expansion Act of 1962 for tax assistance, and, after its issuance, a copy of the certi- fication under such section, and (!i) the taxpayer consents in writing to the assessment, within such period as may be agreed upon with the Secretary, of any deficiency for any year to the extent at- tributable to the disallowance of a deduc- tion previously allowed with respect to such net operating loss, even though at the time of filing such consent the assess- ment of such deficiency would otherwise be prevented by the operation of any law or rule of law. (B) In the case of- (1) a partnership and its partners, or (ii) an electing small business corpora- tion under subchapter S and its share- holders, paragraph (1)(A)(ii) shall apply as deter- mined under regulations prescribed by the Secretary. Such paragraph shall apply to a net operating loss of a partner or such a shareholder only if it arose predominantly from losses in respect of which certifica- tions under section 317 of the Trade Expan- sion Act of 1962 were filed under this sec- tion. (C) Paragraph (1)(D) shall apply only if- (I) the foreign expropriation loss (as de- fined in subsection (h)) for the taxable year equals or exceeds 50 percent of the net operating loss for the taxable year, (ii) in the case of a foreign expropri- ation loss for a taxable year ending after Page 173 § 172
TITLE 26-INTERNAL REVENUE CODE December 31, 1963, the taxpayer elects (at such time and in such manner as the Sec- retary by regulations prescribes) to have paragraph (1)(D) apply, and (iti) in the case of a foreign expropri- ation loss for a taxable year ending after December 31, 1958, and before January 1, 1964, the taxpayer elects (in such manner as the Secretary by regulations pre- scribes) on or before December 31, 1965, to have paragraph (1)(D) apply. (D) If a taxpayer makes an election under subparagraph (C)(iii), then (notwithstand- ing any law or rule of law), with respect to any taxable year ending before January 1, 1964, affected by the election- (i) the time for making or changing any choice or election under subpart A of part III of subchapter N (relating to foreign tax credit) shall not expire before Janu- ary 1, 1966, (ii) any deficiency attributable to the election under subparagraph (C)(iii) or to the application of clause (i) of this sub- paragraph may be assessed at any time before January 1, 1969, and (iii) refund or credit of any overpay- ment attributable to the election under subparagraph (C)(iii) or to the application of clause (i) of this subparagraph may be made or allowed if claim therefor is filed before January 1, 1969. (E) Any taxpayer entitled to a carryback period under paragraph (1) may elect to re- linquish the entire carryback period with respect to a net operating loss for any tax- able year ending after December 31, 1975. Such election shall be made in such manner as may be prescribed by the Secretary, and shall be made by the due date (including ex- tensions of time) for filing the taxpayer's return for the taxable year of the net oper- ating loss for which the election is to be in effect. Such election, once made for any taxable year, shall be irrevocable for that taxable year. (c) Net operating loss defined For purposes of this section, the term "net operating loss" means the excess of the deduc- tions allowed by this chapter over the gross income. Such excess shall be computed with the modifications specified in subsection (d). (d) Modifications The modifications referred to in this section are as follows: (1) Net operating loss deduction No net operating loss deduction shall be al- lowed. (2) Capital gains and losses of taxpayers other than corporations In the case of a taxpayer other than a cor- poration- (A) the amount deductible on account of losses from sales or exchanges of capital assets shall not exceed the amount includi- ble on account of gains from sales or ex- changes of capital assets; and (B) the deduction for long-term capital gains provided by section 1202 shall not be allowed. (3) Deduction for personal exemptions No deduction shall be allowed under section 151 (relating to personal exemptions). No de- duction in lieu of any such deduction shall be allowed. (4) Nonbusiness deductions of taxpayers other than corporations In the case of a taxpayer other than a cor- poration, the deductions allowable by this chapter which are not attributable to a tax- payer's trade or business shall be allowed only to the extent of the amount of the gross income not derived from such trade or busi- ness. For purposes of the preceding sen- tence- (A) any gain or loss from the sale or other disposition of- (i) property, used in the trade or busi- ness, of a character which is subject to the allowance for depreciation provided in section 167, or (it) real property used in the trade or business, shall be treated as attributable to the trade or business; (B) the modifications specified in para- graphs (1), (2)(B), and (3) shall be taken into account; (C) any deduction allowable under section 165(c)(3) (relating to casualty losses) shall not be taken into account; and (D) any deduction allowed under section 404 or section 405(c) to the extent attribut- able to contributions which are made on behalf of an individual who is an employee within the meaning of section 401(c)(1) shall not be treated as attributable to the trade or business of such individual. (5) Special deductions for corporations No deduction shall be allowed under section 242 (relating to partially tax-exempt interest) or under section 922 (relating to Western Hemisphere trade corporations). (6) Computation of deduction for dividends re- ceived, etc. The deductions allowed by sections 243 (re- lating to dividends received by corporations), 244 (relating to dividends received on certain preferred stock of public utilities), and 245 (relating to dividends received from certain foreign corporations) shall be computed with- out regard to section 246(b) (relating to limi- tation on aggregate amount of deductions); and the deduction allowed by section 247 (re- lating to dividends paid on certain preferred stock of public utilities) shall be computed without regard to subsection (a)(1)(B) of such section. (7) In the case of any taxable year for which part II of subchapter M (relating to real estate in- vestment trusts) applies to the taxpayer- (A) the net operating loss for such taxable year shall be computed by taking into ac- count the adjustments described in section 857(b)(2) (other than the deduction for divi- dends paid described in section 857(b)(2)(B)); and (B) where such taxable year is a "prior taxable year" referred to in paragraph (2) of subsection (b), the term "taxable § 172 Page 174
TITLE 26-INTERNAL REVENUE CODE income" in such paragraph shall mean "real estate investment trust taxable income" (as defined in section 857(b)(2)). (e) Law applicable to computations In determining the amount of any net operat- ing loss carryback or carryover to any taxable year, the necessary computations involving any other taxable year shall be made under the law applicable to such other taxable year. f) Disallowance of net operating loss of electing small business corporations In determining the amount of the net operat- ing loss deduction under subsection (a) of any corporation, there shall be disregarded the net operating loss of such corporation for any tax- able year for which such corporation is an electing small business corporation under sub- chapter S. (g) Carryover of net operating loss for certain regu- lated transportation corporations (1) Definition For purposes of subsection (b)(1)(C), the term "regulated transportation corporation" means a corporation- (A) 80 percent or more of the gross income of which (computed without regard to dividends and capital gains and losses) for the taxable year is derived from the fur- nishing or sale of transportation described in subparagraph (A), (C)(i), (E), or (F) of section 7701(a)(33) and taken into account for purposes of the limitation contained in the last two sentences of section 7701(a)(33), (B) which is described in subparagraph (G) or (H) of section 7701(a)(33), or (C) which is a member of a regulated transportation system. (2) Regulated transportation system For purposes of this subsection, a corpora- tion shall be treated as a member of a regu- lated transportation system for a taxable year if- (A) it is a member of an affiliated group of corporations making a consolidated return for such taxable year, and (B) 80 percent or more of the aggregate gross income of the members of such affili- ated group (computed without regard to dividends and capital gains and losses) for such taxable year is derived from sources described in paragraph (1)(A). For purposes of subparagraph (B), income de- rived by a corporation described in subpara- graph (G) or (H) of section 7701(a)(33) from leases described in subparagraph (G) thereof shall be considered as derived from sources described in paragraph (1)(A). (3) Limitation For purposes of subsection (b)(1)(C).- (A) a net operating loss may not be a net operating loss carryover to the 6th taxable year following the loss year unless the tax- payer is a regulated transportation corpora- tion for such 6th taxable year; and (B) a net operating loss may not be a net operating loss carryover to the 7th taxable year following the loss year unless the tax- payer is a regulated transportation corpora- tion for the 6th taxable year following the loss year and for such 7th taxable, year. (C) in the case of a net operating loss car- ryover from a loss year ending after Decem- ber 31, 1975. subparagraphs (A) and (B) shall be applied by substituting "8th tax- able year" for the "6th taxable year" and "9th taxable year" for "7th taxable year." (h) Foreign expropriation loss defined For purposes of subsection (b)- (1) The term "foreign expropriation loss" means, for any taxable year, the sum of the losses sustained by reason of the expropri- ation, intervention, seizure, or similar taking of property by the government of any foreign country, any political subdivision thereof, or any agency or instrumentality of the forego- ing. For purposes of the preceding sentence, a debt which becomes worthless shall, to the extent of any deduction allowed under sec- tion 166(a), be treated as a loss. (2) The portion of the net operating loss for any taxable year attributable to a foreign ex- propriation loss is the amount of the foreign expropriation loss for such year (but not in excess of the net operating loss for such year). (3) The term "Cuban expropriation loss" means, for any taxable year, a foreign expro- priation loss sustained by reason of the ex- propriation, intervention, seizure, or similar taking of property, before January 1, 1964, by the government of Cuba, any political subdi- vision thereof, or any agency or instrumental- ity of the foregoing. The portion of a foreign expropriation loss for any taxable year attrib- utable to a Cuban expropriation loss is the amount of the Cuban expropriation loss. (1) C:oss references (1) For treatment of net operating loss carryovers in certain corporate acquisitions, see section 381. (2) For special limitation on net operating loss car- ryovers in case of a corporate change of ownership, see section 382. (Aug. 16, 1954, ch. 736, 68A Stat. 63; Sept. 2, 1958, Pub. L. 85-866, title I, §§ 14(a), (b), 64(b), title II, §203(a), (b), 72 Stat. 1611, 1656, 1678; Sept. 27, 1962, Pub. L. 87-710, § 1, 76 Stat. 648; Oct. 10, 1962, Pub. L. 87-792, § 7f), 76 Stat. 829; Oct. 11, 1962, Pub. L. 87-794, title III, § 317(b), 7S Stat. 889; Feb. 26, 1964, Pub. L. 88-272, title II, §§ 210(a), (b), 234(b)(5), 78 Stat. 47, 48, 115; Dec. 27, 1967, Pub. L. 90-225, § 3(a), 81 Stat. 732; Dec. 30, 1969, Pub. L. 91-172, title IV, § 431(b), 83 Stat. 619; Jan. 12, 1971, Pub. L. 91-677, § 2(a)-(c), 84 Stat. 2061; Oct. 4, 1976, Pub. L. 94- 455, title VIII, § 806(a)-(c), title XVI, § 1606(b), (c), title XIX, §§ 1901(a)(29), 1906(b)(13)(A), title XXI, § 2126,.90 Stat. 1598, 1755, 1756, 1769, 1834, 1920.)" AMENDMENT OF SUBSEC. (d) Subsec. (d) of this section amended by Pub. L. 94-455, title X, § 1052(c)(3), (d), Oct. 4, 1976, 90 Stat. 1648, applicable with re- spect to taxable years beginning after Dec. 31, 1979, by striking out paragraph (5) and redesignating paragraph (6) as (5). REFERENCES IN TEXT Provisions of section 317 of the Trade Expansion Act of 1962 relating to application for tax assistance, and Page 175 § 172
TITLE 26-INTERNAL REVENUE CODE to certifications, referred to in subsecs. (b)(1)CA)(li) and (b)(3), were contained in section 317(a) which was classified to section 1917 of Title 19, Customs Duties, and was repealed by Pub. L. 93-618, Title VI, §602(e), Jan. 3, 1975, 88 Stat. 2072. Section 317(b) to (d) amended sections 172(b), 6501(h), and 6511(d)(2)(A) of Title 26. Section 2 of the Farm Credit Act of 1933 (12 U.S.C. 1134), referred to in subsec. (b)(l)(G), was repealed by section 5.26(a) of the Farm Credit Act of 1971, Pub. L. 92-181, Dec. 10, 1971, 85 Stat. 624. Section 5.26(a) of the Farm Credit Act of 1971 also provided that all ref- erences in other le, lation to the Acts repealed there- by "shall be deemed to refer to comparable provisions of this Act". Section 2 of the Farm Credit Act of 1933, which was classified to section 1134 of Title 12, Banks and Banking, is now covered by section 2121 of Title 12. AMENDMENTS 1976-Subsec. (b)(1)(B). Pub. L. 94-455, § 806(a), added "Except as provided in subparagraphs (C), (D), (E), and (F), a net operating loss for any taxable year ending after December 31, 1975, shall be a net operat- ing loss carryover to each of the 7 taxable years fol- lowing the taxable year of such loss" following "year of such loss". Subsec. (b)(1)(C). Pub. L. 94-455, §§806(b)(1), 1901(a)(29)(C)(ii), added "For any taxable year ending after December 31, 1975, the preceding sentence shall be applied by substituting "9 taxable years" for "7 tax- able years" following "year of such loss", substituted "subsection (g)(1)" for "subsection (j)(1)" following "as defined in" and "subsection (g)" for "subsection Mi" following "as provided in". Subsec. (b)(1)(D). Pub. L. 94-455, §§ 1901(a)(29)(C)(iii), 2126, substituted "subsection (h)" for "subsection (k" following "as defined in" and "20" for "15" following "expropriation loss, to each of the". Subsec. (b)(1)(E). Pub. L. 94-455, § 1606(b), added subpar. (E). Subsec. (b)(2). Pub. L. 94-455, § 1901(a)(29)(C)(iv), substituted "subsection (g)" for "subsections (i) and (J)" following "provided in". Subsec. (b)(3). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (b)(3)(A)(i), (it). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" In two places following "Secretary". Subsec. (b)(3)(C)(i). Pub. L. 94-455, § 1901(a)(29)(C)(iii), substituted "subsection (h)" for "subsection (k)" following "as defined in", Subsec. (b)(3)(C)(i), (iII). Pub. L. 94-455, § 1906(b)(13)(A), struck out "Or his delegate" in two places following "Secretary". Subsec. (b)(3)(E). Pub. L. 94-455, §§ 806(c), 1901(a)(29)(A)(ii), added subpar. (E. Former subpar. (E, which related to applicability of special rules in computing taxpayer's net operating loss deduction, was stricken. Subsec. (b)(3)(F). Pub. L. 94-455, § 1901(a)(29)(A)(ii), struck out subpar. (.') which defined "class of prod- ucts" and provided for the use of information com- piled or published by Secretary of Commerce or manu- facturers as prima facie evidence of the total number of units of such class of products manufactured and produced in the United States in a calendar year. Subsec. (c). Pub. L. 94-455, § 1901(a)(29)(B), struck out "(for any taxable year ending after December 31, 1953)" following "means". Subsec. (d)(7). Pub. L. 94-455, § 1606(c), added par. (7). Subsec. (e. Pub. L. 94-455, § 1901(a)(29)(D), struck out "The preceding sentence shall apply with respect to all taxable years, whether they begin before, on, or after January 1, 1954" following "applicable to such other taxable year". Subsec. Cf). Pub. L. 94-455, § 1901(a)'29)(C)(i), struck out subsec. (f) relating to net operating loss deduction for taxable years beginning in 1953 and ending in 1954, and redesignated subsec. (h) as (f). Subsec. (g). Pub. L. 94-455, § 1901(a)(29)(C)(i), struck out subsec. (g) relating to special transitional rules to be applied to net operating loss deductions, and rede- signated subsec. (j) as (g). Subsec. (g)(2). Pub. L. 94-455, § 1901(a)(29)(E), struck out par. (4) relating to carryover of net operat- ing loss for certain regulated transportation corpora- tions for taxable years beginning in 1955 and ending in 1956. Subsec. (g)(3). Pub. L. 94-455, § 806(b)(2), added subpar. (C). Subsec. (h). Pub. L. 94-455, § 1901(a)(29)(C)(i), rede- signated subsec. (k) as (h). Former subsec. (h) redesig- nated (f). Subsec. (i). Pub. L. 94-455, § 1901(a)(29)(C)(i), struck out subsec. (i) relating to carryback of net operating loss for taxable years beginning in 1957 and ending in 1958, and redesignated subsec. (1) as (i). Subsec. (j). Pub. L. 94-455, § 1901(a)(29)(C)(1), rede- signated former subsec, () as (g). Subsec. (k. Pub. L. 94-455, § 1901(a)(29)(C)(i), rede- signated former subsec. (k) as (h). Subsec. (1). Pub. L. 94-455, § 1901(a)(29)(C)(i), rede- signated former subsec. (l) as (i). 1971-Subsec. (b)(1)(D). Pub. L. 91-677, § 2(a), added "(or, with respect to that portion of the net operating loss for such year attributable to a Cuban expropri- ation loss, to each of the 15 taxable years following the taxable year of such loss)" following "the 10 tax- able years following the taxable year of such loss". Subsec. (b)(2). Pub. L. 91-677, § 2(b), added the provi- sions relating to the treatment of Cuban expropriation losses. Subsec. (k)(3). Pub. L. 91-677, § 2(c), added subsec. (k)(3). 1969-Subsec. (b)(1). Pub. L. 91-172 substituted "(E), (F), and (G)", for "and (E)" in subparagraph (A)(i) and added subpars. (F) and (G). 1967-Subsec. (b)(1). Pub. L. 90-225, § 3(a)(1) to (3) added reference to subpar. (E) in subpars. (A)(i) and (B), and added subpar. E). Subsec. (b)(3). Pub. L. 90-225, § 3(a)(4), added sub- pars. E) and (F). 1964-Subsec. (b). Pub. L. 88-272, § 210(a)(1) to (4), (b), inserted subpar. (D) in par. (1), references to such subpar. (D) in par. (1)(A)(i) and (1)(B), subpars. (C) and (D) in par. (3), provided that the net operating loss deduction in par. (2)(B) be determined without regard to that portion of a net operating loss due to a foreign expropriation loss, if such portion may not, under par. 1)(D), be carried back to such prior tax- able year, and that if a portion of the net operating loss is attributable to foreign expropriation to which par. (1)(D) applied, such portion shall be considered a separate loss for such year to be applied after the other portion of such net operating loss. Subsec. (J)(1), (2), Pub. L. 88-272, § 234(b)(5), substi- tuted references to section 7701(a)(33) for references to section 1503(c)(1) or (2), wherever appearing. Subsec. k). Pub. L. 88-272, § 210(a)(5), added subsec. k). Former subsec. (k) redesignated (1). Subsec. (1). Pub. L. 88-272, § 210(a)(5). redesignated former subsec. (k) as (1). 1962-Subsec. (b)(1). Pub. L. 87-794 designated exist- ing provisions as cl. (A)(i) and eliminated provisions therefrom which authorized a net operating loss for any taxable year ending after Dec. 31, 1957, to be a net operating loss carryover to each of the 5 taxable years following the taxable year of such loss, and added cls. (A)i), (B), and (C). Subsee. (b)(2). Pub. L. 87-794 inserted the reference to subsection (j), and substituted "shall be carried to the earliest of the taxable years to which (by reason of paragraph (1))" for "shall be carried to the earliest of the 8 taxable years to which (by reason of subpara- graphs (A) and (B) of paragraph (1))", and "each of the other taxable years" for "each of the other 7 tax- able years". Subsee. (b)(3). Pub. L. 87-794 added subsec. (b)(3). § 172 Page 176
TITLE 26-INTERNAL REVENUE CODE Pub. L. 87-710, § 1(a), authorized a carryover of a net operating loss for any taxable year ending after Dec. 31, 1955, to each of the 5 taxable years following the taxable year of loss, or when such loss occurs in the case of regulated transportation corporation, except as provided in subsec. (J), then to each of the 7 taxable years following the taxable year of loss, and eliminat- ed provisions authorizing a net operating loss for any taxable years ending Dec. 31, 1957, to be carried over to each of the 5 taxable years following the taxable year of such loss, in par. (1), and inserted the refer- ence to subsec. (j) in par. (2). Subsec. (d)(4). Pub. L. 87-792 added subpar. (D). Subsec. (j). Pub. L. 87-710, § 1(b), added subsec. (j). Former subsec. (j) redesignated (k). Subsec. k). Pub. L. 87-710, §1(b), redesignated former subsec. (j) as (k. 1958-Subsec. (b). Pub. L. 85-866, § 203(a), substitut- ed "1957" for "1953", and "3" for "2" in par. (1), and substituted "subsection (i)" for "subsection (f)", "8' for "7", and "7" for "8" in par. (2). Subsecs. (f)(3), (4). Pub. L. 85-866, § 14(a), added sub- secs. (f)(3), (4). Subsec. (g)(3). Pub. L. 85-866, § 14(b), added subsec. (g)(3) and redesignated former subsec. (g)(3) as (g)(4). Subsec. (g)(4). Pub. L. 85-866, § 14(b), redesignated former subsec. (g)(3) as (g)(4). Subsec. (h). Pub. L. 85-866, § 64(b), added subsec. (h) and redesignated former subsec. (h) as (I). Subsec. (i). Pub. L. 85-866, § 203(b), added subsec. (I) and redesignated former subsec. (I) as redesignated by § 64(b) as (J). Subsec. (J). Pub. L. 85-866, § 203(b), redesignated former subsec. (1) as (j). EFFECTIVE DATE OF 1976 AMENDMENT Section 806(g)(1) of Pub. L. 94-455 provided that: "The amendments made by subsections (a), (b), (c), and (d) [to subsecs. (b)(1)(B), (C), (3)(E) and (g)(3) of this section and sections 812(b)(1), (3) and 825(d) of this title) shall apply to losses incurred in taxable years ending after December 31, 1975." Amendment of subsecs. (b)(1)(E), (d)(7) by section 1606(b), Wc) of Pub. L. 94-455, respectively, effective for taxable years ending after Oct. 4, 1976, see section 1608(c) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 857 of this title. Amendment of section by section 1901(a)(29) of Pub. L. 94-455 effective for taxable years ending after Oct. 4, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under sec- tion 2 of this title. EFFECTIVE DATE OF 1971 AMENDMENT Section 2(d) of Pub. L. 91-677 provided that: "The amendments made by this section [amending subsecs. (b) and (k) of this section) shall apply in respect of foreign expropriation losses sustained in taxable years ending after December 31, 1958." EFFECTIVE DATE OF 1967 AMENDMENT Section 3(b) of Pub. L. 90-225 provided that: "No in- terest shall be paid or allowed with respect to any overpayment of tax resulting from the application of the amendments made by subsection (a) [amending subsec. (b) of this section] for any period prior to the date of the enactment of this Act [Dec. 27, 1967]." Section 3(c) of Pub. L. 90-225 provided that: "The amendments made by subsection (a) [amending subsec. (b) of this section) shall apply with respect to net operating losses sustained in taxable years ending after December 31, 1966." EFFECTIVE DATE OF 1964 AMENDMENT Section 210(c) of Pub. L. 88-272 provided that: "The amendments made by this section [adding subsec. (k), redesignating former subsec. (k) as (1), and amending subsec. (b) of this section] shall apply in respect of foreign expropriation losses (as defined in section 172(k) of the Internal Revenue Code of 1954, as amended by subsection (a)(5) of this section), sus- tained in taxable years ending after December 31, 1958." Amendment of subsec. (j) of this section by Pub. L. 88-272 applicable to taxable years beginning after Dec. 31, 1963, see section 234(c) of Pub. L. 88-272, set out as a note under section 1503 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Section 317(b) of Pub. L. 87-794 provided in part that the amendment of subsec. (b) of this section by Pub. L. 87-794 shall be effective with respect to net op- erating losses for taxable years ending after Dec. 31, 1955. Amendment by Pub. L. 87-792 applicable to taxable years beginning after Dec. 31, 1962, see section 8 of Pub. L. 87-792, set out as an Effective Date of 1962 Amendment note under section 37 of this title. Section 2 of Pub. L. 87-710 provided that: "The amendments made by the first section of this Act [to this section] shall apply only with respect to net oper- ating losses for taxable years ending after December 31, 1955." EFFECTIVE DATE OF 1958 AMENDMENT Section 203(c) of Pub. L. 85-866 provided that: "The amendments made by subsections (a) and (b) [to sub- sees. (b)(1), (2). and (j) of this section] shall apply in respect of net operating losses for taxable years ending after December 31, 1957." Subsecs. (f)(3), (4), and (g)(3) of this section as appli- cable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 1(c) of Pub. L. 85-866, set out as an Effective Date of 1958 Amend- ment note under section 165 of this title. Section 64(e) of Pub. L. 85-866 provided that: "The amendments made by this section [adding sections 1016(a)(18), 1371-1377, 1504(b)(8) and 6037 of this title, amending subsecs. (h) and (I) of this section and renumbering former section 6037 as 6038 of this title) shall apply only with respect to taxable years begin- ning after December 31, 1957". REFUND OR CREDIT OF OVERPAYMENT; LIMITATIONS; INTEREST Section 14 of Pub. L. 85-866 provided that if any refund or credit of any overpayment resulting from application of subsec. (a) and (b) of Pub. L. 85-866, amending former subsecs. (f)(3), (4) and (g)(3), (4), was prevented on Sept, 2, 1958 or 6 months thereafter, by operation of any law or rule of law, refund was to be allowed if a claim was filed wihin six months of the date of such date but such reiund was to be without interest. INTEREST ATTRIBUTABLE TO NET OPERATING Loss CARRY- BACK FOR CERTAIN TAXABLE YEARS ENDING IN 1954 For payment of interest attributable to net operat- ing loss carryback, see section 83(e) of Pub. L. 85-866, set out as a note under section 6601 of this title. CROSS REFERENCES Adjustments required by changes in method of ac- counting, see section 481 of this title. Losses generally, see section 165 of this title. Net operating loss- Amount and method of adjustment, see section 1314 of this title. Extension of time for payment of taxes by corpo- rations expecting carrybacks under this section, see section 6164 of this title. Partnership not allowed deduction, see section 703 of this title. Net operating loss carryover on termination of estate or trust, see section 642 of this title. Special limitations on net operating loss carryovers, see section 382 of this title. Page 177 § 172
TITLE 26-INTERNAL REVENUE CODE SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 56, 170, 186, 246, 381, 481, 512, 527, 528, 535, 545, 556, 584, 613A, 642, 703, 804. 809, 822, 823, 844, 852, 904, 1212, 1242, 1244, 1247, 1314, 1341, 1351, 1373, 1374, 1402, 6164, 6411, 6501 of this title. § 173. Circulation expenditures Notwithstanding section 263, all expenditures (other than expenditures for the purchase of land or depreciable property or for the acquisi- tion of circulation through the purchase of any part of the business of another publisher of a newspaper, magazine, or other periodical) to es- tablish, maintain, or increase the circulation of a newspaper, magazine, or other periodical shall be allowed as a deduction; except that the deduction shall not be allowed with respect to the portion of such expenditures as, under reg- ulations prescribed by the Secretary, is charge- able to capital account if the taxpayer elects, in accordance with such regulations, to treat such portion as so chargeable. Such election, if made, must be for the total amount of such portion of the expenditures which is so charge- able to capital account, and shall be binding for all subsequent taxable years unless, upon appli- cation by the taxpayer, the Secretary permits a revocation of such election subject to such con- ditions as he deems necessary. (Aug. 16, 1954, ch. 736, 68A Stat. 65; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Pub. L. 94-455 struck out "or his delegate' !n two places following "Secretary". CROSS REFERENCES Capital expenditures not ded ictible, see section 263 of this title. Trade or business expenses deductible, see section 162 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 1016 of this title. § 174. Research and experimental expenditures (a) Treatment as expenses (1) In general A taxpayer may treat research or experi- mental expenditures which are paid or in- curred by him during the taxable year in con- nection with his trade or business as expenses which are not chargeable to capital account. The expenditures so treated shall be allowed as a deduction. (2) When method may be adopted (A) Without consent A taxpayer may, without the consent of the Secretary, adopt the method provided in this subsection for his first taxable year- (I) which begins after December 31, 1953, and ends after August 16, 1954, and (i) for which expenditures described in paragraph (1) are paid or incurred. (B) With consent A taxpayer may, with the consent of the Secretary, adopt at any time the method provided in this subsection. (3) Scope The method adopted under this subsection shall apply to all expenditures described in paragraph (1). The method adopted shall be. adhered to in computing taxable income for the "taxable year and for all subsequent -tax- able years unless, with the approval of the Secretary, a change to a different method is authorized with respect to part or all of such expenditures. (b) Amortization of certain research and experimen- tal expenditures (1) In general At the election of the taxpayer, made In ac- cordance with regulations prescribed by the Secretary, research or experimental expendi- tures which are- (A) paid or incurred by the taxpayer in connection with his trade or business, (B) not treated as expenses under subsec- tion (a), and (C) chargeable to capital account but not chargeable to property of a character which is subject to the allowance under section 167 (relating to allowance for depreciation, etc.) or section 611 (relating to allowance for depletion), may be treated as deferred expenses. In com- puting taxable income, such deferred ex- penses shall be allowed as a deduction ratably over such period of not less than 60 months as may be selected by the taxpayer (begin- ning with the month in which the taxpayer first realizes benefits from such expendi- tures). Such deferred expenses are expendi- tures properly chargeable to capital account for purposes of section 1016(a)(1) (relating to adjustments to basis of property). (2) Time for and scope of election The election provided by paragraph (1) may be made for any taxable year beginning after December 31, 1953, but only if made not later than the time prescribed by law for filing the return for such taxable year (including exten- sions thereof). The method so elected, and the period selected by the taxpayer, shall be adhered to in computing taxable income for the taxable year for which the election is made and for all subsequent taxable years unless, with the approval of the Secretary, a change to a different method (or to a differ- ent period) is authorized with respect to part or all of such expenditures. The election shall not apply to any expenditure paid or incurred during any taxable year before the taxable year for which the taxpayer makes the elec- tion. (c) Land and other property This section shall not apply to any expendi- ture for the acquisition or improvement of land, or for the acquisition or improvement of property to be used in comection with the re- search or experimentation and of a character which is subject to the allowance under section 167 (relating to allowance for depreciation, etc.) § 173 Page 178
TITLE 26-INTERNAL REVENUE CODE or section 611 (relating to allowance for deple- tion); but for purposes of this section allowances under section 167, and allowances under section 611, shall be considered as expen- ditures. (d) Exploration expenditures This secion shall not apply to any expendi- ture paid or incurred for the purpose of ascer- taining the existence, location, extent, or qual- ity of any deposit of ore or other mineral (in- cluding oil and gas). (e) Cross reference For adjustments to basis of property for amounts al. lowed as deductions as deferred expenses under subsec- tion (b), see section 1016(a)(14). (Aug. 16, 1954, ch. 736, 68A Stat. 66; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(a)(30), 1906(b)(13)(A), 90 Stat. 1769, 1834.) AMENDMENTS 1976-Subsec. (a)(2)(A). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (a)(2)(A)(i). Pub. L. 94-455, § 1901(a)(30), substituted "August 16, 1954" for "the date on which this title is enacted" following "ends after". Subsec. (a)(3). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsecs. (b)(1), (2). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". CROSS REFERENCES Exception from denial of deduction for capital ex- penditures, see section 263 of this title. Trade or business expenses deductible, see section 162 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 263, 993, 1016 of this title. § 175. Soil and water conservation expenditures (a) In general A taxpayer engaged in the business of farm- ing may treat expenditures which are paid or incurred by him during the taxable year for the purpose of soil or water conservation in respect of land used in farming, or for the prevention of erosion of land used in farming, as expenses which are not chargeable to capital account. The expenditures so treated shall be allowed as a deduction. (b) Limitation The amount deductible under subsection (a) for any taxable year shall not exceed 25 per- cent of the gross income derived from farming during the taxable year. If for any taxable year the total of the expenditures treated as ex- penses which are not chargeable to capital ac- count exceeds 25 percent of the gross income derived from farming during the taxable year, such excess shall be deductible for succeeding taxable years in order of time; but the amount deductible under this section for any one such succeeding taxable year (including the expendi- tures actually paid or incurred during the tax- able year) shall not exceed 25 percent of the gross income derived from farming during the taxable year. (c) Definitions For purposes of subsection (a)- (1) The term "expenditures which are paid or incurred by him during the taxable year for the purpose of soil or water conservation in respect of land used in farming, or for the prevention of erosion of land used in farm- ing" means expenditures paid or incurred for the treatment or moving of earth, including (but not limited to) leveling, grading and ter- racing, contour furrowing, the construction, control, and protection of diversion channels, drainage ditches, earthen dams, watercourses, outlets, and ponds, the eradication of brush, and the planting of windbreaks. Such term doew not include- (A) the purchase, construction, installa- tion, or improvement of structures, appli- ances, or facilities which are of a character which is subject to the allowance for depre- ciation provided in section 167, or (B) any amount paid or incurred which is allowable as a deduction without regard to this section. Notwithstanding the preceding sentences, such term also includes any amount, not. oth- erwise allowable as a deduction, paid or in- curred to satisfy any part of an assessment levied by a soil or water conservation or drainage district to defray expenditures made by such district (i) which, if paid or incurred by the taxpayer, wculd without regard to this sentence constitute expenditures deductible under this section, or (ii) for property of a character subject to the allowance for depre- ciation provided in section 167 and used in the soil or water conservation or drainage dis- trict's business as such (to the extent that the taxpayer's share of the assessment levied on the members of the district for such property does not exceed 10 percent of such assess- ment). (2) The term "land used in farming" means land used (before or simultaneously with the expenditures described in paragraph (1)) by the taxpayer or his tenant for the production of crops, fruits, or other agricultural products or for the sustenance of livestock. (d) When method may be adopted (1) Without consent A taxpayer may, without the consent of the Secretary, adopt the method provided in this section for his first taxable year- (A) which begins after December 31, 1953, and ends after August 16, 1954, and (B) for which expenditures described in subsection (a) are paid or incurred. (2) With consent A taxpayer may, with the consent of the Secretary, adopt at any time the method pro- vided in this section. (e) Scope The method adopted under this section shall apply to all expenditures described in subsec- tion (a). The method adopted shall be adhered to in computing taxable income for the taxable year and for all subsequent taxable years unless, with the approval of the Secretary, a change to a different method is authorized with respect to part or all of such expenditures. Page 179
TITLE 26-INTERNAL REVENUE CODE (f) Rules applicable to assessments for depreciable property (1) Amounts treated as paid or incurred over 9-year period In the case of an assessment levied to defray expenditures for property described in clause (ii) of the last sentence of subsection (c)(1), if the amount of such assessment paid or incurred by the taxpayer during the tax- able year (determined without the application of this paragraph) is in excess of an amount equal to 10 percent of the aggregate amounts which have been and will be assessed as the taxpayer's share of thie expenditure s by the district for such property, and if such excess Is more than $500, the entire excess shall be treated as paid or incurred ratably over each of the 9 succeeding taxable years. (2) Disposition of land during 9-yeor period If paragraph (1) applies to an assessment and the land with respect to which such as- sessment was made is sold or otherwise dis- posed of by the taxpayer (other than by the reason of his death) during the 9 succeeding taxable years, any amount of the excess de- scribed in paragraph (1) which has not been treated as paid or incurred for a taxable year ending on or before the sale or other disposi- tion shall be added to the adjusted basis of such land immediately prior to its sale or other disposition and shall not thereafter be treated as paid or incurred ratably under paragraph (1). (3) Disposition by reason of death If paragraph (1) applies to an assessment ant the taxpayer dies during the 9 succeeding taxable years, any amount of the excess de- scribed in paragraph (1) which has not been treated as paid or incurred for a taxable year ending before his death shall be treated as paid or incurred in the taxable year in which he dies. (Aug. 16, 1954, ch. 736, 68A Stat. 67; Oct. 22, 1968, Pub. L. 90-630, § 5(a), (b), 82 Stat. 1329; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(a)(30), 1906(b)(13)(A), 90 Stat. 1769, 1834.) AMENDMENTS 1976-Subsec. (d)(l). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (d)(1)(A). Pub. L. 94-455, § 1901(a)(30), sub- stituted "August 16, 1954" for "the date on which this title is enacted" following "and ends after". Subsec. (d)(2). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (el. Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". 1968-Subsec. (c)(1). Pub. L. 90-630, § 5(a), in the ma- terial following subpar. (B), designated as cl. (i) exist. ing provisions covering amounts which, if paid or in- curred by the taxpayer, would without regard to the exception constitute deductible expenditures, and added cl. (ii). Subsec. (f). Pub. L. 90-630, § 5(b), added subsec. (f). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (d)(1)(A) by section 1901(a)(30) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1968 AMENDMENT Section 5(c) of Pub. L. 90-630 provided that: "The amendments made by subsections (a) and (b) Eamend- ing subsec. (c)(i) and adding subsec. (f) of this section] shall apply to assessments levied after the date of the enactment of this Act [Oct. 22, 1968] in taxable years ending after such date." CROSS REFERENCES Exception from denial of deduction for capital ex- penditures, see section 263 of this title. Trade or business expenses deductible, see section 162 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 263, 1251, 1252 of this title. § 176. Payments with respect to employees of certain foreign corporations In the case of a domestic corporation, there shall be allowed as a deduction amounts (to the extent not compensated for) paid or incurred pursuant to an agreement entered into under section 3121(l) with respect to services per. formed by United States citizens employed by foreign subsidiary corporations. Any reimburse- ment of any amount previously allowed as a de- duction under this section shall be included in gross income for the taxable year in which re- ceived. (Added Sept. 1, 1954, ch. 1206, title II, § 210(a), 68 Stat. 1096.) § 177. Trademark and trade name expenditures (a) Election to amortize Any trademark or trade name expenditure paid or incurred during a taxable year begin- ning after December 31, 1955, may, at the elec- tion of the taxpayer (made in accordance with regulations prescribed by the Secretary), be treated as a deferred expense. In computing taxable income, all expenditures paid or In- curred during the taxable year which are so treated shall be allowed as a deduction ratably over such period of not less than 60 months (beginning with the first month in such taxable year) as may be selected by the taxpayer in making such election. The expenditures so treated are expenditures properly chargeable to capital account for purposes of section 1016(a)(1) (relating to adjustments to basis of property). (b) Trademark and trade name expenditures defined For purposes of subsection (a), the term "trademark or trade name expenditure" means any expenditure which- (1) is directly connected with the acquisi- tion, protection, expansion, registration (Fed- eral, State, or foreign), or defense of a trade- mark or trade name; (2) is chargeable to capital account; and (3) is not part of the consideration paid for a trademark, trade name, or business. (c) Time for and scope of election The election provided by subsection (a) shall be made within the time prescribed by law (in- cluding extensions thereof) for filing the return for the taxable year during which the expendi- ture is paid or incurred. The period selected by the taxpayer under subsection (a) with respect Page 180
TITLE 26-INTERNAL REVENUE CODE to the expenditures paid or incurred during the taxable year which are treatcd as deferred ex- penses shall be adhered to in computing his taxable income for the taxable year for which the election is made and all subsequent years. (d) Cross reference For adjustments to basis of property for amounts al. lowed as deductions for expenditures treated as deferred expenses under this section, see section 1016(a)(16). (Added June 29, 1956, ch. 464, § 4(a), 70 Stat. 406, and amended Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455 struck out "or his delegate" following "Secretary". SECTION REFERRED TO IN OTHER SECTIONS This section is referred to In section 1016 of this title. § 178. Depreciation or amortization of improvements made by lessee on lessor's property (a) General rule Except as provided in subsection (b), in deter- mining the amount allowable to a lessee as a deduction for any taxable year for exhaustion, wear and tear, obsolescence, or amortization- (1) In respect of any building erected (or other improvement made) on the leased prop- erty, if the portion of the term of the lease (excluding any period for which the lease may subsequently be renewed, extended, or continued pursuant to an option exercisable by the lessee) remaining upon the completion of such building or other improvement is less than 60 percent of the useful life of such building or other improvement, or (2) in respect of any cost of acquiring the lease, if less than 75 percent of such cost is at- tributable to the portion of the term of the lease (excluding any period for which the lease may subsequently be renewed, ex- tended, or continued pursuant to an option exercisable by the lessee) remaining on the date of its acquisition, the term of the lease shall be treated as includ- ing any period for which the lease may be re- newed, extended, or continued pursuant to an option exercisable by the lessee, unless the lessee establishes that (as of the close of the taxable year) it is more probable that the lease will not be renewed, extended, or continued for such period than that the lease will be so re- newed, extended, or continued. (b) Related lessee and lessor (1) General rule If a lessee and lessor are related persons (as determined under paragraph (2)) at any time during the taxable year then, in determining the amount allowable to the lessee as a de- duction for such taxable year for exhauption, wear and tear, obsolescence, or amortization in respect of any building erected (or other improvement made) on the leased property, the lease shall be treated as including a period of not less duration than the remain- ing useful life of such improvement. (2) Related persons defined For purposes of paragraph (1), a lessor and lessee shall be considered to be related per- sons if- (A) the lessor and the lessee are members of an affiliated group (as defined in section 1504), or (B) the relationship between the lessor and lessee is one described in subsection (b) of section 267, except that, for purposes of this subparagraph, the phrase "80 percent or more" shall be substituted for the phrase "more than 50 percent" each place it ap- pears in such subsection. For purposes of determining the ownership of stock in applying subparagraph (B), the rules of subsection (c) of section 267 shall apply, except that the family of an individual shall include only his spouse, ancestors, and lineal descendants. (c) Reasonable certainty test In any case in which neither subsection (a) nor subsection (b) applies, the determination as to the amount allowable to a lessee as a deduc- tion for any taxable year for exhaustion, wear and tear, obsolescence, or amortization- (1) in respect of any building erected (or other improvement made) on the leased prop- erty, or (2) in respect of any cost of acquiring the lease, shall be made with reference to the term of the lease (excluding any period for which the lease may subsequently be renewed, extended, or continued pursuant to an option exercisable by the lessee), unless the lease has been renewed, extended, or continued or the facts show with reasonable certainty that the lease will be re- newed, extended, or continued. (Added Pub. L. 85-866, title I, § 15(a), Sept. 2, 1958, 72 Stat. 1612.) EFFECTIVE DATE Section 15(c) of Pub. L. 85-866 provided that: "The amendments made by this section [adding this section and amending analysis preceding section 161 of this title] shall apply with respect to costs of acquiring a lease incurred, and improvements begun, after July 28, 1958 (other than improvements which, on July 28, 1958, and at all times thereafter, the lessee was under a binding legal obligation to make)." § 179. Additional first-year depreciation allowance for small business (a) General rule In the case of section 179 property, the term "reasonable allowance" as used in section 167(a) may, at the election of the taxpayer, in- clude an allowance, for the first taxable year for which a deduction is allowable under sec- tion 167 to the taxpayer with respect to such property, of 20 percent of the cost of such prop- erty. (b) Dollar limitation If in any one taxable year the cost of section 179 property with respect to which the taxpay- er may elect an allowance under subsection (a) for such taxable year exceeds $10,000, then sub- section (a) shall apply with respect to those items selected by the taxpayer, but only to the extent of an aggregate cost of $10,000. In the 71-099 o - 78 - 14 (Vol. 7) Page 181 § 179
TITLE 26-INTERNAL REVENUE CODE case of a husband and wife who file a joint return under section 6013 for the taxable year, the limitation under the preceding sentence shall be $20,000 in lieu of $10,000. (c) Election (1) In general The election under this section for any tax- able year shall be made within the time pre- scribed by law (including extensions thereof) for filing the return for such taxable year. The election shall be made in such manner as the Secretary may by regulations prescribe. (2) Election irrevocable Any election made under this section may not be revoked except with the consent of the Secretary. d) Definitions and special rules (1) Section 179 property For purposes of this section, the term "sec- tion 179 property" means tangible personal property- (A) of a character subject to the allowance for depreciation under section 167. (B) acquired by purchase after December 31, 1957, for use in a trade or business or for holding for production of income, and (C) with a useful life (determined at the time of such acquisition) of 6 years or more. (2) Purchase defined For purposes of paragraph (1), the term "purchase" means any acquisition of proper- ty, but only if- (A) the property is not acquired from a person whose relationship to the person ac- quiring it would result in the disallowance of losses under section 267 or 707(b) (but, in applying section 267(b) and (c) for purposes of this section, paragraph (4) of section 267(c) shall be treated as providing that the family of an individual shall include only his spouse, ancestors, and lineal descen- dants), (B) the property is not acquired by one component member of a controlled group from another component member of the same controlled group, and (C) the basis of the property in the hands of the person acquiring it is not deter- mined- (I) in whole or in part by reference to the adjusted basis of such property in-the hands of the person from whom acquired, or (ii) under section 1014(a) (relating to property acquired from a decedent). (3) Cost For purposes of this section, the cost of property does not include so much of the basis of such property as is determined by ref- erence to the basis of other property held at any time by the person acquiring such prop- erty. (4) Section not to apply to trusts This section shall not apply to trusts. (5) Estates In the case of an estate, any amount appor- tioned to an heir, legatee, or devisee under section 167(h) shall not be taken into account in applying subsection (b) of this section to section 179 property of such heir, legatee, or devisee not held by such estate. (6) Dollar limitation of controlled group For purposes of subsection (b) of this sec- tion- (A) all component members of a con- trolled group shall be treated as one tax- payer, and (B) the Secretary shall apportion the dollar limitation contained in such subsec- tion (b) among the component members of such controlled group in such manner as he shall by regulations prescribe. (7) Controlled group defined For purposes of paragraphs (2) and (6), the term "controlled group" has the meaning as- signed to it by section 1563(a); except that, for such purposes, the phrase "more than 50 percent" shall be substituted for the phrase "at least 80 percent" each place it appears in section 1563(a)(1). (8) Dollar limitation in case of partnerships In the case of a partnership, the dollar limi- tation contained in the first sentence of sub- section (b) shall apply with respect to the partnership and with respect to each partner. (9) Adjustment to basis; when made In applying section 167(g), the adjustment under section 1016(a)(2) resulting by reason of an election made under this section with respect to any section 179 property shall be made before any other deduction allowed by section 167(a) is computed. (e) Regulations The Secretary shall prescribe such regula- tions as may be necessary to carry out the pur- poses of this section. (Added Pub. L. 85-866, title II, § 204(a), Sept. 2, 1958, 72 Stat. 1679, and amended Pub. L. 87- 834, § 13(c)(2), Oct. 16, 1962, 76 Stat. 1034; Pub. L. 91-172, title IV, §401(f), Dec. 30, 1969, 83 Stat. 603; Pub. L. 94-455, title II, § 213(a), title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1547, 1834.) AMENDMENTS 1976-Subsec. (c). Pub. L. 94-455, §1906(b)(13)(A), struck out in pars. (1) and (2) "or his delegate" follow- ing "Secretary". Subsec. (d)(6)(B). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secrettry". Subsec. (d)(8). Pub. L. 94-455, § 213(a), added par. (8) and redesignated existing provisions as par. (9). Subsec. (d)(9). Pub. L. 94-455. § 213(a), redesignated former par. (8) as par. (9). Subsec. (e). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". 1969-Subsec. d). Pub. L. 91-172 substituted refer- ence to component members of a controlled group for reference to members of an affiliated group in pars. (2)(B) and (b), and substituted definition of controlled group for definition of affiliated group in par. (7). 1962-Subsec. (d)(5). Pub. L. 87-834, § 13(c)(2)(A), substituted "section 167(h)" for "section 167(g)". Subsec. (d)(8). Pub. L. 87-834, § 13(c)(2)(B), substi- tuted "section 167(g)" for "section 167(f)". EFFECTIVE DATE OF 1976 AMENDMENT Enactment of subsec. (d)(8) and redesignation as subsec. (d)(9) of prior subsec. (d)(8) by section 213(a) of Pub. L. 94-455 applicable in the case of partnership Page 182
TITLE 26-INTERNAL REVENUE CODE taxable years beginning after Dec. 31, 1975, see section 213(f) of Pub. L. 94-455, set out as an Effective Date note under section 709 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Amendment of subsecs. (d)(2)(B), (d)(6) and (7) by section 401(f) of Pub. L. 91-172 applicable with respect to taxable years ending on or after Dec. 31, 1970, see section 401(h)(3) of Pub. L. 91-172, set out as an Effec- tive Date of 1969 Amendment note under section 1561 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Amendment of subsecs. (d)(5), (8) by Pub. L. 87-834 applicable to taxable years beginning after Dec. 31, 1961, and ending after Oct. 16, 1962, see section 13(g) of Pub. L. 87-834, set out as an Effective Date note under section 1245 of this title. EFFECTIVE DATE Section 204(c) of Pub. L. 85-866 provided that: "The amendments made by this section [which added this section and amended analysis prec. § 161 of this title] shall apply with respect to taxable years ending after June 30, 1958." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 48 of this title. § 180. Expenditures by farmers for fertilizer, etc. (a) In general A taxpayer engaged in the business of farm- ing may elect to treat as expenses which are not chargeable to capital account expenditures (otherwise chargeable to capital account) which are paid or incurred by him during the taxable year for the purchase or acquisition of fertiliz- er, lime, ground limestone, marl, or other mate- rials to enrich, neutralize, or condition land used in farming, or for the application of such materials to such land. The expenditures so treated shall be allowed as a deduction. (b) Land used in farming For purposes of subsection (a), the term "land used in farming" means land used (before or si- multaneously with the expenditures described in subsection (a)) by the taxpayer or his tenant for the production of crops, fruits, or other ag- ricultural products or for the sustenance of livestock. (c) Election The election under subsection (a) for any tax- able year shall be made within the time pre- scribed by law (including extensions thereof) for filing the return for such taxable year. Such election shall be made in such manner as the Secretary may by regulations prescribe. Such election may not be revoked except with the consent of the Secretary. (Added Pub. L. 80-779, § 6(a), Sept. 14, 1960, 74 Stat. 1001, and amended Pub. L. 94-455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (c). Pub. L. 94-455 struck out "or his delegate" following "Secretary". EFFECTIVE DATE Section 6(d) of Pub. L. 86-779 provided that: "The amendments made by subsections (a), (b), and (c) [adding this section and item 180 to table of sections for Part VI and amending section 263(a)(1) of this title] shall apply to taxable years beginning after De- cember 31, 1959." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 263 of this title. [§ 181. Repealed. Pub. L. 88-272, title II, § 203(a)(3) (11), Feb. 26, 1964, 78 Stat. 34] Section, Pub. L. 87-834, § 2(c), Oct. 16, 1962, 76 Stat. 970, related to a deduction for unused investment credit. EFFECTIVE DATE OF REPEAL Repeal of section applicable in case of property placed in service after Dec. 31, 1963, with respect to taxable years ending after such date, and in case of property placed in service before Jan. 1, 1964, with re- spect to taxable years beginning after Dec. 31, 1963, sf.e section 203(a)(4) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 48 of this title. § 182. Expenditures by farmers for clearing land (a) In general A taxpayer engaged in the business of farm- ing may elect to treat expenditures which are paid or incurred by him during the taxable year in the clearing of land for the purpose of making such land suitable for use in farming as expenses which are not chargeable to capital account. The expenditures so treated shall be allowed as a deduction. (b) Limitation The amount deductible under subsection (a) for any taxable year shall not exceed whichever of the following amounts is the lesser: (1) $5,000, or (2) 25 percent of the taxable income derived from farming during the taxable year. For purposes of paragraph (2), the term "tax- able income derived from farming" means the gross income derived from farming reduced by the deductions allowed by this chapter (other than by this section) which are attributable to the business of farming. (c) Definitions For purposes of subsection (a)- (1) The term "clearing of land" includes (but is not limited to) the eradication of trees, stumps, and brush, the treatment or moving of earth, and the diversion of streams and wa- tercourses. (2) The term "land suitable for use in farm- ing" means land which as a result of the ac- tivities described in paragraph (1) is suitable for use by the taxpayer or his tenant for the production of crops, fruits, or other agricul- tural products or for the sustenance of live- stock. (d) Exceptions, etc. (1) Exceptions The expenditures to which subsection (a) applies shall not include- (A) the purchase, construction, installa- tion, or improvement of structures, appli- ances, or facilities which are of a character which is subject to the allowance for depre- ciation provided in section 167, or (B) any amount paid or incurred which is allowable as a deduction without regard to this section. Page 183 § 182
TITLE 26-INTERNAL REVENUE CODE (2) Certain property used in the clearing of land (A) Allowance for depreciation The expenditures to which subsection (a) applies shall include a reasonable allowance for depreciation with respect to property of the taxpayer which is used in the clearing of land for the purpose of making such land suitable for use in farming and which, if used in a trade or business, would be prop- erty subject to the allowance for depreci- ation provided by section 167. (B) Treatment as depreciation deduction For purposes of this chapter, any expen- diture described in subparagraph (A) shall, to the extent allowed as a deduction under subsection (a), be treated as an amount al- lowed under section 167 for exhaustion, wear and tear, or obsolescence of the prop- erty which is used in the clearing of land. (e) Election The election under subsection (a) for any tax- able year shall be made within the time pre- scribed by law (including extensions thereof) for filing the return for such taxable year. Such election shall be made in such manner as the Secretary may by regulations prescribe. Such election may not be revoked except with the consent of the Secretary. (Added Pub. L. 87-834, § 21(a), Oct. 16, 1962, 76 Stat. 1063, and amended Pub. L. 94-455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (e). Pub. L. 94-455 struck out "or his delegate" following "Secretary". EFFEcTIVE DATE Section 21(d) of Pub. L. 87-834 provided that: "The amendments made by this section [enacting this sec- tion and amending section 263(a) of this title] shall apply with respect to taxable years beginning after December 31, 1962." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 263, 1251, 1252 of this title. § 183. Activities not engaged in for profit (a) General rule In the case of an activity engaged in by an in- dividual or an electing small business corpora- tion (as defined in section 1371(b)), if such ac- tivity is not engaged in for profit, no deduction attributable to such activity shall be allowed under this chapter except as provided in this section. (b) Deductions allowable In the case of an activity not engaged in for profit to which subsection (a) applies, there shall be allowed- (1) the deductions which would be allowable under this chapter for the taxable year with- out regard to whether or not such activity is engaged in for profit, and (2) a deduction equal to the amount of the deductions which would be allowable under this chapter for the taxable year only if such activity were engaged in for profit, but only to the extent that the gross income derived from such activity for the taxable year ex- ceeds the deductions allowable by reason of paragraph (1). (c) Activity not engaged in for profit defined For purposes of this section, the term "activ- ity not engaged in for profit" means any activ- ity other than one with respect to which deduc- tions are allowable for the taxable year undeo section 162 or under paragraph (1) or (2) of s(-r- tion 212. (d) Presumption If the gross income derived from an activity for 2 or more of the taxable years in the period of 5 consecutive taxable years which ends with the taxable year exceeds the deductions attrib- utable to such activity (determined without regard to whether or not such activity is en- gaged in for profit), then, unless the Secretary establishes to the contrary, such activity shall be presumed for purposes of this chapter for such taxable year to be an activity engaged in for profit. In the case of an activity which con- sists in major part of the breeding, training, showing, or racing of horses, the preceding sen- tence shall be applied by substituting the period of 7 consecutive taxable years for the period of 5 consecutive taxable years. (e) Special rule (I) In general A determination as to whether the pre- sumption provided by subsection (d) applies with respect to any activity shall, if the tax- payer so elects, not be made before the close of the fourth taxable year (sixth taxable year, in the case of an activity described in the last sentence of such subsection) follow- ing the taxable year in which the taxpayer first engages in the activity. For purposes of the preceding sentence, a taxpayer shall be treated as not having engaged in an activity during any taxable year beginning before January 1, 1970. (2) Initial period If the taxpayer makes an election under paragraph (1), the presumption provided by subsection (d) shall apply to each taxable year in the 5-taxable year (or 7-taxable year) period beginning with the taxable year in which the taxpayer first engages in the activ- ity, if the gross income derived from the ac- tivity for 2 or more of the taxable years in such period exceeds the deductions attribut- able to the activity (determined without regard to whether or not the activity is en- gaged in for profit). (3) Election An election under paragraph (1) shall be made at such time and manner, and subject to such terms and conditions, as the Secre- tary may prescribe. (4) Time for assessing deficiency attributable to ac. tivity If a taxpayer makes an election under para- graph (1) with respect to an activity, the stat- utory period for the assessment of any defi- ciency attributable to such activity shall not expire before the expiration of 2 years after the date prescribed by law (determined with- out extensions) for filing the return of tax § 183 Page 184
TITLE 26-INTERNAL REVENUE CODE under chapter 1 for the last taxable year in the period of 5 taxable years (or 7 taxable years) to which the election relates. Such de- ficiency may be assessed notwithstanding the provisions of any law or rule of law which would otherwise prevent such an assessment. (Added Pub. L. 91-172, title II, § 213(a), Dec. 30, 1969, 83 Stat. 571, and amended Pub. L. 92-178, title III, §311(a), Dec. !0, 1971, 85 Stat. 525; Pub. L. 94-455, title II, §214(a), title XIX, §1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1549, 1834.) AMENDMENTS 1976-Subsec. (d). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (e)(3). Pub. L. 94-455, §1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (e)(4). Pub. L. 94-455, § 214(a), added par. (4). 1971-Subsec. (e). Pub. L. 92-178 added subsec. (e). EFFECTIVE DATE OF 1976 AMENDMENT Section 214(c) of Pub. L. 94-455 provided that: "The amendments made by this section [to subsec. (e)(4) of this section and -ction 6212(c)(2)(E) of this title] shall apply with ,spect to taxable years beginning after December 31, 1969; except that such amend- ments shall not apply to any taxable year ending before the date of the enactment of this Act [Oct. 4. 1976] with respect to which the period for assessing a deficiency has expired before such date of enact- ment." EFFECTIVE DATE OF 1971 AMENDMENT Section 311(b) of Pub. L. 92-178 provided that: "The amendment made by subsection (a) [enacting subsec. (e) of this section] shall apply to taxable years begin- ning after December 31, 1969." EFFECTIVE DATE Section 213(d) of Pub. L. 91-172 provided that: "The amendments made by this section [enacting this sec- tion, amending section 6504 of this title, and repealing section 270 of this title] shall apply to taxable years beginning after December 31, 1969." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 280A, 6212 of this title. § 184. Amortization of certain railroad rolling stock (a) Allowance of deduction Every person, at his election, shall be entitled to a deduction with respect to the amortization of the adjusted basis (for determining gain) of any qualified railroad rolling stock (as defined in subsection (d)), based on a period of 60 months, Such amortization deduction shall be an amount, with respect to each month of such period within the taxable year, equal to the ad- Justed basis of the qualified railroad rolling stock at the end of such month divided by the number of months (including the month for which the deduction is computed) remaining in the period. Such adjusted basis at the end of the month shall be computed without regard to the amortization deduction for such month. The amortization deduction provided by this section with respect to any qualified railroad rolling stock for any month shall be in lieu of the depreciation deduction with respect to such rolling stock for such month provided by sec- tion 167. The 60-month period shall begin, as to any qualified railroad rolling stock, at the elec- tion of the taxpayer, with the month following the month in which such rolling stock was placed in service or with the succeeding taxable year. (b) Election of amortization The election of the taxpayer to take the am- ortization deduction and to begin the 60-month period with the month following the month in which the qualified railroad rolling stock was placed in service, or with the taxable year suc- ceeding the taxable year in which such rolling stock is placed in service, shall be made by filing with the Secretary, in such manner, in such form, and within such time, as the Secre- tary may by regulations prescribe, a statement of such election. () Termination of amortization deduction A taxpayer which has elected under subsec- tion (b) to take the amortization deduction pro- vided by subsection (a) may, at any time after making such election, discontinue the amortiza- tion deduction with respect to the remainder of the amortization period, such discontinuance to begin as of the beginning of any month speci- fied by the taxpayer in a notice in writing filed with the Secretary before the beginning of such month. The depreciation deduction pro- vided under section 167 shall be allowed, begin- ning with the first month as to which the am- ortization deduction does not apply, and the taxpayer shall not be entitled to any further amortization deduction under this section with respect to such rolling stock. (d) Qualified railroad rolling stock Except as provided in subsection (e)(4), the term "qualified railroad rolling stock" means, for purposes of this section, rolling stock of the type used by a common carrier engaged in the furnishing or sale of transportation by railroad and subject to the jurisdiction of the Interstate Commerce Commission if- (1) such rolling stock is- (A) used by a domestic common carrier by railroad on a full-time basis, or on a part- time basis if its only additional use is an in- cidental use by a Canadian or Mexican common carrier by railroad on a per diem basis, or (B) owned and used by a switching or ter- minal company all of whose stock is owned by one or more domestic common carriers by railroad, and (2) the original use of such rolling stock commences with the taxpayer after December 31, 1968. (e) Special rules (1) In general Except as otherwise provided in this subsec- tion, this section shall apply to qualified rail- road rolling stock placed in service after 1968 and before 1976. (2) Placed in service in 1969 If any qualified railroad rolling stock is placed in service in 1969- (A) the month as to which the amortiza- tion period shall begin with respect to such rolling stock shall be determined as if such rolling stock were placed in service on De- cember 31, 1969, and Page 185 § 184
TITLE 26-INTERNAL REVENUE CODE (B) subsections (a) and (b) shall be ap- plied by substituting "48" for "60" each place that it appears in such subsections. This section shall not apply to any qualified railroad rolling stock placed in service in 1969 and owned by any person who is not a domes- tic common carrier by railroad, or a corpora- tion at least 95 percent of the stock of which is owned by one or more such common carri- ers. (3) Placed In service in 1970 If any qualified railroad rolling stock is placed in service in 1970 by a domestic common carrier by rail or by a corporation at least 95 percent of the stock of which is owned by one or more such common carriers, then subsection (a) shall be applied, without regard to paragraph (2), as if such rolling stock were placed in service on December 31, 1969. (4) Railroad rolling stock not in short supply The Secretary shall determine (with the as- sistance of the Secretary of Transportation) which types of railroad rolling stock are not in short supply and shall prescribe regula- tions designating such types. The term "qualified railroad rolling stock" shall not in- clude any rolling stock which- (A) is of the type of rolling stock designat- ed by such regulations as not in short supply, and (B) is placed in service after (1) 1972, or (ii) 30 days after the date on which such regulations are promulgated, whichever is later. (5) Adjusted basis (A) The adjusted basis of any qualified railroad rolling stock, with respect to which an election has been made under this sec- tion, shall not be increased, for purposes of this section, for amounts chargeable to cap- ital account for additions or improvements after the amortization period has begun. (B) Costs incurred in connection with a used unit of railroad rolling stock which are properly chargeable to capital account shall be treated as a separate unit of railroad rolling stock for purposes of this section. (C) The depreciation deduction provided by section 167 shall, despite the provisions of subsection (a), be allowed with respect to the portion of the adjusted basis which is not taken into account in applying this sec- tion. (6) Construction termination If at any time during the amortization period any qualified railroad rolling stock ceases to meet the requirements of subsection (d)(1), the taxpayer shall be deemed to have terminated under subsection (c) his election under this section. Such termination shall be effective beginning with the month following the month in which such cessation occurs. (7) Method of accounting for date placed in service For purposes of subsections (a) and (b), in the case of qualified railroad rolling stock placed in service after December 31, 1969, and before January 1, 1976, the taxpayer may elect (unless paragraph (3) is applicable) to begin the 60-month period with the date when such rolling stock is treated as having been placed in service under a method of ac- counting for acquisitions and retirements of property which- (A) prescribes a date when property is placed In service, and (B) is consistently followed by the taxpay- er. (f) Life tenant and remainderman In the case of qualified railroad rolling stock leased to a domestic common carrier, and held by one person for life with remainder to an- other person, the deduction under this section shall be computed as if the life tenant were the absolute owner of the property and shall be al- lowable to the life tenant. (g) Cross reference For treatment of certain gain derived from the disposi. tion of property the adjusted basis of which Is deter. mined with regard to this section, see section 1245. (Added Pub. L. 91-172, title VII, § 705(a), Dec. 30, 1969, 83 Stat. 670, and amended Pub. L. 93- 625, § 3(b), Jan. 3, 1975, 88 Stat. 2109; Pub. L. 94-455, title XIX, § 1906(b)(13)(A). Oct. 4, 1976, 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (b). Pub. L. 94-455 struck out "or his delegate" in two places following "Secretary". Subsec. (c). Pub. L. 94-455 struck out "or his dele- gate" following "Secretary". Subsec. (e)(4). Pub. L. 94-455 struck out "or his dele- gate" following "Secretary". 1975-Subsec. (e)(1). Pub. L. 93-625, § 3(b)(1), substi- tuted "1976" for "1975". Subsec. (e)(7). Pub. L. 93-625, § 3(b)(2), substituted "January 1, 1976" for "January 1, 1975". EFFECTIVE DATE ' Section 705(c) of Pub. L. 91-172 provided that: "The amendments made by this section [enacting this sec- tion and section 185 of this title] shall apply with re- spect to taxable years beginning after December 31, 1969." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 48, 57, 642, 1082, 1245 of this title. § 185. Amortization of railroad grading and tunnel bores (a) General rule In the case of a domestic common carrier by railroad, the taxpayer shall, at his election, be entitled to a deduction with respect to the am- ortization of the adjusted basis (for determin- ing gain) of his qualified railroad grading and tunnel bores. The amortization deduction pro- vided by this section with respect to such prop- erty shall be in lieu of any depreciation deduc- tion, or other amortization deduction, with re- spect to such property for any taxable year to which the election applies. (b) Amount of deduction (1) In general The deduction allowable under subsection (a) for any taxable year shall be an amount determined by amortizing ratably over a period of 50 years the adjusted basis (for de- termining gain) of the qualified railroad grad- ing and tunnel bores of the taxpayer. Such 50-year period shall commence with the first § 185 Page 186
TITLE 26-INTERNAL REVENUE CODE taxable year for which an election under this section is effective. (2) Special rule In the case of qualified railroad grading and tunnel bores placed in service after the begin- ning of the first taxable year for which an election under this section is effective, the 50- year period with respect to such property shall begin with the year following the year the property is placed in service. (c) Election of amortization The election of the taxpayer to take the am- ortization deduction provided in subsection (a) may be made for any taxable year beginning after December 31, 1969. Such election shall be made by filing with the Secretary, in such manner, in such form, and within such time, as the Secretary may by regulations prescribe, a statement of such election. The election shall remain in effect for all taxable years subse- quent to the first year for which it is effective and shall apply to all qualified railroad grading and tunnel bores of the taxpayer, unless, on ap- plication by the taxpayer, the Secretary per- mits him, subject to such conditions as the Sec- retary deems necessary, to revoke such election. (d) Election with respect to pre-1969 property A taxpayer may, for any taxable year begin- ning after December 31, 1974, elect for purposes of this section to treat the term "qualified rail- road grading and tunnel bores" as including pre-1969 railroad grading and tunnel bores. An election under this subsection shall be made by filing with the Secretary, in such manner, in such form, and within such time, as the Secre- tary may by regulations prescribe, a statement of such election. The election under this sub- section shall remain in effect for all taxable years, after the first year for which it is effec- tive, for which an election under subsection (c) is effective. The election under this subsection shall apply to all pre-1969 railroad grading and tunnel bores of the taxpayer, unless, on appli- cation by the taxpayer, the Secretary permits him, subject to such conditions as the Secretary deems necessary, to revoke such election. (e) Adjusted basis for pre-1969 railroad grading and tunnel bores (1) In general The adjusted basis of any pre-1969 railroad grading and tunnel bore shall be determined under this subsection. (2) Property acquired or constructed after Febru- ary 28, 1913 (A) In the case of pre-1969 railroad grad- ing and tunnel bores- (1) acquired by the taxpayer after Feb- ruary 28, 1913, or (ii) the construction of which was com- pleted by the taxpayer after February 28, 1913. the adjusted basis of such property shall be equal to the adjusted basis (for determining gain) of such property in the hands of the taxpayer. (B) In the case of property described in subparagraph (A)(i)- (1) which was in existence on February 28, 1913, (ii) for which the taxpayer has a substi- tuted basis, and (iii) such substituted basis for which would, but for the provisions of this sec- tion, be determined under section 1053, then the adjusted basis of such property shall be determined as if such property were properly described in paragraph (3)(A). (3) Property acquired or constructed before March 1, 1913 (A) In the case of pre-1969 railroad grad- ing and tunnel bores- (i) acquired by the taxpayer before March 1, 1913, or (11) the construction of which was com- pleted by the taxpayer before March 1, 1913, the adjusted basis of such property shall be determined under the provisions of subpar- agraph (B), (C), or (D) of this paragraph. (B) In the case of any property valued under an original valuation made by the In- terstate Commerce Commission pursuant to section 19a of part I of the Interstate Com- merce Act (49 U.S.C. 19a), the adjusted basis of such property shall be equal to the amount ascertained by the Interstate Com- merce Commission as of the date of such valuation to be such property's cost of re- production new (as the term "cost of repro- duction new" is used in such section 19a). (C) In the case of property which was not valued by the Interstate Commerce Com- mission in the manner described in subpara- graph (B), but which was valued under an original valuation made by a comparable State regulatory body, the adjusted basis of such property shall be equal to the amount ascertained by such State regulatory body as of the date of its original valuation to be such property's value. (D) If, in the case of any property to which this paragraph applies- (i) neither subparagraph (B) nor (C) ap- plies, or (ii) notwithstanding subparagraphs (B) and (C), either the taxpayer or the Secre- tary can establish the adjusted basis (for purposes of determining gain) of such property in the hands of the taxpayer, then the adjusted basis of such property shall be equal to its adjusted basis (for pur- poses of determining gain) in the hands of the taxpayer. (f) Definitions For purposes of this section- (1) Railroad grading and tunnel bores The term "railroad grading and tunnel bores" means all improvements resulting from excavations (including tunneling), con- struction of embankments, clearings, diver- sions of roads and streams, sodding of slopes, and from similar work necessary to provide, construct, reconstruct, alter, protect, improve, replace, or restore a roadbed or right-of-way for railroad track. If expenditures for im- provements described in the preceding sen- tence are incurred with respect to an existing roadbed or right-of-way for railroad track, Page 187 § 185
TITLE 26-INTERNAL REVENUE CODE such expenditures shall be considered, in ap- plying this section, as costs for railroad grad- ing or tunnel bores placed in service in the year in which such costs are incurred. (2) Qualified railroad grading and tunnel bores The term "qualified railroad grading and tunnel bores" means railroad grading and tunnel bores the original use of which com- mences after December 31, 1968. (3) Pre-1969 railroad grading and tunnel bores The term "pre-1969 railroad grading and tunnel bores" means railroad grading and tunnel bores the original use of which com- mences before January 1, 1969. (g) Treatment upon retirement If any qualified railroad grading or tunnel bore is retired or abandoned during a taxable year for which an election under this section is in effect, no deduction shall be allowed on ac- count of such retirement or abandonment and the amortization deduction under this section shall continue with respect to such property. This subsection shall not apply if the retire- ment or abandonment is attributable primarily to fire, storm, or other casualty. (h) Investment credit not to be allowed Property eligible to be amortized under this section shall not be treated as section 38 prop- erty within the meaning of section 48(a). (i) Regulations The Secretary shall prescribe such regula- tions as may be necessary to carry out the pur- poses of this section. (j) Cross reference For special rule with respect to certain gain derived from the disposition of property the adjusted basis of which is determined with regard to this section, see sec- tion 1245. (Added Pub. L. 91-172, title VII, § 705(a), Dec. 30, 1969, 83 Stat. 672, and amended Pub. L. 94- 455, title XVII, § 1702, title XIX, § 1906(b) (13)(A), Oct. 4, 1976, 90 Stat. 1760, 1834.) AMENDMENTS 1976-Subsec. (c). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" in four places following "Secretary". Subsec. (d). Pub. L. 94-455, § 1702(a), added subsec. (d). Former subsec. (d) redesignated (f). Subsec. (e). Pub. L. 94-455, § 1702(a), added subsec. (e). Former subsec. (e) redesignated (g). Subsec. (f). Pub. L. 94-455, § 1702(a), (b), redesignat- ed former subsec. (d) as (f) and, as redesignated, added par. (3). Subsec. (g). Pub. L. 94-455, § 1702(a), redesignated former subsec. (e) as (g). Subsec. (h). Pub. L. 94-455. § 1702(a), redesignated former subsec. (f) as (h). Subsec. (i). Pub. L. 94-455, §§ 1702(a), 1906(b)(13)(A), redesignated former subsec. (g) as (I) and, as redesig- nated, struck out "or his delegate" following "Secre- tary". Subsec. (j). Pub. L. 94-455, § 1702(a), redesignated former subsec. (h) as (j). EFFECTIVE DATE Section applicable with respect to taxable years be- ginning after Dec. 31, 1969, see section 706(c) of Pub. L. 91-172, set out as an Effective Date note under sec- tion 184 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section Is referred to in sections 1082, 1245, 1250 of this title. § 186. Recoveries of damages for antitrust violations, etc. (a) Allowance of deduction If a compensatory amount which is included in gross income is received or accrued during the taxable year for a compensable injury, there shall be allowed as a deduction for the taxable year an amount equal to the lesser of- (1) the amount of such compensatory amount, or (2) the amount of the unrecovered losses sustained as a result of such compensable injury. () Compensable injury For purposes of this section, the term "com- pensable injury" means- (1) injuries sustained as a result of an in- fringement of a patent issued by the United States, (2) injuries sustained as a result of a breach of contract or a breach of fiduciary duty or relationship, or (3) injuries sustained in business, or to property, by reason of any conduct forbidden in the antitrust laws for which a civil action may be brought under section 4 of the Act en- titled "An Act to supplement existing laws against unlawful restraints and monopolies, and for other purposes", approved October 15, 1914 (commonly known as the Clayton Act). (c) Compensatory amount For purposes of this section, the term "com- pensatory amount" means the amount received or accrued during the taxable year as damages as a result of an award in, or in settlement of, a civil action for recovery for a compensable injury, reduced by any amounts paid or in- curred in the taxable year in securing such award or settlement. (d) Unrecovered losses (1) In general For purposes of this section, the amount of any unrecovered loss sustained as a result of any compensable injury is- (A) the sum of the amount of the net op- erating losses (as determined under section 172) for each taxable year in whole or in part within the injury period, to the extent that such net operating losses are attribut- able to such compensable injury, reduced by (B) the sum of- (i) the amount of the net operating losses described in subparagraph (A) which were allowed for any prior taxable year as a deduction under section 172 as a net operating loss carryback or carryover to such taxable year, and (ii) the amounts allowed as a deduction under subsection (a) for any prior taxable year for prior recoveries of compensatory amounts for such compensable injury. (2) Injury period For purposes of paragraph (1), the injury period is- § 186 Page 188
TITLE 26-INTERNAL REVENUE CODE (A) with respect to any infringement of a patent, the period in which such infringe- ment occurred, (B) with respect to a breach of contract or breach of fiduciary duty or relationship, the period during which amounts would have been received or accrued but for the breach of contract or breach of fiduciary duty or relationship, and (C) with respect to injuries sustained by reason of any conduct forbidden in the anti- trust laws, the period in which such injuries were sustained. (3) Net operating losses attributable to compensa- ble injuries* For purposes of paragraph (1)- (A) a net operating loss for any taxable year shall be treated as attributable to a compensable injury to the extent of the compensable injury sustained during such taxable year, and (B) if only P. portion of a net operating loss for any taxable year is attributable to a compensable injury, such portion shall (in applying section 172 for purposes of this section) be considered to be a separate net operating loss for such year to be applied after the other portion of such net operat- ing loss. (e) Effect on net operating loss carryovers If for the taxable year in which a compensa- tory amount Is received or accrued any portion of a net operating loss carryover to such year is attributable to the compensable injury for which such amount is received or accrued, such portion of such net operating loss carryover shall be reduced by an amount equal to- (1) the deduction allowed under subsection (a) with respect to such compensatory amount, reduced by (2) any portion of the unrecovered losses sustained as a result of the compensable injury with respect to which the period for carryover under section 172 has expired. (Added Pub. L. 91-172, title IX, § 904(a), Dec. 30, 1969, 83 Stat. 711.) REFERENCES IN TEXT The antitrust laws, referred to in subsecs. (b)(3), (d)(2)(C), are classified generally to section 1 et seq. of Title 15, Commerce and Trade. Section 4 of the Clayton Act, referred to in subsec. (b)(3), is classified to section 15 of Title 15, Commerce and Trade. EFFECTIVE DATE Section 904(c) of Pub. L. 91-172 provided that: "The amendments made by this section [enacting this sec- tion] shall apply to taxable years beginning after De- cember 31, 1968." [§ 187. Repealed. Pub. L. 94-455, title XIX, § 1901(a)(31), Oct. 4, 1976, 90 Stat. 1769] Section, added Pub. L. 91-172, title VII, § 707(a), Dec. 30, 1969, 83 Stat. 674, and amended Pub. L. 93-625, § 3(d), Jan. 3, 1975, 88 Stat. 2109, provided for an allowance of an amortization deduction for certain coal mine safety equipment, the method of election and termination of such deduction, the definition of term "certified coal mine safety equipment", and spe- cial rules applicable to the amortization deduction. EFFECTIVE DATE OF REPEAL Repeal of this section effective for taxable years be- ginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amend- ment note under section 2 of this title. § 188. Amortization of certain expenditures for on- the-job training and child care facilities (a) Allowance of deduction At the election of the taxpayer, made in ac- cordance with regulations prescribed by the Secretary, any expenditure chargeable to cap- ital account made by an employer to acquire, construct, reconstruct, or rehabilitate section 188 property (as defined in subsection (b)) shall be allowable as a deduction ratably over a period of 60 months, beginning with the month in which the property is placed in service. The deduction provided by this section with respect to such expenditure shall be in lieu of any de- preciation deduction otherwise allowable on ac- count of such expenditure. (b) Section 188 property For purposes of this section, the term "sec- tion 188 property" means tangible property which qualifies under regulations prescribed by the Secretary as a facility for on-the-job train- ing of employees (or prospective employees) of the taxpayer, or as a child care center facility primarily for the children of employees of the taxpayer; except that such term shall not in- clude- (1) any property which is not of a character subject to depreciation; or (2) property located outside the United States. (c) Application of section This section shall apply only with respect to expenditures made after December 31, 1971, and before January 1, 1977. (Added Pub. L. 92-178, title III, § 303(a), Dec. 10, 1971, 85 Stat. 521, and amended Pub. L. 94- 455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) AMENDMENTS 1976-Pub. L. 94-455 struck out "or his delegate" in subsecs. (a) and (b) following "Secretary". EFFECTIVE DATE Section 303(d) of Pub. L. 92-178 provided that: "The amendments made by this section [enacting this sec- tion and section 57(a)(10) of this title and amending sections 642(f), 1082(a)(2)(B), 1245(a)(2), (3)(D), and 1250(b)(3) of this title] shall apply to taxable years ending after December 31, 1971." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 48, 57, 642, 1082, 1245, 1250 of this title. § 189. Amortization of real property construction period interest and taxes (a) Capitalization of construction period interest and taxes Except as otherwise provided in this section or in section 266 (relating to carrying charges), in the case of an individual, an electing small business corporation (within the meaning of section 1371(b)), or a personal holding company (within the meaning of section 542), no deduc- Page 189
TITLE 26-INTERNAL REVENUE CODE tion shall be allowed for real property construc- tion period interest and taxes. (b) Amortization of amounts charged to capital ac. count Any amount paid or accrued which would (but for subsection (a)) be allowable as a deduc- tion for the taxable year shall be allowable for such taxable year and each subsequent amorti- zation year in accordance with the following table: If the amount is paid or accrued in a taxable year beginning in- Residential The percentage of real such amount property allowable for each (other amortization year Nonresidential than low- Low- shall be the following real income income percentage of such property housing) housing amount 1976 ............................................................ see subsection (M) 1978 1982 25 1977 1979 1983 20 1978 1980 1984 16% 1979 1981 1985 14% 1980 1982 1986 12 1981 1983 1987 11 after 1981 after 1983 after 1987 10 (c) Amortization year (1) In general For purposes of this section, the term "am- ortization year" means the taxable year in which the amount is paid or accrued, and each taxable year thereafter (beginning with the taxable year after the taxable year in which paid or accrued or, if later, the taxable year in which the real property is ready to be placed in service or is ready to be held for sale) until the full amount has been allowable as a deduction (or until the property is sold or exchanged). (2) Rules for sales and exchanges For purposes of paragraph (1)- (A) Proportion of percentage allowed For the amortization year in which the property is sold or exchanged, a proportion- ate part of the percentage allowable for such year (determined without regard to the sale or exchange) shall be allowable. If the real property is subject to an allowance for depreciation, the proportion shall be de- termined in accordance with the convention used for depreciation purposes with respect to such property. In the case of all other real property, under regulations prescribed by the Secretary, the proportion shall be based on that proportion of the amortiza- tion year which elapsed before the sale or exchange. (B) Unamortized balance In the case of a sale or exchange of the property, the portion of the amount not al- lowable shall be treated as an adjustment to basis under section 1016 for purposes of de- termining gain or loss. (C) Certain exchanges An exchange or transfer after which the property received has a basis determined in whole or in part by reference to the basis of the property to which the amortizable con- struction period interest and taxes relate, shall not be treated as an exchange. (d) Certain residential property excluded This section shall not apply to any real prop- erty acquired, constructed, or carried if such property is not, and cannot reasonably be ex- pected to be, held in a trade or business or in an activity conducted for profit. (e) Definitions For purposes of this section- (1) Construction period interest and taxes The term "construction period interest and taxes" means all- (A) interest paid or accrued on indebted- ness incurred or continued to acquire, con- struct, or carry real property, and (B) real property taxes, to the extent such interest and taxes are at- tributable to the construction period for such property and would be allowable as a deduc- tion under this chapter for the taxable year in which paid or accrued (determined without regard to this section). (2) Construction period The term "construction period", when used with respect to any real property, means the period- (A) beginning on the date on which con- struction of the building or other improve- ment begins, and (B) ending on the date on which the item of property is ready to be placed in service or is ready to be held for sale. (3) Nonresidential real property The term "nonresidential real property" means real property which is neither residen- tial real property nor low-income housing. (4) Residential real property The term "residential real property" means property which is or can reasonably be ex- pected to be- (A) residential rental property as defined in section 167(j)(2)(B), or (B) real property described in section 1221(1) held for sale as dwelling units (within the meaning of section 167(k)(3)(C)). (5) Low-income housing The term "low-income housing" means property described in clause (1), (ii), (iii), or (iv) of section 1250(a)(1)(B). (f) Transitional rule for 1976 In the case of amounts paid or accrued by the taxpayer in a taxable year beginning in 1976, the percentage of such amount allowable under this section for- (1) the taxable year beginning in 1976 shall be 50 percent, and (2) each amortization year thereafter shall be 16% percent. (Added Pub. L. 94-455, title II, § 201(a), Oct. 4, 1976, 90 Stat. 1525.) EFFECTIVE DATE Section 201(c) of Pub. L. 94-455 provided that: "The amendments made by this section [adding this section and amending analysis preceding section 161 of this title] shall apply- § 189 Page 190
TITLE 26-INTERNAL REVENUE CODE "(1) in the case of nonresidential real property, if the construction period begins after December 31, 1975, "(2) in the case of residential real property (other than low-income housing), to taxable years begin- ning after December 31, 1977. and "(3) in the case of low-income housing, to taxable years beginning after December 31, 1981. For purposes of this subsection, the terms 'nonresiden- tial real property', 'residential real property (nther than low-income housing)', 'low-income housing', and 'construction period' have the same meaning as when used in section 189 of the Internal Revenue Code of 1954 (as added by subsection (a) of this section) (this section]." § 190. Expenditures to remove architectural and transportition barriers to the handicapped and elderly (a) Treatment as expenses (1) In general A taxpayer may elect to treat qualified ar- chitectural and transportation barrier remov- al expenses which are paid or Incurred by him during the taxable year as expenses which are not chargeable to capital account. The ex- penditures so treated shall be allowed as a de- duction. (2) Election An election under paragraph (1) shall be made at such time and in such manner as the Secretary prescribes by regulations. (b) Definitions For purposes of this section- (1) Architectural and transportation barrier remov. al expenses The term "architectural and transportation barrier removal expenses" means an expendi- ture for the purpose of making any facility or public transportation vehicle owned or leased by the taxpayer for use in connection with his trade or business more accessible to, and usable by, handicapped and elderly individ- uals. (2) Qualified architectural and transportation bar- rier removal expenses The term "qualified architectural and transportation barrier removal expense" means, with respect to any such facility or public transportation vehicle, an architectur- al or transportation barrier removal expense with respect to which the taxpayer estab- lishes, to the satisfaction of the Secretary, that the resulting removal of any such barrier meets the standards promulgated by the Sec- retary with the concurrence of the Architec- tural and Transportation Barriers Compli- ance Board and set forth in regulations pre- scribed by the Secretary. (3) Handicapped individual The term "handicapped individual" means any individual who has a physical or mental disability (including, but not limited to, blind- ness or deafness) which for such individual constitutes or results in a functional limita- tion to employment, or who has any physical or mental impairment (including, but not limited to, a sight or hearing impairment) which substantially limits one or more major life activities of such individual. (c) Limitation The deduction allowed by subsection (a) for any taxable year shall not exceed $25,000. (d) Regulations The Secretary shall prescribe such regula- tions as may be necessary to carry out the pro- visions of this section within 180 days after the date of the enactment of the Tax Reform Act of 1976. (Added Pub. L. 94-455, title XXI, § 2122(a), Oct. 4, 1976, 90 Stat. 1914.) REFERENCES IN TEXT Tax Reform Act of 1976, referred to in subsec. (d), is Pub. L. 94-455, Oct. 4, 1976, 90 Stat. 1520. The date of enactment of such act probably means Oct. 4, 1976, the date of approval of the Tax Reform Act of 1976. For complete classification of this Act to the Code, see Tables volume. EFFECTIVE DATE Section 2122(c) of Pub. L. 94-455 provided that: "The amendments made by this section [enacting this section and amending sections 263(a)(1), 1245(a)(2) and 1250(b)(3) of this title] shall apply to taxable years beginning after December 31, 1976, and before January 1, 1980." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 263 of this title. § 191. Amortization of certain rehabilitation expendi. tures for certified historic structures (a) Allowance of deduction Every person, at his election, shall be entitled to a deduction with respect to the amortization of the amortizable basis of any certified histor- ic structure (as defined in subsection (d)) based on a period of 60 months. Such amortization deduction shall be an amount, with respect to each month of such period within the taxable year, equal to the amortizable basis at the end of such month divided by the number of months (including the month for which the de- duction is computed) remaining in the period. Such amortizable basis at the end of the month shall be computed without regard to the amor- tization deduction for such month. The amorti- zation deduction provided by this section with respect to any month shall be in lieu of the de- preciation deduction with respect to such basis for such month provided by section 167. The 60-month period shall begin, as to any historic structure, at the election of the taxpayer, with the month following the month in which the basis is acquired, or with the succeeding taxable year. (b) Election of amortization The election of the taxpayer to take the am- ortization deduction and to begin the 60-month period with the month following the month in which the basis is acquired, or with the taxable year succeeding the taxable year in which such basis is acquired, shall be made by filing with the Secretary, in such manner, in such form, and within such time as the Secretary may by regulations prescribe, a statement of such elec- tion. (c) Termination of amortization deduction A taxpayer who has elected under subsection (b) to take the amortization deduction provided In subsection (a) may, at any time after making Page 191 § 191
TITLE 26-INTERNAL REVENUE CODE such election, discontinue the amortization de- duction with respect to the remainder of the amortization period, such discontinuance to begin as of the beginning of any month speci- fied by the taxpayer in a notice in writing filed with the Secretary before the beginning of such month, The depreciation deduction pro- vided under section 167 shall be allowed, begin- ning with the first month as to which the am- ortization deduction does not apply, and the taxpayer shall not be entitled to any further amortization deeduction under this section with respect to such certified historic structure. (d) Definitions For purposes of this section- (1) Certified historic structure The term "certified historic structure" means a building or structure which is of a character subject to the allowance for depre- ciation provided in section 167 which- (A) is listed in the National Register, (B) is located in a Registered Historic Dis- trict and is certified by the Secretary of the Interior as being of historic significance to the district, or (C) is located in an historic district desig- nated under a statute of the appropriate State or local government if such statute is certified by the Secretary of the Interior to the Secretary as containing criteria which will substantially achieve the purpose of preserving and rehabilitating buildings of historic significance to the district. (2) Amortizable basis The term "amortizable basis" means the portion of the basis attributable to amounts expended in connection with certified reha- bilitation. (3) Certified rehabilitation The term "certified rehabilitation" means any rehabilitation of a certified historic struc- ture which the Secretary of the Interior has certified to the Secretary as being consistent with the historic character of such property or the district in which such property is locat- ed. (e) Depreciation deduction The depreciation deduction provided by sec- tion 167 shall, despite the provisions of subsec- tion (a), be allowed with respect to the portion of the adjusted basis which is not the amortiza- ble basis. (f) Life tenant and remainderman In the case of property held by one person for life with remainder to another person, the de- duction under this section shall be computed as if the life tenant were the absolute owner of the property and shall be allowable to the life tenant. (g) Cross references (1) For rules relating to the listing of buildings and structures in the National Register and for definitions of "National Register" and "Registered Historic District", see section .170 et seq. of title 16 of the United States Code. (2) For special rule with respect to certain gain derived from the disposition of property the adjusted basis of which is determined with regard to this section, see sec- tion 1245. (Added Pub. L. 94-455, title XXI, §2124(a)(1), Oct. 4, 1976, 90 Stat. 1916.) EFFECTIVE AND TERMINATION DATE Section 2124(a)(4) of Pub. L. 94-455 provided that: "The amendments made by this subsection leacting this section and amending sections 642(f), 1082(a)(2), 1245(a) and 1250(b)(3) of this title] shall apply with respect to additions to capital account made after June 14, 1976 and before June 15, 1981." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 280B, 642 of this title. PART VII-ADDITIONAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS Sec. 211. Allowance of deductions. 212. Expenses for production of income. 213. Medical, dental, etc., expenses. [214. Repealed.] 215. Alimony, etc., payments. 216. Deduction of taxes, Interest, and business depre- ciation by cooperative housing corporation tenant-stockholder. 217. Moving expenses. 218. Contributions to candidates for public office. 219. Retirement savings. 220. Retirement savings for certain married individ- uals. 221. Cross references. AMENDMENTS 1976-Pub. L. 94-455, title V, § 504(b)(2), Oct. 4, 1976, 90 Stat. 1565, struck out item 214 "Expenses for household and dependent care services necessary for gainful employment". Pub. L. 94-455, title XV, § 1501(c), Oct. 4, 1976, 90 Stat. 1737, added item 220 and redesignated former item 220 as 221. 1974-Pub. L. 93-406, title II, § 2002(h)(1), Sept. 2, 1974, 88 Stat. 970, redesignated former item 219 as 220 and added item 219. 1971-Pub. L. 92-178, title II, § 210(b), title VII, § 702(c), Dec. 10, 1971, 85 Stat. 520, 562, substituted "Expenses for household and dependent care services necessary for gainful employment" for "expenses for care of certain dependents" in item 214, added item 218 and redesignated former item 218 as 219. 1964-Pub. L. 88-272, title II, § 213(a)(2), Feb. 26, 1964, 78 Stat. 52, redesignated former item 217 as 218. and added item 217. 1962-Pub. L. 87-834, § 28(b), Oct. 16, 1962, 76 Stat. 1068, substituted "Deduction of taxes, interest, and business depreciation by cooperative housing corpora- tion tenant-stockholder" for "Amounts representing taxes and interest paid to cooperative housing corpo- ration" in item 216. PART REFERRED TO IN OTHER SECTIONS This part is referred to in sections 62, 703 of this title. § 211. Allowance of deductions In computing taxable income under section 63(a), there shall be allowed as deductions the items specified in this part, subject to the ex- ceptions provided in part IX (section 261 and following, relating to items not deductible). (Aug. 16, 1954, ch. 736, 68A Stat. 69.) § 212. Expenses for production of income In the case of an individual, there shall be al- lowed as a deduction all the ordinary and neces- sary expenses paid or incurred during the tax- able year- § 211 Page 192
TITLE 26-INTERNAL REVENUE CODE (1) for the production or collection of income; (2) for the management, conservation, or maintenance of property held for the produc- tion of income; or (3) in connection with the determination, collection, or refund of any tax. (Aug. 16, 1954, ch. 736, 68A Stat. 69.) DENIAL OF DEDUCTION FOR AMOUNTS PAID OR INCURRED ON JUDGMENTS IN SUITS BROUGHT TO RECOVER PRICE INCREASES IN PURCHASE OF NEW PRINCIPAL RESIDENCE No deductions to be allowed in computing taxable income for two-thirds of any amount paid or incurred on a judgment entered against any person in a suit brought under section 208(b) of Pub. L. 94-12, see sec- tion 208(c) of Pub. L. 94-12, set out as a note under section 44 of this title. CROSS REFERENCES Adjusted gross income as gross income minus, among others, expenses for production of income, see section 82 of this title. Trade or business expenses deductible, see section 162 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to In sections 62, 163, 164, 183, 263, 265, 267, 274, 404, 691 of this title. § 213. Medical, dental, etc., expenses (a) Allowance of deduction There shall be allowed as a deduction the fol- lowing amounts, not compensated for by insur- ance or otherwise- (1) the amount by which the amount of the expenses paid during the taxable year (re- duced by any amount deductible under para- graph (2)) for medical care of the taxpayer, his spouse, and dependents (as defined in sec- tion 152) exceeds 3 percent of the adjusted gross income, and (2) an amount (not in excess of $150) equal to one-half of the expenses paid during the taxable year for insurance which constitutes medical care for the taxpayer, his spouse, and dependents. (b) Limitation with respect to medicine and drugs Amounts paid during the taxable year for medicine and drugs which (but for this subsec- tion) would be taken into account In computing the deduction under subsection (a) shall be taken into account only to the extent that the aggregate of such amounts exceeds 1 percent of the adjusted gross income. [(c) Repealed. Pub. L. 89-97, title I, § 106(d)(1), July 30, 1965, 79 Stat. 337] (d) Special rule for decedents (1) Treatment of expenses paid after death For purposes of subsection (a), expenses for the medical care of the taxpayer which are paid out of his estate during the 1-year period beginning with the day after the date of his death shall be treated as paid by the taxpayer at the time incurred. (2) Limitation Paragraph (1) shall not apply if the amount paid is allowable under section 2053 as a de- duction in computing the taxable estate of the decedent, but this paragraph shall not apply if (within the time and in the manner and form prescribed by the Secretary) there is filed- (A) a statement that such amount has not been allowed as a deduction under section 2053, and (B) a waiver of the right to have such amount allowed at any time as a deduction under section 2053. (e) Definitions For purposes of this section- (1) The term "medical care" means amounts paid- (A) for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body, (B) for transportation primarily for and essential to medical care referred to in sub- paragraph (A), or (C) for insurance (including amounts paid as premiums under part B of title XVIII of the Social Security Act, relating to supple- mentary medical insurance for the aged) covering medical care referred to in subpar- agraphs (A) and (B). (2) In the case of an insurance contract under which amounts are payable for other than medical care referred to in subpara- graphs (A) and (B) of paragraph (1)- (A) no amount shall be treated as paid for insurance to which paragraph (1)(C) applies unless the charge for such insurance is either separately stated in the contract, or furnished to the policyholder by the insur- ance company in a separate statement, (B) the amount taken into account as the amount paid for such insurance shall not exceed such charge, and (C) no amount shall be treated as paid for such insurance if the amount specified In the contract (or furnished to the policy- holder by the Insurance company in a sepa- rate statement) as the charge for such in- surance is unreasonably large in relation to the total charges under the contract. (3) Subject to the limitations of paragraph (2), premiums paid during the taxable year by a taxpayer before he attains the age of 65 for insurance covering medical care (within the meaning of subparagraphs (A) and (B) of paragraph (1)) for the taxpayer, his spouse, or a dependent after the taxpayer attains the age of 65 shall be treated as expenses paid during the taxable year for insurance which constitutes medical care if premiums for such insurance are payable (on a level payment basis) under the contract for a period of 10 years or more or until the year in which the taxpayer attains the age of 65 (but in no case for a period of less than 5 years). (4) The determination of whether an indi- vidual is married at any time during the tax- able year shall be made in accordance with the provisions of section 6013(d) (relating to determination of status as husband and wife). (f) Exclusion of amounts allowed for care of certain dependents Any expense allowed as a credit under section 44A shall not be treated as an expense paid for medical care. Page 193 § 213
TITLE 26-INTERNAL REVENUE CODE (Aug. 16, 1954, ch. 736, 68A Stat. 69; Sept. 2, 1958, Pub. L. 85-866, title I, §§ 16, 17(a), (b), 72 Stat. 1613, 1614; May 14, 1960, Pub. L. 86-470, § 3(a), 74 Stat. 133; Oct. 23, 1962, Pub. L. 87-863, § 1(a), (b), 76 Stat. 1141; Feb. 26, 1964, Pub. L. 88-272, title II, § 211(a), 78 Stat. 49; July 30, 1965, Pub. L. 89-97, title I, § 106(a)-(d)(1), 79 Stat. 336, 337; Oct. 4, 1976, Pub. L. 94-455, title V, § 504(c)(1), title XIX, § 1906(b)(13)(A), 90 Stat. 1565, 1834.) REFERENCES IN TEXT The Social Security Act, referred to in subsec. (e)(1)(C), is act Aug. 14, 1935, ch. 531, 49 Stat. 620, as amended. Part B of title XVIII of the Social Security Act is classified generally to part B (Q 1395J et seq.) of subchapter XVIII of chapter 7 of Title 42, The Public Health and Welfare. For complete classification of this Act to the Code, see Tables volume. AMENDMENTS 1976-Subsec. (d)(2). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (f). Pub. L. 94-455, § 504(c)(1), substituted "a credit under section 44A" for "a deduction under sec- tion 214" following "allowed as". 1965-Subsee. (a). Pub. L. 89-97, § 106(a), substituted "There shall be allowed as a deduction the following amounts, not compensated for by insurance or other- wise- "(1) the amount by which the amount of the ex- penses paid during the taxable year (reduced by any amount deductible under paragraph (2)) for medical care of the taxpayer, his spouse, and dependents (as defined in section 152) exceeds 3 percent of the ad- justed gross income, and "(2) an amount (not in excess of $150) equal to one-half of the expenses paid during the taxable year for insurance which constitutes medical care for the taxpayer, his spouse, and dependents." for "There shall be allowed as a deduction the following amounts of the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a depen- dent (as defined in section 152): "(1) If neither the taxpayer nor his spouse has at- tained the age of 65 before the close of the taxable year- "(A) the amount of such expenses for the care of any dependent who- "(i) is the mother or father of the taxpayer or of his spouse, and "(ii) has attained the age of 65 before the close of the taxable year, and "(B) the amount by which such expenses for the care of the taxpayer, his spouse, and such depen- dents (other than any dependent described in sub- paragraph (A)) exceed 3 percent of the adjusted gross income. "(2) If either the taxpayer or his spouse has at- tained the age of 65 before the close of the taxable year- "(A) the amount of such expenses for the care of the taxpayer and his spouse. "(B) the amount of such expenses for the care of any dependent described in paragraph (1)(A), and "(C) the amount by which such expenses for the care of such dependents (other than any depen- dent described In paragraph (1)(A)) exceed 3 per- cent of the adjusted gross income." Subsec. (b). Pub. L. 89-97, § 106(b), repealed the second sentence which had provided: "The preceding sentence shall not apply to amounts paid for the care of- "(1) the taxpayer and his spouse, if either of them has attained the age of 65 before the close of the taxable year, or "(2) any dependent described in subsection (a)(I)(A)." Subsec. (c). Pub. L. 89-97, § 106(d)(1), struck out maximum limitations provisions. Subsec. (e). Pub. L. 89-97, § 106(c), deleted from par. (1)(A) "including amounts paid for accident or health insurance" following "function of the body", added pars, (1)(C), (2), and (3), and renumbered former par. (2) as (4). Subsec. (g). Pub, L. 89-97, § 106(d)(1), struck out pro- visions relating to maximum limitation if taxpayer or spouse has attained age 65 and is disabled, special rule, amounts taken into account, meaning of disabled, and determination of status. 1964-Subsec. (b). Pub. L. 88-272 excluded persons attaining age 65 before the close of the taxable year from the limitation, whether they are the taxpayer and his spouse, or the mother or father of the taxpay. er and his spouse. 1962-Subsec. (c). Pub. L. 87-863, § 1(a), substituted "$5,000" for "$2,500", "$10,000" for "$5,000", and "$20,000" for "$10,000". Subsec. (g). Pub. L. 87-863, § 1(b), substituted "$20,000" for "$15,000" in three instances, and "$40,000" for "$30,000". 1960-Subsec. (a). Pub. L, 86-470 authorized a tax. payer to deduct medical care expenses for dependent parents of the taxpayer or his spouse who have at- tained the age of 65 before the close of the taxable year without applying the three percent limitation. 1958-Subsec. (c). Pub. L. 85-866, § 17(b), substituted "Except as provided in subsection (g), the" for "The". Subsec. (d)(2)(A). Pub. L. 85-866. § 16, eliminated "claimed or" preceding "allowed". Subsec. (g). Pub. L. 85-866, § 17(A), added subsec. (g). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (f) by section 504(c)(1) of Pub. L. 94-455 applicable to taxable years beginning after Dec. 31, 1975, see section 508 of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 3 of this title. EFFECTIVE DATE OF 1965 AMENDMENT Section 106(e) of Pub. L. 89-97 provided that: "The amendments made by this section [to sections 72, 79, 213, 401, and 405 of this title] shall apply to taxable years beginning after December 31, 1966." EFFECTIVE DATE OF 1964 AMENDMENT Section 211(b) of Pub. L. 88-272 provided that: "The amendment made by subsection (a) [to subsec (b) of this section] shall apply to taxable years beginning after December 31, 1963." EFFECTIVE DATE OF 1962 AMENDMENT Section 1(c) of Pub. L. 87-863 provided that: "The amendments made by subsections (a) and (b) [to sub- sees. (c) and (g) of this section] shall apply only with respect to taxable years beginning after December 31, 1961." EFFECTIVE DATE OF 1960 AMENDMENT Section 3(b) of Pub. L. 86-470 provided that: "The amendment made by subsection (a) [to subsec. (a) of this section] shall apply to taxable years beginning after December 31, 1959." EFFECTIVE DATE OF 1958 AMENDMENT Amendment of subsec. (d)(2)(A) by Pub. L. 85-866 applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 1(c) of Pub. L. 85-866, set out as a note under section 165 of this title. Section 17(c) of Pub. L. 85-866 provided that: "The amendments made by subsections (a) [which added subsec, (g) of this section] and (b) [to subsec. (c) of this section] shall apply only with respect to taxable years beginning after December 31, 1957." § 213 Page 194
TITLE 26-INTERNAL REVENUE CODE CROSS REFERENCES Amounts received under accident and health plans excludible from gross income, see section 105 of this title. Compensation for injuries or sickness excludible from gross income, see section 104 of this title. Personal, living and family expenses not deductible, see section 262 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 57, 104. 105 of this title. [§ 214. Repealed. Pub. L. 94-455, title V, § 504(b)(1), Oct. 4, 1976, 90 Stat. 1565] Section, acts Aug. 16, 1954, ch. 736, 68A Stat. 70; Apr. 2, 1963, Pub. L. 88-4, § 1, 77 Stat. 4; Feb. 26. 1964, Pub. L. 88-272, title II, § 212(a), 78 Stat. 49; Dec. 10, 1971. Pub. L. 92-178, title II, § 210(a), 85 Stat. 518; Mar. 29, 1975, Pub. L. 94-12, title II, § 206, 89 Stat. 32, provided for allowance of deduction for household and depen- dent care services necessary for gainful employment; defined "qualifying individual", "employment-related expenses", "maintaining a household"; limitation on deductible amount, income limitation; and special rules and regulations applicable in the determination and allowance of deduction. EFFECTIVE DATE OF REPEAL Repeal of section applicable to taxable years begin- ning after Dec. 31, 1975, see section 508 of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 3 of this title. § 215. Alimony, etc., payments (a) General rule In the case of a husband described in section 71, there shall be allowed as a deduction amounts includible under section 71 in the gross income of his wife, payment of which is made within the husband's taxable year. No de- duction shall be allowed under the preceding sentence with respect to any payment if, by reason of section 71(d) or 682, the amount thereof is not includible in the husband's gross Income. (b) Cross reference For definitions of "husband" and "wife," see section 7701(a)(17). (Aug. 16, 1954, ch. 736, 68A Stat. 71.) CROSS REFERENCES Alimony and separate maintenance payments as income to wife, see section 71 of this title. Husband and wife, definition of, see section 7701 of this title, SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in .ections 62, 71, 7701 of this title. § 216. Deduction of taxes, interest, and business de- preciation by cooperative housing corporation tenant-stockholder (a) Allowance of deduction In the case of a tenant-stockholder (as de- fined in subsection (b)(2)), there shall be al- lowed as a deduction amounts (not otherwise deductible) paid or accrued to a cooperative housing corporation within the taxable year, but only to the extent that such amounts rep- resent the tenant-stockholder's proportionate share of- (1) the real estate taxes allowable as a de- duction to the corporation under section 164 which are paid or incurred by the corporation on the houses or apartment building and on the land on which such houses (or building) are situated, or (2) the interest allowable as a deduction to the corporation under section 163 which is paid or incurred by the corporation on its in- debtedness contracted- (A) in the acquisition, construction, alter- ation, rehabilitation, or maintenance of the houses or apartment building, or (B) in the acquisition of the land on which the houses (or apartment building) are situated. (b) Definitions For purposes of this section- (1) Cooperative housing corporation The term "cooperative housing corpora- tion" means a corporation- (A) having one and only one class of stock outstanding, (B) each of the stockholders of which is entitled, solely by reason of his ownership of stock in the corporation, to occupy for dwelling purposes a house, or an apartment in a building, owned or leased by such cor- poration, (C) no stockholder of which is entitled (either conditionally or unconditionally) to receive any distribution not out of earnings and profits of the corporation except on a complete or partial liquidation of the corpo- ration, and (D) 80 percent or more of the gross income of which for the taxable year in which the taxes and interest described in subsection (a) are paid or incurred is de- rived from tenant-stockholders. (2) Tenant-stockholder The term "tenant-stockholder" means an individual who is a stockholder in a cooperat- ive housing corporation, and whose stock is fully paid-up in an amount not less than an amount shown to the satisfaction of the Sec- retary as bearing a reasonable relationship to the portion of the value of the corporation's equity in the houses or apartment building and the land on which situated which is at- tributable to the house or apartment which such individual is entitled to occupy. (3) The term "tenant-stockholder's propor- tionate share" means that proportion which the stock of the cooperative housing corpora- tion owned by the tenant-stockholder is of the total outstanding stock of the corporation (including any stock held by the corporation). (4) Stock owned by governmental units For purposes of this subsection, in deter- mining whether a corporation is a cooperative housing corporation, stock owned and apart- ments leased by the United States or any of its possessions, a State or any political subdi- vision thereof, or any agency or instrumental- ity of the foregoing empowered to acquire shares in a cooperative housing corporation for the purpose of providing housing facili- ties, shall not be taken into account. Page 195
TITLE 26-INTERNAL REVENUE CODE (5) Stock acquired through foreclosure by lending subsec. (b) of this section] shall apply to taxable years institution beginning after December 31, 1969." If a bank or other lending institution ac- quires by foreclosure (or by instrument in lieu of foreclosure) the stock of a tenant- stockholder, and a lease or the right to occupy an apartment or house to which such stock is appurtenant, such bank or other lending institution shall be treated as a tenant-stockholder for a period not to exceed three years from the date of acquisition. The preceding sentence shall apply even though, by agreement with the cooperative housing corporation, the bank (or other lending insti- tution) or its nominee may not occupy the house or apartment without the prior approv- al of such corporation. (c) Treatment as property subject to depreciation So much of the stock of a tenant-stockholder in a cooperative housing corporation as is allo- cable, under regulations prescribed by the Sec- retary, to a proprietary lease or right of tenan- cy in property subject to the allowance for de- preciation under section 167(a) shall, to the extent such proprietary lease or right of tenan- cy is used by such tenant-stockholder in a trade or business or for the production of income, be treated as property subject to the allowance for depreciation under section 167(a). The preced- Ing sentence shall not be construed to limit or deny a deduction for depreciation under 167(a) by a cooperative housing corporation with re- spect to property owned by such a corporation and leased to tenant-stockholders. (Aug. 16, 1954, ch. 736, 68A Stat. 71; Oct. 16, 1962, Pub. L. 87-834, § 28(a), 76 Stat. 1068; Dec. 30, 1969, Pub. L. 91-172, title IX, § 913(a), 83 Stat. 723; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), title XXI, § 2101(b), (f)(1), 90 Stat. 1834, 1899.) AMENDMENTS 1976-Subsec. (b)(2). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (b)(5). Pub. L. 94-455, § 2101(f), added par. (5). Subsec. (c). Pub. L. 94-455, §§ 1906(b)(13)(A), 2101(b), added "The preceding sentence shall not be construed to limit or deny a deduction for depreciation under 167(a) by a cooperative housing corporation with re- spect to property owned by such corporation and leased to tenant-stockholders" following "treated as property subject to the allowance for depreciation under 167(a)" and struck out "or his delegate" follow- ing "Secretary". 1969-Subsec. (b). Pub. L. 91-172 added par. (4). 1962-Pub. L. 87-834 substituted "Deduction of taxes, interest, and business depreciation by cooperat- ive housing corporation tenant-stockholders" for "Amounts representing taxes and interest paid to co- operative housing corporation" in section catchline, and added subsec. (c). EFFECTIVE DATE OF 1976 AMENDMENT Section 2101(f)(2) of Pub. L. 94-455 provided that: "The amendment made by paragraph (1) [enacting subsec. (b)(5) of this section] shall apply to stock ac- quired by banks or other lending institutions after the date of the enactment of this Act [Oct. 4, 19761." EFFECTIVE DATE OF 1969 AMENDMENT Section 913(b) of Pub. L. 91-172 provided that: "The amendment made by subsection (a) [adding par. (4) to EFFECTIVE DATE OF 1962 AMENDMENT Section 28(c) of Pub. L. 87-834 provided that: "The amendments made by subsection (a) [amending sec- tion catchline and adding subsec. (c) of this section] shall be effective with respect to taxable years begin- ning after December 31, 1961." CROSS REFERENCES Interest deductible, see section 163 of this title. Taxes deductible, see section 164 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 121, 1034 of this title. § 217. Moving expenses (a) Deduction 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 or as a self-employed individual, at a new principal place of work. (b) Definition of moving expenses (1) In general For purposes of this section, the term "moving expenses" means only the reason- able expenses- (A) of moving household goods and per- sonal effects from the former residence to the new residence, (B) of traveling (including meals and lodg- ing) from the former residence to the new place of residence, (C) of traveling (including meals and lodg- ing), after obtaining employment, from the former residence to the general location of the new principal place of work and return, for the principal purpose of searching for a new residence, (D) of meals and lodging while occupying temporary quarters in the general location of the new principal place of work during any period of 30 consecutive days after ob- taining employment, or (E) constituting qualified residence sale, purchase, or lease expenses. (2) Qualified residence sale, etc., expenses For purposes of paragraph (1)(E), the term "qualified residence sale, purchase, or lease expenses" means only reasonable expenses in- cident to- (A) the sale or exchange by the taxpayer or his spouse of the taxpayer's former resi- dence (not including expenses for work per- formed on such residence in order to assist in its sale) which (but for this subsection and subsection (e)) would be taken into ac- count in determining the amount realized on the sale or exchange, (B) the purchase by the taxpayer or his spouse of a new residence in the general lo- cation of the new principal place of work which (but for this subsection and subsec- tion (e)) would be taken into account in de- termining- (I) the adjusted basis of the new resi- dence, or § 217 Page 196
TITLE 26-INTERNAL REVENUE CODE (ii) the cost of a loan (but not including any amounts which represent payments or prepayments of interest), (C) the settlement of an unexpired lease held by the taxpayer or his spouse on prop- erty used by the taxpayer as his former residence, or (D) the acquisition of a lease by the tax- payer or his spouse on property used by the taxpayer as his new residence in the general location of the new principal place of work (not including amounts which are payments or prepayments of rent). (3) Limitations (A) Dollar limits The aggregate amount allowable as a de- duction under subsection (a) in connection with a commencement of work which is at- tributable to expenses described in subpara- graph (C) or (D) of paragraph (1) shall not exceed $1,500. The aggregate amount al- lowable as a deduction under subsection (a) which is attributable to qualified residence sale, purchase, or lease expenses shall not exceed $3,000, reduced by the aggregate amount so allowable which is attributable to expenses described in subparagraph (C) or (D) of paragraph (1). (B) Husband and wife If a husband and wife both commence work at a new principal place of work within the same general location, subpara- graph (A) shall be applied as if there was only one commencement of work. In the case of a husband and wife filing separate returns, subparagraph (A) shall be applied by substituting "$750" for "$1,500", and by substituting "$1,500" for "$3,000". (C) Individuals other than taxpayer In the case of any individual other than the taxpayer, expenses referred to in sub- paragraphs (A) through (D) of 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 No deduction shall be allowed under this sec- tion unless- (1) the taxpayer's new principal place of work- (A) is at least 35 miles farther from his former residence than was his former prin- cipal place of work, or (B) if he had no former principal place of work, is at least 50 miles from his former residence, and (2) either- (A) during the 12-month period immedi- ately following his arrival in the general lo- cation of his new principal place of work, the taxpayer is a full-time employee, in such general location, during at least 39 weeks, or (B) during the 24-month period immedi- ately following his arrival in the general lo- cation of his new principal place of work, the taxpayer is a full-time employee or per- forms services as a self-employed individual on a full-time basis, in such general loca- tion, during at least 78 weeks, of which not less than 39 weeks are during the 12-month period referred to in subparagraph (A). For purposes of paragraph (1), the distance between two points shall be the shortest of the more commonly traveled routes between such two points. (d) Rules for application of subsection (c)(2) (1) The condition of subsection (e)(2) shall not apply if the taxpayer is unable to satisfy such condition by reason of- (A) death or disability, or (B) involuntary separation (other than for willful misconduct) from the service of, or transfer for the benefit of, an employer after obtaining full-time employment in which the taxpayer could reasonably have been expected to satisfy such condition. (2) If a taxpayer has not satisfied the condi- tion of subsection (c)(2) before the time pre- scribed by law (including extensions thereof) for filing the return for the taxable year during which he paid or incurred moving ex- penses which 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 subsection (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) cannot be satisfied at the close of a subse- quent taxable year, then an amount equal to the expenses which were so deducted shall be included in gross income for the first such subsequent taxable year. (e) Denial of double benefit The amount realized on the sale of the resi- dence described in subparagraph (A) of subsec- tion (b)(2) shall not be decreased by the amount of any expenses described in such sub- paragraph which are allowed as a deduction under subsection (a), and the basis of a resi- dence described in subparagraph (B) of subsec- tion (b)(2) shall not be increased by the amount of any expenses described in such subpara- graph which are allowed as a deduction under subsection (a). This subsection shall not apply to any expenses with respect to which an amount is included in gross income under sub- section (d)(3). (f) Rules for self-employed individuals (1) Definition For purposes of this section, the term "self- employed individual" means an individual who performs personal services- (A) as the owner of the entire interest in an unincorporated trade or business, or (B) as a partner in a partnership carrying on a trade or business. 71-999 0 - 78 - 15 (Vol, 7) Page 197 § 217
TITLE 26-INTERNAL REVENUE CODE (2) Rule for application of subsections (b)(1)(C) and (D) For purposes of subparagraphs (C) and (D) of subsection (b)(1), an individual who com- mences work at a new principal place of work as a self-employed individual shall be treated as having obtained employment when he has made substantial arrangements to commence such work. (g) Rules for members of the Armed Forces of the United States In the case of a member of the Armed Forces of the United States on active duty who moves pursuant to a military order and incident to a permanent change of station- (1) the limitations under subsection (c) shall not apply; (2) any moving and storage expenses which are furnished in kind (or for which reim- bursement or an allowance is provided, but only to the extent of the expenses paid or in- curred) to such member, his spouse, or his de- pendents, shall not be includible in gross income, and no reporting with respect to such expenses shall be required by the Secretary of Defense or the Secretary of Transporta- tion, as the case may be; and (3) if moving and storage expenses are fur- nished in kind (or if reimbursement or an allowance for such expenses is provided) to such member's spouse and his dependents with regard to moving to a location other than the one to which such member moves (or from a location other than the one from which such member moves), this section shall apply with respect to the moving expenses of his spouse and dependents- (A) as if his spouse commenced work as an employee at a new principal place of work at such location; (B) for purposes of subsection (b)(3), as if such place of work was within the same general location as the member's new prin- cipal place of work, and (C) without regard to the limitations under subsection (c). (h) Regulations The Secretary shall prescribe such regula- tions as may be necessary to carry out the pur- poses of this section. (Added Pub. L. 88-272, title II, § 213(a)(1), Feb. 26, 1964, 78 Stat. 50, and amended Pub. L. 91- 172, title I1, § 231(a), Dec. 30, 1969, 83 Stat. 577; Pub. L. 94-455, title V, § 506 (a)-(c), title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1568, 1834.) PRIOR PROVISIONS A prior section 217, act Au,. 16, 1954, ch. 736, 68A Stat. 72, § 217, renumbered § 218, Feb. 26, 1964, Pub. L. 88-272, title II, § 213(a)(1), 78 Stat. 50, renumbered § 219, Dec. 10, 1971, Pub. L. 92-178, title VII, § 702(a), 85 Stat. 561, renumbered § 220, Sept. 2, 1974, Pub. L. 93-406, title II, § 2002(a)(1), 88 Stat. 958, renumbered § 221, Oct. 4, 1976, Pub. L. 94-455, title XV, § 1501(a), 90 Stat. 1734, relating to cross references concerning deduction for long term capital gains and deductions in respect of a decedent, was redesignated as section 221 of this title by section 1501(a) of Pub. L. 94-455. AMENDMILNTS 1976--Subsec. (b)(3)(A). Pub. L. 94-455, §506(b)(1), (2), substituted "$1,500" for "$1,000" following "(1) shall not exceed" and "$3,000" for "$2,500" following "lease expenses shall not exceed". Subsec. (b)(3)(B). Pub. L. 94-455. § 506(b)(3), substi- tuted "$750' for '$1,500'" for " '$500' for '$1,000'" fol- lowing "applied by substituting" and "'$1,500' for '$3,000'" for "'$1,250' for '$2,500'" following "and by substituting". Subsec. (c)(1). Pub. L. 94-455, § 506(a), substituted "35" for "50" following "at least". Subsec. (g). Pub. L. 94-455, § 506(c), added subsec. (g). Former subsec. (g) redesignated subsec. (h). Subsec. (h). Pub. L. 94-455, §§ 506(c), 1906(b)(13)(A), redesignated former subsec. (g) as (h) and, as redesig- nated, struck out "or his delegate" following "Secre- tary". 1969-Pub. L. 91-172 substantially reenacted existing provisions and extended the coverage to self-employed persons working at the new location for 78 weeks, made it a requirement that the new principal place of work be located 50 miles from the former residence, and redefined the deduction to include costs of house. hunting trips, temporary living expenses prior to lo- cating a new home, and expenses of selling an old home or buying a new one. EFFECTIVE DATE OF 1976 AMENDMENT Section 506(d) of Pub. L. 94-455 provided that: "The amendments made by subsections (a) and (b) [to sub- sees. (b)(3) and (c)(1) of this section] shall apply to taxable years beginning after December 31, 1976." EFFECTIVE DATE OF 1969 AMENDMENT Section 231(d) of Pub. L. 91-172, as amended by Pub. L. 91-642, § 2, Dec. 31, 1970, 84 Stat. 1880, provided that: "The amendments made by this section [enact- ing section 82 of this title and amending this section and sections 1001 and 1016(c) of this title] shall apply to taxable years beginning after December 31, 1969. except that- "(1) section 217 of the Internal Revenue Code of 1954 (as amended by subsection (a)) shall not apply to any item to the eitent that the taxpayer received or accrued reimbursement or other expense allowance for such item in a taxable year beginning on or before December 31, 1969, which was not in- cluded in his gross income; and "(2) the amendments made by this section shall not apply (at the election of the taxpayer made at such time and manner as the Secretary of the Trea- sury or his delegate prescribes) with respect to moving expenses paid or incurred before January 1, 1971, in connection with the commencement of work by the taxpayer as an employee at a new principal place of work of which the taxpayer had been noti- fied by his employer on or before December 19, 1969." EFFECTIVE DATE Section applicable to expenses incurred after Dec. 31, 1963, in taxable years ending after such date, see section 213(d) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 62 of this title. MOVING EXPENSES OF MEMBERS OF THE UNIFORMED SERVICES Pub. L. 93-490, § 2, Oct. 26, 1974, 88 Stat. 1466, au- thorized the Secretary of the Treasury, applicable with respect to taxable years ending before January 1, 1976, to: (1) enter into an agreement with the Secretary con- cerned under which the Secretary concerned would not be required to withhold tax on, or to report, moving expense reimbursements made to members of the armed forces; (2) permit any taxpayer who was a member of the armed forces not to include in adjusted gross income § 217 Page 198
TITLE 26-INTERNAL PEVENUE CODE the amount of any reimbursement in kind of moving expenses made by the Secrel ary concerned; and (3) permit any taxpayer who was a member of the armed forces to deduct any amount paid by him as moving expenses in connection with any move re- quired by the Secretary concerned, in excess of any re- imbursement received for such expenses, without regard to the provisions of subsec. (c) of this section, to the extent it was otherwise deductible under this section. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 62, 1001, 1016, 3121, 3306, 3401 of this title; title 42 section 409. § 218. Contributions to candidates for public office (a) Allowance of deduction . In the case of an individual, there shall be al- lowed as a deduction any political contribution (as defined in section 41(c)(1)) or newsletter fund contribution (as defined In section 41(c)(5)) payment of which is made by such in- dividual within the taxable year. (b) Limitations (1) Amount The deduction under subsection (a) shall not exceed $100 ($200 in the case of a joint return under section 6013). (2) Verification The deduction under subsection (a) shall be allowed, with respect to any political contri- bution or newsletter fund contribution, only if such contribution is verified in such manner as the Secretary shall prescribe by regulations. c) Election to take credit in lieu of deduction This section shall not apply in the case of any taxpayer who, for the taxable year, elects to take the credit against tax provided by section 41 (relating to credit against tax for contribu- tions to candidates for public office). Such elec- tion shall be made in such manner and at such time as the Secretary shall prescribe by regula- tions. (d) Cross reference For disallowance or deduction to estates and trusts, see section 642(i). (Added Pub. L. 92-178, title VII, § 702(a), Dec. 10, 1971, 85 Stat. 561, and amended Pub. L. 93- 625, §§ 11(d), 12(b), Jan. 3, 1975, 88 Stat. 2120: Pub. L. 94-455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) PRIOR PROVISIONS A prior section 218, act Aug. 16, 1954, ch. 736, 68A Stat. 72, § 217, renumbered § 218, Feb. 26, 1964, Pub. L. 88-272, title II, § 213(a)(1), 78 Stat. 50, renumbered § 219, Dec. 10, 1971, Pub. L. 92-178, title VII, § 702(a), 85 Stat. 561, renumbered § 220, Sept. 2, 1974, Pub. L. 93-406, title II, § 2002(a)(1), 88 Stat. 958, renumbered § 221, Oct. 4, 1976, Pub. L. 94-455, title XV, § 1501(a), 90 Stat. 1734, relating to cross references concerning deduction for long term capital gains and deductions in respect of a decedent, was redesignated as section 221 of this title by section 1501(a) of Pub. L. 94-455. AMENDMENTS 1976-Pub. L. 94-455 struck out "or his delegate" in subsecs. (b)(2) and (c) following "Secretary". 1975-Subsec. (a). Pub. L. 93-625, § 11(d)(1), provided for allowance of deduction for newsletter fund contri- bution as defined in section 41(c)(5) of this title. Subsec, (b)(1). Pub. L. 93-625, § 12(b), doubled amount of maximum deduction. Subsec. (b)(2). Pub. L. 93-625, § 11(d)(2), inserted "or newsletter fund contribution" after "political contri- bution" where first appearing and substituted "such contribution" for "such political contribution". EFFECTIVE DATE OF 1975 AMENDMENT Amendment by Pub. L. 93-625 applicable to any con- tribution payment of which was made after Dec. 31, 1974, in taxable years beginning after such dite, see sections 11(f) and 12(c) of Pub. L, 93-625, set out as Ef- fective Date of 1975 Amendment notes under section 41 of this title. EFFECTIVE DATE Section applicable to taxable years ending after Dec. 31, 1971, but only with respect to political contribu- tions, payment of which is made after such date, see section 703 of Pub. L. 92-178, set out as an Effective Date note under section 41 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 642 of this title. § 219. Retirement savings (a) Deduction allowed In the case of an individual, there is allowed as a deduction amounts paid in cash for the taxabie year by or on behalf of such individual for his benef it- (1) to an individual retirement account de- scribed in section 408(a), (2) for an individual retirement annuity de- scribed in section 408(b), or (3) for a retirement bond described in sec- tion 409 (but only if the bond is not redeemed within 12 months of the date of its issuance). For purposes of this title, any amount paid by an employer to such a retirement account or for such a retirement annuity or retirement bond constitutes payment of compensation to the employee (other than a self-employed indi- vidual who is an employee within the meaning of section 401(c)(1) 1 includible in his gross income, whether or not a deduction for such payment is allowable under this section to the employee after the application of subsection (b). (b) Limitations and restrictions (1) Maximum deduction The amount allowable as a deduction under subsection (a) to an individual for any taxable year may not exceed an amount equal to 15 percent of the compensation includible in his gross income for such taxable year, or $1,500, whichever is less. (2) Covered by certain other plans No deduction is allowed under subsection (a) for an individual for the taxable year if for any part of such year- (A) he was an active participant in- (I) a plan described in section 401(a) which includes a trust exempt from tax under section 501(a), (ii) an annuity plan described tri section 403(a), (iII) a qualified bond purchase plan de- scribed in section 405(a), or Probably should be followed by a closing parenthe- sis. Page 199
TITLE 26-INTERNAL REVENUE CODE (iv) a plan established for its employees by the United States, by a State or politi- cal subdivision thereof, or by an agency or instrumentality of any of the foregoing, or (B) amounts were contributed by his em- ployer for an annuity contract described in section 403(b) (whether or not his rights in such contract are nonforfeitable). (3) Contributions after age 702 No deduction is allowed under subsection (a) with respect to any payment described in subsection (a) which is made during the tax- able year of an individual who has attained age 70V2 before the close of such taxable year. (4) Recontriliuted amounts No deduction is allowed under this section with respect to a rollover contribution de- scribed in section 402(a)(5), 403(a)(4), 408(d)(3), or 409(b)(3)(C). (5) Amounts contributed under endowment con- tract In the case of an endowment contract de- scribed in section 408(b), no deduction is al- lowed under subsection (a) for that portion of the amounts paid under the contract for the taxable year properly allocable, under regula- tions prescribed by the Secretary, to the cost of life insurance. (6) Alternative deduction No deduction Is allowed under subsection (a) for the taxable year if the individual claims the deduction allowed by section 220 for the taxable year. (c) Definitions and special rules (1) Compensation For purposes of this section, the term "com- pensation" includes earned income as defined in section 401(c)(2). (2) Married individuals The maximum deduction under subsection (b)(1) shall be computed separately for each individual, and this section shall be applied without regard to any community property laws. For purposes of this section, the deter- mination of whether an individual is married shall be made in accordance with the provi- sions of section 143(a). (3) Time when contributions deemed made For purposes of this section, a taxpayer shall be deemed to have made a contribution on the last day of the preceding taxable year if the contribution is made on account of such taxable year and is made not later than 45 days after the end of such taxable year. (4) Participation in governmental plans by certain individuals (A) Members of reserve components A member of a reserve component of the armed forces (as defined in section 261 ka) of title 10) is not considered to be an active participant in a plan described in subsection (b)(3)(A)(iv) for a taxable year solely be- cause he is a member of a reserve compo- nent unless he has served in excess of 90 days on active duty (other than active duty for training) during the year. (B) Volunteer firefighters An individual whose participation in a plan described in subsection (b)(3)(A)(iv) is based solely upon his activity as a volunteer firefighter and whose accrued benefit as of the beginning of the taxable year is not more than an annual benefit of $1,800 (when expressed as a single life annuity commencement at age 65) is not considered to be an active participant in such a plan for the taxable year. (Added Pub. L. 93-406, title II, §2002(a)(1), Sept. 2, 1974, 88 Stat. 958, and amended Pub. L. 94-455, title XV, §§ 1501(b)(4), 1503(a), title XIX, §§ 1901(a)(32), 1906(b)(13)(A), Oct. 4. 1976, 90 Stat. 1736, 1738, 1769, 1834.) PRIOR PROVISIONS A prior section 219, act Aug, 16, 1954, ch. 736, 68A Stat. 72, § 217, renumbered § 218, Feb. 26, 1964, Pub. L. 88-272. title II, § 213(a)(1), 78 Stat. 50, renumbered § 219, Dec. 10, 1971, Pub. L. 92-178, title VII. § 702(a), 85 Stat. 561, renumbered § 220, Sept. 2, 1974, Pub, L. 93-406. title II. § 2002(a)(1), 88 Stat. 958, renumbered § 221, Oct. 4, 1976, Pub. L. 94-455, title XV, § 150ha), 90 Stat. 1734, relating to cross references concerning deduction for long term capital gains and deductions in respect of a decedent, was redesignated as secthm 221 of this title by section 1501(a) of Pub. L. 94-455. AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, § 1501(b)(4)(B), substituted "for" for "duing" following "paid in cash". Subsec. (b)(2)(AXiv). Pub. L. 94-455, § 1901(a)(32), substituted "subdivision" for "division" following "State or political". Subsec. (b)(5). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (b)(6). Pub. L. 94-455, § 1501(b)(4)(B), added par. (6). Subsec. (c)(2). Pub. L. 94-455, § 1501(b)(4)(C), added "For purposes of this section, the determination of whether an individual is married shall be made in ac- cordance with the provisions of section 143(a)" follow- ing "community property laws". Subsec. (c)(3). Pub. L. 94-455, § 1501(b)(4)(D), added par. (3). Subsec. (c)(4). Pub. L. 94-455, § 1503(a), added par. (4)' EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (a), (c)(2) and enactment of subsecs. (b)(6), (c)(3) by section 1501(b)(4) of Pub. L. 94-455 applicable to taxable years beginning after Dec. 31. 1976, see section 1501(d) of Pub. L. 94-455, set out as an Effective Date note under section 220 of this title. Amendment of subsec. (b)(2)(A)(iv) by section 1901(a)(32) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Section 1503(b) of Pub. L. 94-455 provided that: "The amendment made by this section (enacting subsec. (c)(4) of this section] shall apply to taxable years beginning after December 31, 1975." EFFECTIVE DATE Section 2002(i)(1) of Pub. L. 93-406 provided that: "The amendments made by subsections (a), (b), and (c) [of section 2002 of Pub. L. 93-406, which enacted this section and sections 408 and 409 of this title and amended section 62 of this title] apply to taxable years beginning after December 31, 1974." § 219 Page 200
TITLE 26-INTERNAL REVENUE CODE SECTION REFERRED TO IN OTHER SECTIONS This section Is referred to in sections 62, 220, 408, 409, 3401, 4973, 6047 of this title; title 29 section 1309. § 220. Retirement savings for certain married Individ- uals (a) Deduction allowed In the case of an individual, there is allowed as a deduction amounts paid in cash for a tax- able year by or on behalf of such individual for the benefit of himself and his spouse- (1) to an individual retirement account de- scribed in section 408(a), (2) for an individual retirement annuity de- scribed in section 408(b), or (3) for a retirement bondidescribed in sec- tion 409 (but only if the bond is not redeemed within 12 months of the date of its issuance). For purposes of this title, any amount paid by an employer to such a retirement account or for such a retirement annuity or retirement bond constitutes payment of compensation to the employee (other than a self-employed indi- vidual who is an employee within the meaning of section 401(c)(1)) includible in his gross income, whether or not a deduction for such payment is allowable under this section to the employee after the application of subsection (b). (b) Limitation and restrictions (1) Maximum deduction The amount allowable as a deduction under subsection (a) to an individual for any taxable year may not exceed- (A) twice the amount paid to the account or annuity, or for the bond, established for the individual or for his spouse to or for which the lesser amount was paid for the taxable year, (B) an amount equal to 15 percent of the compensation includible in the individual's gross income for the taxable year, or (C) $1,750, whichever is the smallest amount. (2) Alternative deduction No deduction is allowed under subsection (a) for the taxable year if the individual claims the deduction allowed by section 219 for the taxable year. (3) Coverage under certain other plans No deduction is allowed under subsection (a) for an individual for the taxable year if for any part of such year- (A) he or his spouse was an active partici- pant in- (i) a plan described in section 401(a) which includes a trust exempt from tax under section 501(a), (ii) an annuity plan described in section 403(a), (iII) a qualified bond purchase plan de- scribed in section 405(a), or (iv) a plan established for its employees by the United States, by a State or politi- cal subdivision thereof, or by an agency or instrumentality of any of the foregoing, or (B) amounts were contributed by his em- ployer, or his spouse's employer, for an an- nuity contract described in section 403(b) (whether or not his, or his spouse's, rights in such contract are nonforfeitable). (I) Contributions after age 701/2 No deduction is allowed under subsection (a) with respect to any payment which is made for a taxable year of an individual if either the individual or his spouse has at- tained age 70'/2 before the close of such tax- able year. (5) Recontributed amounts No deduction is allowed under this section with respect to a rollover contribution de- scribed in section 402(a)(5), 403(a)(4), 408(d)(3), or 409(b)(3)(C). (6) Amounts contributed under endowment con. tract In the case of an endowment contract de- scribed in section 408(b), no deduction is al- lowed under subsection (a) for that portion of the amounts paid under the contract for the taxable year properly allocable, under regula- tions prescribed by the Secretary, to the cost of life insurance. (7) Employed spouses No deduction is allowed under subsection (a) with respect to a payment described in subsection (a) made for any taxable year of the individual if the spouse of the individual has any compensation (determined without regard to section 911) for the taxable year of such spouse ending with or within such tax- able year. (c) Definitions and special rules (I) Compensation For purposes of this section, the term "com- pensation" includes earned income as defined in section 401(c)(2). (2) Married individuals This section shall be applied without regard to any community property laws. (3) Determination of marital status The determination of whether an individual is married for purposes of this section shall be made in accordance with the provisions of section 143(a). (4) Time when contributions deemed made For purposes of this section, a taxpayer shall be deemed to have made a contribution on the last day of the preceding taxable year if the contribution is made on account of such taxable year and is made not later than 45 days after the end of such taxable year. (5) Participation in governmental plans by certain individuals A member of a reserve component of the armed forces or a volunteer firefighter is not considered to be an active participant in a plan described in subsection (b)(3)(A)(iv) if, under section 219(c)(4), he is not considered to be an active participant in such a plan. (Added Pub. L. 94-455, title XV, § 1501(a), Oct. 4, 1976, 90 Stat. 1734.) PRIOR PROVISIONS A prior section 220, act Aug. 16, 1954, ch. 736, 68A Stat. 72, § 217, renumbered § 218, Feb. 26, 1964, Pub. L. 88-272, title II, § 213(a)(1), 78 Stat. 50, renumbered Page 201 § 220
TITLE 26-INTERNAL REVENUE CODE § 219, Dec. 10, 1971, Pub. L. 92-178, title VII, § 702(a), 85 Stat. 561, renumbered § 220, Sept. 2, 1974, Pub. L. 93-405, title II, § 2002(a)(1), 88 Stat. 958, renumbered § 221, Oct. 4, 1976, Pub. L. 94-455, title XV, § 1501(a), 90 Stat. 1734, relating to cross references concerning deduction for long term capital gains and deductions in respect of a decedent, was redesignated as section 221 of this title by section 1501(a) of Pub. L. 94-455. EFFECTIVE DATE Section 1501(d) of Pub. L. 94-455 provided that: "The amendments made by this section [enacting this section, amending sections 62(10), 219(a), (b)(6), (c)(2), (3), 408(c)(2), (d)(4), 409(a)(4), 3401(a)(12), 4973(a), (b)(1)(B), (2) and 6047(d) of this title, and renumber- Ing section 220 as 221 of this title], other than the amendment made by subsection (b)(3), shall apply to taxable years beginning after Deceml-er 31, 1976. The amendment made by subsection (b)(3) [amending sec- tion 415(a)(2), (3) of this title] shall apply to years be- ginning after December 31, 1976." SECTION REFERRED TO IN OTHER SECTIONS Th s section is referred to in sections 62, 219, 408, 3401, 4973 of this title. § 221. Cross references (1) For deduction for long-term capital gains in the case of a taxpayer other than a corporation, see section 1202. (2) For deductions In respect of a decedent, see section 691. (Aug. 16, 1954, ch. 736, 68A Stat. 72, § 217, re- numbered § 218, Feb. 26, 1964, Pub. L. 88-272, title II, § 213(a)(1), 78 Stat. 50, renumbered § 219, Dec. 10, 1971, Pub. L. 92-178, title VII, § 702(a), 85 Stat. 561, renumbered § 220, Sept. 2, 1974, Pub. L. 93-406, title II, § 2002(a)(1), 88 Stat. 958, renumbered § 221, Oct. 4, 1976, Pub. L. 94-455, title XV, § 1501(a), 90 Stat. 1734.) PART VIII-SPECIAL DEDUCTIONS FOR CORPORATIONS Sec. 241. Allowance of special deductions. [242. Repealed.] 243. Dividends received by corporations. 244. Dividends received on certain preferred stock. 245. Dividends received from certain foreign corpora. tions. 246. Rules applying to deductions for dividends re- ceived. 247. Dividends paid on certain preferred stock of public utilities. 248. Organizational expenditures. 249. Limitation on deduction of bond premium on re- purchase. 250. Certain payments to the National RAilroad Pas- senger Corporations. AMENDMENTS 1976-Pub. L. 94-455, title XIX, § 1901(b)(1)(AA). Oct. 4, 1976, 90 Stat. 1792, struck out item 242 "Par- tially tax-exempt interest". 1970-Pub. L. 91-518, title IX, § 901(b), Oct. 30, 1970, 84 Stat. 1342, added item 250. 1969-Pub. L. 91-172, title IV, § 414(b), Dec. 30, 1969, 83 Stat. 613, added item 249. PART REFERRED TO IN OTHER SECTIONS This part is referred to in sections 527, 528, 535, 545, 556, 593, 822, 832, 857, 1373, 1374 of this title. § 241. Allowance of special deductions In addition to the deductions provided in part VI (sec. 161 and following), there shall be al- lowed as deductions in computing taxable income the items specified in this part. (Aug. 16, 1954, ch. 736, 68A Stat. 72.) SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 535 of this title. [§ 242. Repealed. Pub. L. 94-455, title XIX, § 1901(a)(33), Oct. 4, 1976, 90 Stat. 1769] Section, acts Aug. 16, 1954, ch. 736, 68A Stat. 72; Feb. 26, 1964, Pub. L. 88-272, title I, § 123(c), 78 Stat. 30, al- lowed to corporations as a deduction the amount're. ceived as interest on obligations of the United States or on obligations of corporations organized under Acts of Congress which are instrumentalities of the United States under certaiR conditions. EFFECTIVE DATE OF REPEAL Repeal of this section effective for taxable years be- ginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amend- ment note under section 2 of this title. § 243. Dividends received by corporations (a) General rule In the case of a corporation, there shall be al- lowed as a deduction an amount equal to the following percentages of the amount received 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 re- ceived by a small business investment compa- ny operating under the Small Business In- vestment Act of 1958 (15 U.S.C. 661 and fol- lowing); and (3) 100 percent, in the case of qualifying dividends (as defined in subsection (b)(1)). (b) Qualifying dividends (1) Definition For purposes of subsection (a)(3), the term "qualifying dividends" means dividends re- ceived by a corporation which, at the close of the day the dividends are rece jed, is a member of the same affiliated group of corpo- rations (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 effec- tive for the taxable years of its members which include such day, and either (B) such dividends are distributed out of earnings and profits of a taxable year of the distributing corporation ending after De- cember 31, 1963- (i) on each day of which the distributing corporation and the corporation receiving the dividends were members of such affili- ated group, and (ii) for which an election under section 1562 (relating to election of multiple surtax exemptions) is not effective, or (C) such dividends are paid by a corpora- tion with respect to which an election under section 936 is in effect for the taxable year in which such dividends are paid. (2) Election An election under this paragraph shall be made for an affiliated group by the common Page 202
TITLE 26-INTERNAL REVENUE CODE parent corporation, and shall be made for any taxable year of the common parent corpora- tion at such time and in such manner as the Secretary 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 effective. Each corpora- tion 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 by regulations pre- scribes. 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, 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 effec- tive with respect to a taxable year of the common parent corporation, then under regu- lations prescribed by the Secretary- (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 pur- poses of making the election under section 901(a) (relating to allowance of foreign tax credit), and (C) the members of such affiliated group shall be limited to one- (i) $150,000 minimum accumulated earn- ings credit under section 535(c)(2) or (3), (ii) $400,000 limitation for certain explo- ration expenditures under section 617(h)(1), (iii) $25,000 limitation on small business deduction of life insurance companies under sections 804(a)(3) and 809(d)(10), and (iv) surtax exemption, and one amount under section 6154(c)(2) and section 6655(e)(2), for purposes of estimated tax payment requirements under section 6154 and the addition to the 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 corpo- ration 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 common parent corporation if- (A) Consent of members Such affiliated group files a termination of such election (at such time and in such manner as the Secretary by regulations pre- scribes) with respect to such taxable year of the common parent corporation, and each corporation which is a member of such af- filiated group at any time during its taxable year which includes the last day of such taxable year of the common parent corpora- tion consents to such termination, or (B) Refusal by new member to consent During such taxable year of the common parent corporation such affiliated group in- cludes a member which- (i) was not a member of such group during such common parent corporation's immediately preceding taxable year, and (i) such member files a statement that it does not consent to the election at such time and in such manner as the Secretary by regulations prescribes. (5) Definition of affiliated group For purposes of this subsection, the term "affiliated group" has the meaning assigned to it by section 1504(a), except that for such purposes sections 1504(b)(2), 1504(b)(4), and 1504(c) shall not apply. (6) Special rules for insurance companies If an election under this subsection is effec- tive for the taxable year of an insurance com- pany 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) (relat- ing to certain excluded members) with re- spect to such company and the other corpo- rations which are members of the con- trolled group of corporations (as deter- mined under section 1563 without regard to subsections (a)(4) and (b)(2)(D)) of which such company is a member, and (B) for purposes of paragraph (1), a distri- bution by such company out of earnings and profits of a taxable year for which an election under this subsection was not effec- tive, 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 divi- dend. (c) Special rules for certain distributions For purposes of subsection (a)- (1) Any amount allowed as a deduction under section 591 (relating to deduction for dividends paid by mutual savings banks, etc.) shall not be treated as a dividend. (2) A dividend received from a regulated in- vestment company shall be subject to the limitations prescribed In section 854. (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 (sec- tion 856 and following) shall not be treated as a dividend. (4) Any dividend received which is described in section 244 (relating to dividends received on preferred stock of a public utility) shall not be treated as a dividend. Page 203 § 243
TITLE 26-INTERNAL REVENUE CODE (d) Certain dividends from foreign corporations For purposes of subsection (a) and for pur- poses of section 245, any dividend from a for- eign corporation from earnings and profits ac- cumulated by a domestic corporation during a period with respect to which such domestic cor- poration was subject to taxation under this chapter (or corresponding provisions of prior law) shall be treated as a dividend from a do- mestic corporation which is subject to taxation under this chapter. (Aug. 16, 1954, ch. 736, 68A Stat. 73; Sept. 2, 1958, Pub. L. 85-866, title I, § 57(b), 72 Stat. 1645; Sept. 14, 1960, Pub. L. 86-779, §§3(a), 10(g), 74 Stat. 998, 1009; Feb. 26, 1964, Pub. L. 88-272, title II, § 214(a), 78 Stat. 52; June 28, 1968, Pub. L. 90-364, title I, § 103(e)(2), 82 Stat. 264; Dec. 30, 1969, Pub. L. 91-172, title V, § 504(c)(1), 83 Stat, 633; Mar. 29, 1975, Pub. L. 94-12, title III, § 304(b), 89 Stat. 45; Oct. 4, 1976, Pub. L. 94-455, title X, §§ 1031(b)(2), 1051(f)(1), (2), title XIX, §§ 1901(a)(34), (b)(1)(J)(ii), (21)(A)(i), 1906(b)(3)(C)(ii), (13)(A), 90 Stat. 1622, 1646, 1769, 1791, 1797, 1833, 1834.) REFERENCES IN TEXT The Small Business Investment Act of 1958, referred to in subsec. (a)(2), is Pub. L. 85-699, Aug. 21, 1958, 72 Stat. 689, as amended, which is classified principally to chapter 14B (§ 661 et seq.) of Title 15, Commerce and Trade. For complete classification of this Act to the Code, see Short Title note set out under section 661 of Title 15 and Tables volume. AMENDMENTS 1976-Subsec. (a)(2). Pub. L. 94-455, § 1901(a)(34)(A), added "(15 U.S.C. 661 and following)" after "Small Business Investment Act of 1958". Subsec. (b)(1). Pub. L. 94-455, § 1051(f)(1), added "either" at the end of subpar. (A), substituted a comma for a period and added "or" at the end of subpar. (B), and added subpar. (C). Subsecs. (b)(2), (3), (4), Pub. L. 94-455, title XIX, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (b)(2)(A). Pub. L. 94-455, § 1901(a)(34)(B), struck out "(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 elec- tion shall be effective for such taxable year of such member, if such member consents to such election with respect to such taxable year)" following "with re- spect to which the election is made". Subsec. (b)(3)(B). Pub. L. 94-455, § 1031(b)(2), substi- tuted "election under section 901(a) (relating to allowance of foreign tax credit)" for "elections under section 001(a) (relating to allowance of foreign tax credit) and section 904(b)(1) (relating to election of overall limitation)". Subsec. (b)(3)(C). Pub. L. 94-455, §§ 1901(b)(1)(J)(ii), (21)(A)(i). 1906(b)(3)(C)(ii), struck out cl. (ii) which set a $100,000 limitation for exploration expenditures under section 615 (a) and (b), redesignated former cls. (iii), (iv), and (v) as cls. (ii), (iII), and (iv), respectively, and substituted "certain exploration expenditures under section 617(h)(1)" for "exploration expenditures under sections 615(c)(1) and 617(h)(1)" in cl. (ii) ab so redesignated, "804(a)(Gi" for "804(a)(4)" in cl. (iii) as so redesignated, and "section 6154(c)(2) and section 6655(e)(2)" for "sections 6154(c)(2) and (3) and sec- tions 6655(e)(2) and (3)" in cl. (iv) as so redesignated. Subsee. (b)(5). Pub. L. 94-455, § 1051(f)(2), added ", 1504(b)(4)," after "sections 1504(b)(2)". 1975-Subsec. (b)(3)(C)(i). Pub. L. 94-12 substituted "$150,000" for 1$100,000". 1969-Subsec. (b)(3)(C)(iii). Pub. L. 91-172 substitut- ed "sections 615(c)(1) and 617(h)(1)" for "section 615(c)(1)". 1968-Subsec. (b)(3)(C)(v). Pub. L. 90-364 substitut- ed "surtax exemption, and one amount under section 6154(c)(2) and (3) and sections 6655(e)(2) and (3), for purposes of estimated tax payment requirements under section 6154" for "$100,000 exemption for pur- poses of estimated tax filing requirements under sec- tion 6016". 1964-Subsec. (a). Pub. L. 88-272 substituted provi- sions permitting a deduction for 85 percent of divi- dends received except that it shall be 100 percent when received by a small business investment compa- ny operating under the Small Business Investment Act of 1958, and 100 percent in case of qualifying divi- dends, for provisions permitting an 85 percent deduc- tion for corporations other than one operating under the Small Business Investment Act of 1958, and for other than dividends described in section 244(1) of this title. Subsec. (b). Pub. L. 88-272 added subsec. (b) and omitted a prior subsec. (b) which allowed a 100 per- cent deduction of dividends received by a small busi- ness investment company operating under the Small Business Investment Act of 1958, other than dividends described in section 244(1) of this title. Subsec. (c). Pub. L. 88-272 substitiited "subsection (a)" for "subsections (a) and (b)", and added par. (4). Subsec. (d). Pub. L. 88-272 substituted "subsection (a)" for "subsections (a) and (b)". 1960-Subsec. (c)(3). Pub. L. 86-779, § 10(g), added par. (3). Subsec. (d). Pub. L. 86-779, § 3(a), added subsec. (d). 1958-Subsec. (a). Pub. L. 85-866, § 57(b)(1), inserted "(other than a small business investment company op- erating under the Small Business Investment Act of 1958)". Subsec. (b). Pub. L. 85-866, § 57(b)(2), added subsec, (b) and redesignated former subsec. (b) as (c). Subsec. (c). Pub. L. 85-866, § 57(b)(2), (3), redesignat- ed former subsec. (b) as (c) and substituted "subsec- tions (a) and (b)" for "subsection (a)". EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (a) and (b) by sections 1901(a)(34), (b)(1), (21), of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title, For effective date of amendment of subsec. (b)(1), (5), by section 1051(f)(1), (2) of Pub. L. 94-455, see sec- tion 1051(i) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 33 of this title. For effective date of amendment of subsec. (b)(3) by section 1031(b)(2) of Pub. L. 94-455, see section 1031(c) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note set out under section 904 of this title. For effective date of amendment of subsec. (b)(3)(C) by section 1906(b)(3)(C)(ii) of Pub. L. 94-455, see sec- tion 1906(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 6013 of this title. EFFECTIVE DATE OF 1975 AMENDMENT Amendment by section 304 of Pub. L. 94-12 applica- ble to taxable years beginning after Dec. 31, 1974, see section 305(c) of Pub. L. 94-12, set out as an Effective Date of 1975 Amendment note under section 535 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Section 504(d) of Pub. L. 91-172 provided that: "(1) In general.-The amendments made by this sec- tion [amending sections 243, 381, 615, 617, 703 and 1016 of this title] shall apply with respect to explora- tion expenditures paid or incurred after December 31, 1969. § 243 Page 204
TITLE 26-INTERNAL REVENUE CODE "(2) Presumption of election under section 617.-For purposes of section 617 of the Internal Revenue Code of 1954 (section 617 of this title], an election under section 615(e) of such Code (subsec. (e) of section 615 of this title], which is effective with respect to explo- ration expenditures paid or incurred before January 1, 1970, shall be treated as an election under section 617(a) of such Code (section 617(a) of this title] with respect to exploration expenditures paid or incurred after December 31, 1969. The preceding sentence shall not apply to any taxpayer who notifies the Secretary of the Treasury or his delegate (at such time and in such manner as the Secretary or his delegate pre- scribes by regulations) that he does not desire his elec- tion under section 615(e) (subsec. (e) of section 615 of this title] to be so treated." EFFECTIVE DATE OF 1968 AMENDMENT Amendment by Pub. L. 90-364 applicable with re- spect to taxable years beginning after Dec. 31, 1967, except as provided by section 104 of Pub. L. 90-364, set out as notes under sections 51 and 6154 of this title, see section 103(f) of Pub. L. 90-364, set out as an Ef- fective Date of 1968 Amendment note under section 6154 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Section 214(c) of Pub. L. 88-272 provided that: "The amendments made by subsections (a) [to this section] and (b) [to sections 244, 246(b). 804(a)(5) and 809(d)(8)(B) of this title] shall apply with respect to dividends received in taxable years ending after De- cember 31, 1963." EFFECTIVE DATE OF 1960 AMENDMENT Amendment of subsec. (c)(3) by Pub. L. 86-779, § 10(g) applicable with respect to taxable years of real estate investment trusts beginning after Dec. 31, 1960, see section 10(k) of Pub. L. 86-779, set out as an Effec- tive Date note under section 856 of this title. Section 3(c) of Pub. L. 86-779 provided that: "The amendments made by subsections (a) and (b) [adding subsec. (d) of this section and amending section 861(a)(2) of this title] shall apply to dividends received after December 31, 1959, in taxable years ending after such date." EFFECTIVE DATE OF 1958 AMENDMENT Section 57(d) of Pub. L. 85-866 provided that: "The amendments made by this section [adding sections 165(h)(3), (4), 1242 and 1243 and amending section 246(b)(1) of this title and subsecs. (a) to (c) of this sec- tion] shall apply with respect to taxable years begin- ning after the date of the enactment of this Act [Sept. 2, 1958]." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 172, 244, 245, 246, 277, 512, 596, 804, 809, 812, 815, 854, 857, 861, 1244. 1504, 1564 of this title; title 46 section 1177. § 244. Dividends received on certain preferred stock (a) General rule In the case of a corporation, there shall be al- lowed as a deduction an amount computed as follows: (1) First determine the amount received as dividends on the preferred stock of a public utility which is subject to taxation under this chapter and with respect to which the deduc- tion provided in section 247 for dividends paid is allowable. (2) Then multiply the amount determined under paragraph (1) by the fraction- (A) the numerator of which is 14 percent, and (B) the denominator of which is that per. centage which equals the sum of the normal tax rate and the surtax rate for the taxable year prescribed by section 11. (3) Finally ascertain the amount which is 85 percent of the excess of- (A) the amount determined under para- graph (1), over (B) the amount determined under para. graph (2). (b) Exception If the dividends described in subsection (a)(1) are qualifying dividends (as defined in section 243(b)(1), but determined without regard to sec- tion 243(c)(4))- (1) subsection (a) shall be applied separate- ly to such qualifying dividends, and (2) for purposes of subsection (a)(3), the percentage applicable to such qualifying divi- dends shall be 100 percent in lieu of 85 per- cent. (Aug. 16, 1954, ch. 736, 68A Stat. 73; Feb. 26, 1964, Pub. L. 88-272, title II, § 214(b)(1), 78 Stat. 55.) AMENDMENTS 1964-Subsec. (b). Pub. L. 88-272 designated existing provisions as subsec. (a), and added subsec. (b). EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272 applicable to divi- dends received in taxable years ending after Dec. 31, 1963, see section 214(c) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note ufider section 243 of this title. Cnoss REFERENCES Definition of public utility, see section 247 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 172, 243, 246, 247, 277, 512, 596, 804, 809, 812, 815, 1244 of this title. § 245. Dividends received from certain foreign corpo- rations (a) General rule In the case of dividends received from a for- eign corporation (other than a foreign personal holding company) which is subject to taxation under this chapter, if, for an uninterrupted period of not less than 36 months -ending with the close of such foreign corporation's taxable year in which such dividends are paid (or, if the corporation has not been in existence for 36 months at the close of such taxable year, for the period the foreign corporation has been in existence as of the close of such taxable year) such foreign corporation has been engaged in trade or business within the United States and if 50 percent or more of the gross income of such corporation from all sources for such period is effectively connected with the conduct of a trade or business within the United States, there shall be allowed as a deduction in the case of a corporation- (1) An amount equal to the percent (speci- fied in section 243 for the taxable year) of the dividends received out of its earnings and profits specified in paragraph (2) of the first sentence of section 316(a), but such amount shall not exceed an amount which bears the Page 205 § 245
TITLE 26-INTERNAL REVENUE CODE same ratio to such percent of such dividends received out of such earnings and profits as the gross income of such foreign corporation for the taxable year which is effectively con- nected with the conduct of a trade or business within the United States bears to its gross income from all sources for such taxable year, and (2) An amount equal to the percent (speci- fied in section 243 for the taxable year) of the dividends received out of that part of its earn. ings and profits specified in paragraph (1) of the first sentence of section 316(a) accumulat- ed after the beginning of such uninterrupted period, but such amount shall not exceed an amount which bears the same ratio to such percent of such dividends received out of such accumulated earnings and profits as the gross income of such foreign corporation, which is effectively connected with the conduct of a trade or business within the United States, for the portion of such uninterrupted period ending at the beginning of such taxable year bears to its gross income from all sources for such portion of such uninterrupted period. For purposes of this subsection, the gross income of the foreign corporation for any period before the first taxable year beginning after December 31, 1966, which is effectively connected with the conduct of a trade or busi- ness within the United States is an amount equal to the gross income for such period from sources within the United States. For purposes of paragraph (2), there shall not be taken into account any taxable year within such uninter- rupted period if, with respect to dividends paid out of the earnings and profits of such year, the deduction provided by subsection (b) would be allowable. (b) Certain dividends received from wholly owned foreign subsidiaries (1) In general In the case of dividends described in para- graph (2) received from a foreign corporation by a domestic corporation which, for its tax- able year in which such dividends are re- ceived, owns (directly or indirectly) all of the outstanding stock of such foreign corpora- tion, there shall be allowed as a deduction (in lieu of the deduction provided by subsection (a)) an amount equal to 100 percent of such dividends. (2) Eligible dividends Paragraph (1) shall apply only to dividends which are paid out of the earnings and profits of a foreign corporation for a taxable year during which- (A) all of its outstanding stock is owned (directly or indirectly) by the domestic cor- poration to which such dividends are paid; and (B) all of its gross income from all sources Is effectively connected with the conduct of a trade or business within the United States. (3) Exception Paragraph (1) shall not apply to any divi- dends if an election under section 1562 is ef- fective for either- (A) the taxable year of the domestic cor- poration in which such dividends are re- ceived, or (B) the taxable year of the foreign corpo- ration out of the earnings and profits of which such dividends are paid. (c) Property distributions For purposes of subsections (a) and (b), the amount of any distribution of property other than money shall be the amount determined by applying section 301(b)(1)(B). (Aug. 16, 1954, ch. 736, 68A Stat. 73; Oct. 16, 1962, Pub. L. 87-834, § 5(c), 76 Stat. 977; Nov. 13, 1966, Pub. L. 89-809, title I, § 104(d), (e), 80 Stat. 1558.) AMENDMENTS 1966-Subsec, (a). Pub. L. 89-809. § 104(d), (e)(2), substituted "and if 50 percent or more of the gross income of such corporation from all sources for such period Is effectively connected with the conduct of a trade or business within the United States" for "and has derived 50 percent or more of its gross income from sources within the United States" in the material preceding par. (1), "which Is effectively connected with the conduct of a trade or business within the United States" for "from sources within the United States" in par. (1), ", which is effectively connected with the conduct of a trade or business within the United States," for "from sources within the United States" in par. (2), and added material following par. (2). Subsec. (b). Pub. L. 89-809, § 104(e)(1), added subsec. (b) and redesignated former subsec. (b) as (c). Subsec. (c). Pub. L. 89-809, § 104(e)(1), (3), redesig- nated former subsec. (b) as (c), and substituted therein "subsections (a) and (b)" for "subsection (a)". 1962-Pub. L. 87-834 designated existing provisions as subsec. (a), inserting therein the subsection catch- line, and added subsec. (b). EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-809 applicable with re- spect to taxable years beginning after Dec. 31, 1966, see section 104(n) of Pub. L. 89-809, set out as an Ef- fective Date of 1966 Amendment note under section 11 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Amendment by Pub. L. 87-834 applicable to distribu- tions made after Dec. 31, 1962, see section 5(d) of Pub. L. 87-834, set out as an Effective Date of 1962 Amend- ment note under section 301 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 78, 172, 243, 246, 277, 301, 512, 596, 804, 809, 812, 815, 861, 1244 of this title. § 246. Rules applying to deductions for dividends re- ceived (a) Deduction not allowed for dividends from cectain corporations The deductions allowed by sections 243, 244, and 245 shall not apply to any dividend from a corporation which, for the taxable year of the corporation In which the distribution is made, or for the next preceding taxable year of the corporation, is a corporation exempt from tax under section 501 (relating to certain charita- ble, etc., organizations) or section 521 (relating to farmers' cooperative associations). § 246 Page 206
TITLE 26-INTERNAL REVENUE CODE (b) Limitation on aggregate amount of deductions (1) General rule Except as provided in paragraph (2), the ag- gregate amount of the deductions allowed by sections 243(a)(1), 244(a), and 245 shall not exceed 85 percent of the taxable income com- puted without regard to the deductions al- lowed by sections 172, 243(a)(1), 244(a), 245, and 247, and without regard to any capital loss carryback to the taxable year under sec- tion 1212(a)(1). (2) Effect of net operating loss Paragraph (1) shall not apply for any tax- able year for which there Is a net operating loss (as determined under section 172). (c) Exclusion of certain dividends (1) In general No deduction shall be allowed under section 243, 244, or 245, in respect of any dividend on any share of stock- (A) which is sold or otherwise disposed of in any case in which the taxpayer has held such share for 15 days or less, or (B) to the extent that the taxpayer is under an obligation (whether pursuant to a short sale or otherwise) to make corre- sponding payments with respect to substan- tially identical stock or securities. (2) 90-day rule in the case of certain preference dividends In the case of any stock having preference in dividends, the holding period specified in paragraph (1)(A) shall be 90 days in lieu of 15 days if the taxpayer receives dividends with respect to such stock which are attributable to a period or periods aggregating in excess of 366 days. (3) Determination of holding periods For purposes of this subsection, in deter- mining the period for which the taxpayer has held any share of stock- (A) the day of disposition, but not the day of acquisition, shall be taken into account, (B) there shall not be taken into account any day which is more than 15 days (or 90 days in the case of stock to which para- graph (2) applies) after the date on which such share becomes ex-dividend, and (C) paragraph (4) of section 1223 shall not apply. The holding periods determined under the preceding provisions of this paragraph shall be appropriately reduced (in the manner pro- vided In regulations prescribed by the Secre- tary) for any period (during such holding pe- riods) in which the taxpayer has an option to sell, is under a contractual obligation to sell, or has made (and not closed) a short sale of, substantially identical stock or securities. (d) Dividends from a DISC or former DISC No deduction shall be allowed under section 243 in respect of a dividend from a corporation which is a DISC or former DISC (as defined in section 992(a)) to the extent such dividend is paid out of the corporation's accumulated DISC income or previously taxed income, or is a deemed distribution pursuant to section 995(b)(1). (e) Cross reference For special rule relating to mutual savings banks, etc.. to which section 593 applies, see section 596. (Aug. 16, 1954, ch. 736, 68A Stat. 74; Sept. 2, 1958, Pub. L. 85-866, title I, §§ 18(a), 57(c)(2), 72 Stat. 1614, 1646; Feb. 26, 1964, Pub. L. 88-272, title II, § 214(b)(2), 78 Stat. 55; Dec. 30, 1969, Pub. L. 91-172, title IV, §434(b)(1), title V, § 512(f)(3), 83 Stat. 625, 641; Dec. 10, 1971, Pub. L. 92-178, title V, § 502(a), 85 Stat. 549; Oct. 4, 1976, Pub. L, 94-455, title X. § 1051(f)(3), title XIX, § 1906(b)(13)(A), 90 Stat. 1646, 1834.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, § 1051(f)(3), struck out references to dividends from corporations orga- nized under the China Trade Act, 1922, and corpora- tions to which section 931 (relating to income from sources within possessions of the United States) ap- plies. Subsec. (c)(3). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". 1971-Subsec, (d). Pub. L. 92-178 added subsec. (d), Former subsec. (d) redesignated (e). Subsec. (e). Pub. L. 92-178 redesignated former subsec. (d) as (e). 1969-Subsec. (b)(1). Pub. L. 91-172, § 512(f)(3), sub- stituted "and 247, and without regard to any capital loss carryback to the taxable year under section 1212(a)(1)" for "and 247". Subsec. (d. Pub. L. 91-172, § 434(b)(1), added subsec. (d. 1964-Subsec. (b). Pub. L. 88-272 substituted "243(a)(1), 244(a)" for "243(a), 244" wherever appear- Ing. 1958-Subsec. (b)(1). Pub. L. 85-866, § 57(c)(2), sub- stituted "243(a)" for "243" wherever appearing. Subsec. (c. Pub. L. 85-866, § 18(a), added subsec. (c). EFFECTIVE DATE OF 1976 AMENDMENT For effective date of amendment of subsec. (a) by section 1051(f)(3) of Pub. L. 94-455, see section 1051(i) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 33 of this title. Amendment of subsec. (c)(3) by section 1906(b)(13)(A) of Pub. L. 94-455 effective Feb. 1, 1977, see section 1906(d)(1) of Pub. L. 94-455, set out as Ef- fective Date of 1976 Amendment note under section 6013 of this title. EFFECTIVE DATE OF 1971 AMENDMENT Enactment of subsec. (d) of this section by Pub. L. 92-178 applicable with respect to taxable years ending after Dec. 31, 1971, except that a corporation may not be a DISC for any taxable year beginning before Jan. 1, 1972, see section 507 of Pub. L. 92-178, set out as an Effective Date note under section 991 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Amendment of subsec. (b)(1) of this section by sec- tion 512(f)(3) of Pub. L. 91-172 applicable with respect to net capital losses sustained in taxable years begin- ning after Dec. 31, 1969, see section 512(g) of Pub. L. 91-172, set out as an Effective Date of 1969 Amend- ment note under section 1212 of this title. Subsec. (d) of this section applicable to taxable years beginning after July 11, 1969, see section 434(c) of Pub. L. 91-172, set out as an Effective Date note under section 596 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272 applicable to divi- dends received in taxable years ending after Dec. 31, 1963, see section 214(c) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 243 of this title. § 2416 Page 207
TITLE 26-INTERNAL REVENUE CODE EFFECTIVE DATE OF 1958 AMENDMENT Amendment of subsec. (b)(1) applicable with respect to taxable years beginning after Sept. 2, 1958, see sec- tion 57(d) of Pub. L. 85-866, set out as an Effective Date of 1958 Amendment note under section 243 of this title. Section 18(b) of Pub. L. 85-866 provided that: "The amendment made by subsection (a) [which added subsec. (C) of this section] shall apply with respect to taxable years ending after December 31, 1957, but only with respect to shares of stock acquired or short sales made after December 31, 1957." SECTION REFERRID TO IN OTHER SECTIONS This section is referred to in sections 172, 804, 809, 812, 822, 852, 857 of this title. § 247. Dividends paid on certain preferred stock of public utilities (a) Amount of deduction In the case of a public utility, there shall be allowed as a deduction an amount computed as follows: (1) First determine the amount which is the lesser of- (A) the amount of dividends paid during the taxable year on its preferred stock, or (B) the taxable income for the taxable year (computed without the deduction al- lowed by this section). (2) Then multiply the amount determined under paragraph (1) by the fraction- (A) the numerator of which is 14 percent, and (B) the denominator of which is that per- centage which equals the sum of the normal tax rate and the surtax rate for the taxable year specified in section 11. For purposes of the deduction provided in this section, the amount of dividends paid shall not include any amount distributed in the current taxable year with respect to dividends unpaid and accumulated in any taxable year ending before October 1, 1942. Amounts distributed in the current taxable year with respect to divi- dends unpaid and accumulated for a prior tax- able year shall for purposes of this subsection be deemed to be distributed with respect to the earliest year or years for which there are divi- dends unpaid and accumulated. (b) Definitions For purposes of this section and section 244- (1) Public utility The term "public utility" means a corpora- tion engaged in the furnishing of telephone service or in the sale of electrical energy, gas, or water, if the rates for such furnishing or sale, as the case may be, have been estab- lished or approved by a State or political sub- division thereof or by an agency or instru- mentality of the United States or by a public utility or public service commission or other similar body of the District of Columbia or of any State or political subdivision thereof. (2) Preferred stock (A) In general The term "preferred stock" means stock issued before October 1, 1942, which during the whole of the taxable year (or the part of the taxable year after its issue) was stock the dividends in respect of which were cu- mulative, limited to the same amount, and payable in preference to the payment of dividends on other stock. (B) Certain stock issued on or after October 1, 1942 Stock issued on or after October 1, 1942, shall be deemed for purposes of this para- graph to have been issued before October 1, 1942, if it was issued to refund or replace bonds or debentures issued before October 1, 1942, or to refund or replace other pre- ferred stock (including stock which is pre- ferred stock by reason of this subparagraph or subparagraph (D)), but only to the extent that the par or stated value of the new stock does not exceed the par, stated, or face value of the bonds or debentures issued before October 1, 1942, or the other preferred stock, which such new stock is issued to refund or replace. (C) Determination under regulations The determination of whether stock was issued to refund or replace bonds or deben- tures issued before October 1, 1942, or to refund or replace other preferred stock, shall be made under regulations prescribed by the Secretary. (D) Issuance of stock For purposes of subparagraph (B), issu- ance of stock includes issuance either by the same or another corporation in a trans- action which is a reorganization (as defined in section 368(a)), a transaction to which section 371 (relating to insolvency reorgani- zations) applies, or a transaction subject to part VI of subchapter 0 (relating to ex- changes in SEC obedience orders), or the re- spectively corresponding provisions of the Internal Revenue Code of 1939. (Aug. 16, 1954, ch. 736, 68A Stat. 75; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(a)(35), 90 Stat. 1770.) REFERENCES IN TEXT The Internal Revenue Code of 1939, referred to in subsec. (b)(2)(D), is act Feb. 10. 1939, ch. 2, 53 Stat. 1, as amended. Prior to the enactment of the Internal Revenue Code of 1954, the 1939 Code was classified to former Title 26, Internal Revenue Code. For table of comparisons of the 1939 Code to the 1954 Code, see Table I preceding section 1 of this title. AMENDMENTS 1976-Subsec. (b)(2). Pub. L. 94-455 divided existing provisions into subpars. (A), (B), (C), and (D), added headings for subpars. (A), (B), (C), and (D), and, in subpar. (C) as so redesignated, substituted "prescribed by the Secretary" for "prescribed by the Secretary or his delegate". EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (b)(2) by section 1901(a)(35) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 172, 244, 246 of this title. Page 208
TITLE 26-INTERNAL REVENUE CODE § 248. Organizational expenditures (a) Election to amortize The organizational expenditures of a corpora- tion may, at the election of the corporation (made in accordance with regulations pre- scribed by the Secretary, be treated as deferred expenses. In computing taxable income, such deferred expenses shall be allowed as a deduc- tion ratably over such period of not less than 60 months as may be selected by the corporation (beginning with the month in which the corpo- ration begins business). (b) Organizational expenditures defined The term "organizational expenditures" means any expenditure which- (1) is incident to the creation of the corpo- ration; (2) is chargeable to capital account; and (3) is of a character which, if expended inci- dent to the creation of a corporation having a limited life, would be amortizable over such life. (c) Time for and scope of election The election provided by subsection (a) may be made for any taxable year beginning after December 31, 1953, but only if made not later than the time prescribed by law for filing the return for such taxable year (including exten- sions thereof). The period so elected shall be adhered to in computing the taxable income of the corporation for the taxable year for which the election is made and all subsequent taxable years. The election shall apply only with re- spect to expenditures paid or incurred on or after August 16, 1954. (Aug. 16, 1954, ch. 736, 68A Stat. 76: Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(a)(36), 1906(b)(13)(A), 90 Stat. 1770, 1834.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c). Pub. L. 94-455, § 1901(a)(36), substituted "August 16, 1954" for "the date of enactment of this title". EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (a) by section 1906(b)(13)(A) of Pub. L. 94-455 effective Feb. 1, 1977, see section 1906(d)(1) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 6013 of this title. Amendment of subsec. (c) by section 1901(a)(36) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. CROSS REFERENCES Capital expenditures not deductible, see section 263 of this title. Time for filing returns, see sections 6072, 6081 of this title. Trade or business expenses deductible, see section 162 of Lhis title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 170, 535, 545, 556, 822, 857, 1247, 1373, 1374 of this title. § 249. Limitation on deduction of bond premium on repurchase (a) General rule No deduction shall be allowed to the issuing corporation for any premium paid or incurred upon the repurchase of a bond, debenture, note, or certificate or other evidence of indebt- edness which is convertible into the stock of the issuing corporation, or a corporation in con- trol of, or controlled by, the issuing corpora- tion, to the extent the repurchase price exceeds an amount equal to the adjusted issue price plus a normal call premium on bonds or other evidences of indebtedness which are not con- vertible. The preceding sentence shall not apply to the extent that the corporation can demonstrate to the satisfaction of the Secre- tary that such excess is attributable to the cost of borrowing and is not attributable to the con- version feature. (b) Special rules For purposes of subsection (a)- (1) Adjusted issue price The adjusted issue price is the issue price (as defined in section 1232(b)) increased by any amount of discount deducted before re- purchase, or, in the case of bonds or other evidences of indebtedness issued after Febru- ary 28, 1913, decreased by any amount of pre- mium included in gross income before repur- chase by the issuing corporation. (2) Control The term "control" has the meaning as- signed to such term by section 368(c). (Added Pub. L. 91-172, title IV, § 414(a), Dec. 30, 1969, 83 Stat. 612, and amended Pub. L. 94- 455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455 struck out "or his delegate" following "Secretary". EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (a) by section 1906(b)(13)(A) of Pub. L. 94-455 effective Feb. 1, 1977, see section 1906(d)(1) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 6013 of this title. EFFECTIVE DATE Section 414(c) of Pub. L. 91-172 provided that: "The amendments made by this section [adding this sec- tion] shall apply to a convertible bond or other con- vertible evidence of indebtedness repurchased after April 22, 1969, other than such a bond or other evi- dence of indebtedness repurchased pursuant to a bind- Ing obligation incurred on or before April 22, 1969, to repurchase such bond or other evidence of indebted- ness at a specified call premium, but no inference shall be drawn from the fact that section 249 of the Inter- nal Revenue Code of 1954 (as added by subsection (a) of this section) [this section] does not apply to the re- purchase of such convertible bond or other convertible evidence of indebtedness." § 250. Certain payments to the National Railroad Pas- senger Corporation (a) General rule If- (1) any corporation which is a common car- rier by railroad (as defined in section 1(3) of Page 209 § 250
TITLE 26-INTERNAL REVENUE CODE the Interstate Commerce Act (49 U.S.C. 1(3) makes a payment in cash, rail passenger equipment, or services to the National Rail- road Passenger Corporation (hereinafter in this section referred to as the "Passenger Corporation") pursuant to a contract entered into under section 401(a) of the Rail Passen- ger Service Act, and (2) no stock in the Passenger Corporation is issued at any time to such corporation in con- nection with any contract entered into under such section 401(a), then the amount of such payment shall (sub- ject to subsection (c) be allowed as a deduction for the taxable year in which it is made. (b) When payment is made Under regulations prescribed by the Secre- tary, a payment in rail passenger equipment shall be treated as made when title to the equipment is transferred, and a payment in ser- vices shall be treated as made when the services are rendered. (c) Effect of certain subsequent acquisitions of stock (1) Disallowance of deductions If any dedu,-tion has been allowed under subsection (a) to a corporation and such cor- poration (or a successor corporation) acquires any stock in the Passenger Corporation (other than in a transaction described in sec- tion 374 or 381) before the close of the 36- month period which begins with the day on which the last payment is made to the Pas- senger Corporation pursuant to the contract entered into under such section 401(a), then such deduction shall be disallowed (as of the close of the taxable year for which it was al- lowed under subsection (a)). (2) Collection of deficiency If any deduction is disallowed by reason of paragraph (1), then the periods of limitation provided in sections 6501 and 6502 on the making of an assessment and the collection by levy or a proceeding in court shall, with re- spect to any deficiency (including interest and additions to the tax) resulting from such a disallowance, include one year following the date on which the person acquiring the stock which results in the disallowance (in accor- dance with regulations prescribed by the Sec- retary) notifies the Secretary of such acquisi- tion; and such assessment and collection may be made notwithstanding any provision of law or rule of law which otherwise would prevent such assessment and collection. (d) Members of controlled group Under regulations prescribed by the Secre- tary, if a corporation is a member of a con- trolled group of corporations (within the mean- ing of section 1563), subsections (a)(2) and (c) shall be applied by treating all members of such controlled group as one corporation. (Added Pub. L. 91-518, title IX, § 901(a), Oct. 30, 1970, 84 Stat. 1341, and amended Pub. L. 93- 496, § 12, Oct. 28, 1974, 88 Stat. 1531; Pub. L. 94- 455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) REFERENCES IN TEXT Section 401(a) of the Rail Passenger Service Act re- ferred to in subsec. (a)(l), is classified to section 561(a) of Title 45, Railroads. AMENDMENTS 1976-Subsecs. (b), (c)(2), (d). Pub. L. 96-455 struck out "or his delegate" following "Secretary". 1974-Subsec. (a)(1). Pub. L. 93-496 substituted "Rail Passenger Service Act" for "Rail Passenger Service Act of 1970". EFFECTIVE DATE Section 901(c) of Pub. L. 91-518 provided that: "The amendments made by this section (adding this sec- tion] shall apply to taxable years ending after the date of the enactment of this Act [October 30, 1970J." PART IX-ITEMS NOT DEDUCTIBLE Sec. 261. General rule for disallowance of deductions. 262. Personal, living, and family expenses. 263. Capital expenditures. 264. Certain amounts paid in connection with in- surance contracts. 265. Expenses and interest relating to tax-exempt income. 266. Carrying charges. 267. Losses, expenses, and interest with respect to transactions between related taxpayers. 268. Sale of land with unharvested crop. 269. Acquisitions made to evade or avoid income tax. [270. Repealed.] 271. Debts owed by political parties, etc. 272. Disposal of coal or domestic iron ore. 273. Holders of life or terminable interest. 274. Disallowance of certain entertainment, etc., expenses. 275. Certain taxes. 276. Certain indirect contributions to political parties. 277. Deductions incurred by certain membership organizations in transactions with mem- bers. 278. Capital expenditures incurred in planting and developing citrus and almond groves. 279. Interest on indebtedness incurred by corpo- ration to acquire stock or assets of another corporation. 280. Certain expenditures incurred in production of films, books, records, or similar proper- ty. 280A. Disallowance of certain expenses in connec- tion with business use of home, rental of vacation homes, etc. 280B. Demolition of certain historic structures. AMENDMENTS 1976-Pub. L. 94-455, title II, § 210(b), title VI, § 601(b), title XXI, § 2124(b)(2), Oct. 4, 1976, 90 Stat. 1544, 1572, 1918, added items 280, 280A, and 280B. 1971-Pub. L. 91-680, § 1(c), Jan. 12, 1971, 84 Stat. 2064, added "and almond" following "citrus" in item 278. 1969-Pub. L. 91-172, title I, § 121(b)(3)(B), title II, §§ 213(c)(2), 216(b), title IV, § 411(b), Dec. 30, 1969, 83 Stat. 541, 572, 574, 608, struck out item 270, limitation on deductions allowable to individuals in certain cases, and added items 277 to 279. 1966-Pub. L. 89-368, title III, § 301(b), Mar. 15, 1966, 80 Stat. 67, added item 276. 1964-Pub. L. 88-272, title 11, §§ 207(b)(3)(B), 227(b)(4), Feb. 26, 1964, 78 Stat. 42, 98, inserted "or do- mestic iron ore" In item 272, and added item 275. 1962-Pub. L. 87-834, § 4(a)(2), Oct. 16, 1962, 76 Stat. 976, added item 274. Page 210 § 250
TITLE 26-INTERNAL REVENUE CODE PART REFERRED TO IN OTHER SECTIONS This part is referred to in sections 161, 211 of this title. § 261. General rule for disallowance of deductions In computing taxable income no deduction shall in any case be allowed in respect of the items specified in this part. (Aug. 16, 1954, ch. 736, 68A Stat. 76.) § 262. Personal, living, and family expenses Except as otherwise expressly provided in this chapter, no deduction shall be allowed for personal, living, or family expenses. (Aug. 16, 1954, ch. 736, 68A Stat. 76.) CROSS REFERENCES Additional exemption for students, see section 151 of this title. Medical and dental expenses deductible, see section 213 of this title. Non.trade or non.business expenses deductible, see section 212 of this title. Trade or business expenses deductible, see section 162 of this title. Traveling expenses including meals and lodging de- ductible, see section 162 of this title. § 263. Capital expenditures (a) General rule No deduction shall be allowed for- (1) Any amount paid out for new buildings or for permanent improvements or better- ments made to increase the value of any property or estate. This paragraph shall not apply to- (A) expenditures for the development of mines or deposits deductible under section 616, (B) research and experimental expendi- tures deductible under section 174, (C) soil and water conservation expendi- tures deductible under section 175, (D) expenditures by farmers for fertilizer, etc., deductible under section 180, (E) expenditures by farmers for clearing land deductible under section 182, or (F) expenditures for removal of architec- tural and transportation barriers to the handicapped and elderly which the taxpay- er elects to deduct under section 190. (2) Any amount expended in restoring prop- erty or in making good the exhaustion there- of for which an allowance is or has been made. (b) Expenditures for advertising and good will If a corporation has, for the purpose of com- puting its excess profits tax credit under chap- ter 2E or subchapter D of chapter 1 of the In- ternal Revenue Code of 1939 claimed the bene- fits of the election provided in section 733 or section 451 of such code, as the case may be, no deduction shall be allowable under section 162 to such corporation for expenditures for adver- tising or the promotion of good will which, under the rules and regulations prescribed under section 733 or section 451 of such code, as the case may be, may be regarded as capital in- vestments. (c) Intangible drilling and development costs in the case of oil and gas wells Notwithstanding subsection (a), regulations shall be prescribed by the Secretary under this subtitle corresponding to the regulations which granted the option to deduct as expenses intan- gible drilling and development costs in the case of oil and gas wells and which were recognized and approved by the Congress in House Con- current Resolution 50, Seventy-ninth Congress. (d) Expenditures In connection with certain railroad rolling stock In the case of expenditures in connection with the rehabilitation of a unit of railroad rolling stock (except a locomotive) used by a do- mestic common carrier by railroad which would, but for this subsection, be properly chargeable to capital account, such expendi- tures, if during any 12-month period they do not exceed an amount equal to 20 percent of the basis of such unit in the hands of the tax- payer, shall, at the election of the taxpayer, be treated (notwithstanding subsection (a)) as de- ductible repairs under section 162 or 212, An election under this subsection shall be made for any taxable year at such time and in such manner as the Secretary prescribes by regula- tions. An election may not be made under this subsection for any taxable year to which an election under subsection (e) applies to railroad rolling stock (other than locomotives). (e) Reasonable repair allowance The Secretary may by regulations provide that the taxpayer may make an election under which amounts representing either repair ex- penses or specified repair, rehabilitation, or im- provement expenditures for any class of depre- ciable property- (1) are allowable as a deduction under sec- tion 162(a) or 212 (whichever is appropriate) to the extent of the repair allowance for that class, and (2) to the extent such amounts exceed for the taxable year such repair allowance, are chargeable to capital account. Any allowance prescribed under this subsection shall reasonably reflect the anticipated repair experience of the class of property in the indus- try or other group. (f) Railroad ties In the case of a domestic common carrier by rail (including a railroad switching or terminal company) which uses the retirement-replace- ment method of accounting for depreciation of its railroad track, expenditures for acquiring and installing replacement ties of any material (and fastenings related to such ties) shall be ac- corded the same tax accounting treatment as expenditures for replacement ties of wood (and fastenings related to such ties). (Aug. 16, 1954, ch. 736, 68A Stat. 77; Sept. 14, 1960, Pub. L. 86-779, § 6(c), 74 Stat. 1001; Oct. 16, 1962, Pub. L. 87-834, § 21(b), 76 Stat. 1064; Sept. 2, 1964, Pub. L. 88-563, § 4, 78 Stat. 845; Oct. 9, 1965, Pub. L. 89-243, §4(p)(1), (2), 79 Stat. 964; Dec. 30, 1969, Pub. L. 91-172, title VII, § 706(a), 83 Stat. 674; Dec. 10, 1971, Pub. L. 92-178, title I, § 109(b), (c), 85 Stat. 509; Oct. 4, 1976, Pub. L. 94-455, title XVII, § 1701(a), title XIX, §§ 1904(b)(10)(A)(i), 1906(b)(13)(A), title Page 211 § 263
TITLE 26-INTERNAL REVENUE CODE XXI, § 2122(b)(2), 90 Stat. 1759, 1817, 1834, 1915.) REFERENCES IN TEXT Chapter 2E of the Internal Revenue Code of 1939, referred to in subsec. (b), was comprised of sections 710 to 784 of former Title 26, Internal Revenue Code. Sections 710 to 736, 740, 742 to 744, 750, 751, 760, 761, and 780 to 784 were repealed by act Nov. 8, 1945, ch. 453, title I, § 122(a), 59 Stat. 568. Section 741 was re- pealed by act Oct. 21, 1942, ch. 619, title II, §§ 224(b), 228(b), 56 Stat. 920, 925. Section 752 was repealed by act Oct. 21, 1942, ch. 619, title II, § 229(a)(1), 56 Stat. 931, eff. as of Oct. 8. 1940. Subchapter D of chapter 1 of the Internal Revenue Code of 1939, referred to in subsec. (b), was comprised of sections 430 to 474 of former Title 26, Internal Rev- enue Code, which terminated on Dec. 31, 1953, pursu- ant to its own terms. AMENDMENTS 1976-Subsee. (a)(1)(F). Pub. L. 94-455, § 2122(b)(2), added subsec. (a)(1)(F). Subsec. a)(3). Pub. L. 94-455, § 1904(b)(10)(A)(i)(I), struck out subsec. (a)(3) which provided that no de- duction be allowed for amounts paid as tax under sec- tion 4911 (relating to imposition of interest equaliza- tion tax) except as provided in subsec, d). Subsec. (d). Pub. L. 94-455. §§ 1904(b)(10)(A(i)CI). (II), 1906(b)(13)(A), redesignated subsec. (e) as (d) and in subsec. (d) as so redesignated struck out "or his del- egate" following "Secretary" and substituted "subsec- tion (e)" for "subsection (f)". Former subsec. (d) was struck out. Subsec. (e). Pub. L. 94-455, §§ 1904(b)(10)CA)(i)(I), 1906(b)(13)(A), redesignated subsec. f) as (e) and in subsec. (e) as so redesignated struck out "or his dele- gate" following "Secretary". Former subsec. (e) was re- designated d). Subsec. f). Pub. L. 94-455, §§ 1701(a), 1904b)(10)(A)(i)CI), added subsec. CfM. Former subsec. Cf) redesignated (e). 1971-Subsec. (e). Pub. L. 92-178, § 109(c), substitut- ed "shall, at the election of the taxpayer, be treated" for "shall be treated" and added provisions respecting making of election under this subsection for any tax- able year at such time and in such mannor as Secre- tary or his delegate prescribed by regulation and pro- hibiting making of election for any taxable year to which an election under subsec. (f) applies to railroad rolling stock (other than locomotives). Subsec. f). Pub. L. 92-178, § 109(b), added subsec. (f). 1969-Subsec. (e). Pub. L. 91-172 added subsec. (e). 1965-Subsec. (a)(3). Pub. L. 89-243, § 4(p)(1), insert- ed "Except as provided in subsection (d)", and deleted "except to the extent that any amount attributable to the amount paid as tax is included in gross income for the taxable year" following the parenthetical materi- al. Subsec. (d). Pub. L. 89-243, § 4(p)(2), added subsec. d). 1964-Subsec. (a). Pub. L. 88-563 added par. (3). 1962-Subsec. (a)1)(E). Pub. L. 87-834 added subsec. (a)(1)(E). 1960-Subsec. (a)(1)(D). Pub. L. 86-779 added subpar. (D). EFFECTIVE DATE OF 1976 AMENDMENT Section 1904(b)(10)CA)(vii) of Pub. L. 94-455 pro- vided that: "The amendments made by this subpara- graph [amending sections 263, 6011, 6611, and 6651 of this title and repealing sections 6076 and 6680 of this title] shall apply with respect to acquisitions of stock or debt obligations made after June 30, 1974, except thpt the repeal of paragraph (2) of section 6011(d) under clause (ii) shall apply with respect to loans and commitments made after such date." Amendment of subsec. (a)(1)F) by section 2122(b)(2) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, and before Jan. 1, 1980, see section 2122(c) of Pub. L. 94-455, set out as an Ef- fective Date note under section 190 of this title. EFFECTIVE DATE OF 1971 AMENDMENT Section 109(d)(2), (3) of Pub. L. 92-178 provided that: "(2) The amendment made by subsection (b) [enact- ing subsec. (f) of this section] shall apply to taxable years ending after December 31, 1970. "(3) The amendments made by subsection (c) [to subsec. (e) of this section] shall apply to taxable years beginning after December 31, 1969." EFFECTIVE DATE OF 1969 AMENDMENT Section 706(b) of Pub. L. 91-172 provided that: "The amendment made by subsection (a) [amending this section] shall apply with respect to taxable years be- ginning after December 31, 1969." EFFECTIVE DATE OF 1965 AMENDMENT Section 4(p)(3) of Pub. L. 89-243 provided that: "The amendments made by this subsection [to this section] shall apply to taxable years ending after September 2, 1964." Section 4(q) of Pub. L. 89-243 provided in part that: "Except as otherwise specifically provided in this sec- tion and in the amendments made by this section [to sections 263, 4912, 4914, 4916, 4917, 4919, 4920 and 4931 of this title], such amendments shall apply with respect to acquisitions of stock and debt obligations made after February 10, 1965." EFFECTIVE DATE OF 1962 AMENDMENT Amendment by Pub. L. 87-834 applicable with re- spect to taxable years beginning after Dec. 31, 1962, see section 21(d) of Pub. L. 87-834, set out as an Effec- tive Date note under section 182 of this title. EFFECTIVE DATE OF 1960 AMENDMENT Amendment by Pub. L. 86-779 applicable to taxable years beginning after Dec. 31, 1959, see section 6(d) of Pub. L. 86-779, set out as an Effective Date note under section 180 of this title. EFFECT OF 1965 AMENDMENT ON Ex. ORD. No. 11198 Ex. Ord. No. 11198, set out as a note under section 4931 of this title, deemed modified by the amendment made by section 4 of the Pub. L. 89-243 to this section to the extent such Ex. Ord. is inconsistent with such amendment, see section 4(q) of Pub. L. 89-243, set out as an Effect of 1965 Amendment on Ex. Ord. No. 11198 note under section 4931 of this title. SHORT TITLE OF 1965 AMENDMENT Section 1(a) of Pub. L. 89-243 provided that: "This Act [amending sections 263. 4912, 4914, 4916, 4917, 4919, 4920, and 4931 of this title, and enacting provi- sions set out as notes under sections 6011 and 6076 of this title] may be cited as the 'Interest Equalization Tax Extension Act of 1965'." SHORT TITLE OF 1964 AMENDMENT Section 1(a) of Pub. L. 88-563 provided that: "This Act [enacting sections 4911 to 4920, 4931. 6076, 6680, 6681, and 7241 of this title, amending sections 263, 1232, 6011, and 6103 of this title, and enacting provi- sions set out as notes under section 6011 of this title] may be cited as the 'Interest Equalization Tax Act'." CROSS REFERENCES Non-trade or non-business expenses deductible, see section 212 of this title. Reasonable allowance for exhaustion, see section 167 of this title. Trade or business expenses deductible, see section 162 of this title. Page 212 § 263
TITLE 26-INTERNAL REVENUE CODE SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 57. 173, 707 of this title. § 264. Certain amounts paid in connection with insur- ance contracts (a) General rule No deduction shall be allowed for- (1) Premiums paid on any life insurance policy covering the life of any officer or em- ployee, or of any person financially interested in any trade or business carried on by the tax- payer, when the taxpayer is directly or indi- rectly a beneficiary under such policy. (2) Any amount paid or accrued on indebt- edness incurred or continued to purchase or carry a single premium life insurance, endow'- ment, or annuity contract. (3) Except as provided in subsection (c), any amount paid or accrued on indebtedness in- curred or continued to purchase or carry a life insurance, endowment, or annuity con- tract (other than a single premium contract or a contract treated as a single premium con- tract) 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). Paragraph (2) shall apply in respect of annuity contracts only as to contracts purchased after March 1, 1954. Paragraph (3) shall apply only in respect of contracts purchased after August 6, 1963. (b) Contracts treated as single premium contracts For purposes of subsection (a)(2), a contract shall be treated as a single premium contract- (1) if substantially all the premiums on the contract are paid within a period of 4 years from the date on which the contract is pur- chased, or (2) if an amount is deposited after March 1, 1954, with the insurer for payment of a sub- stantial number of future premiums on the contract. (c) Exceptions Subsection (a)(3) shall not apply to any amount paid or accrued by a person during a taxable year on indebtedness incurred or con- tinued as part of a plan referred to in subsec- tion (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 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 ac- crued by such person during such taxable year for which (without regard to this para- graph) 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 unfore- seen substantial loss of income or unforeseen substantial increase in his financial obliga- tions, or (4) if such indebtedness was incurred in con- nection with his trade or business. For purposes of applying paragraph (1), if there is a substantial increase in the premiums on a contract, a new 7-year period described in such pa.agraph with respect to such contract shall commence on the date of first such in- creased premium is paid. (Aug. 16, 1954, ch. 736, 68A Stat. 77; Feb. 26, 1964, Pub. L. 88-272, title II, §215(a), (b), 78 Stat. 55.) AMENDMENTS 1964-Subsec. (a). Pub. L. 88-272 inserted par. (3), and provided that it shall apply only to contracts pur- chased after August 6, 1963. Subsec. (c). Pub. L. 88-272 added subsec. (c). EFFECTIVE DATE OF 1964 AMENDMENT Section 215(c) of Pub. L. 88-272 provided that: "The amendments made by this section [to this section] shall apply with respect to amounts paid or accrued in taxable years beginning after December 31, 1963." CROSS REFERENCES Interest paid deductible, see section 163 of this title. § 265. Expenses and interest relating to tax-exempt income No deduction shall be allowed for- (1) Expenses Any amount otherwise allowable as a deduc- tion which is allocable to one or more classes of income other than interest (whether or not any amount of income of that class or classes is received or accrued) wholly exempt from the taxes imposed by this subtitle, or any amount otherwise allowable under section 212 (relating to expenses for production of income) which is allocable to interest (wheth- er or not any amount of such interest is re- ceived or accrued) wholly exempt from the taxes imposed by this subtitle. (2) Interest Interest on indebtedness incurred or contin- ued to purchase or carry obligations the in- terest on which is wholly exempt from the taxes imposed by this subtitle. In applying the preceding sentence to a financial institu- tion (other than a bank) which is a face- amount certificate company registered under the Investment Company Act of 1940 (15 U.S.C. 80a-1 and following) and which is sub- ject to the banking 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 institu- tion, and interest on amounts received for the purchase of such certificates to be issued by such institution, shall not be considered as in- terest on indebtedness incurred or continued to purchase or carry obligations the interest on which is wholly exempt from the taxes im- posed by this subtitle, to the extent that the average amount of such obligations held by such institution during the taxable year (as determined under regulations prescribed by the Secretary) does not exceed 15 percent of the average of the total assets held by such institution during the taxable year (as so de- termined). 71-999 0 - 78 - 16 (Vol. 7) Page 213 § 265
TITLE 26-INTERNAL REVENUE CODE (3) Certain regulated investment companies In the case of a regulated investment com- pany which distributes during the taxable year an exempt-interest dividend (including exempt-interest dividends paid after the close of the taxable year as described in section 855), that portion of any amount otherwise allowable as a deduction which the amount of the income of such company wholly exempt from taxes under this subtitle bears to the total of such exempt income and its gross income (excluding from gross income, for this purpose, capital gain net income, as defined in section 1222(9)). (4) Interest related to exempt-interest dividends Interest on indebtedness incurred or contin- ued to purchase or carry shares of stock of a regulated investment company which during the taxable year of the holder thereof distrib- utes exempt-interest dividends. (Aug. 16, 1954, ch. 736, 68A Stat. 78; Feb. 26, 1964, Pub. L. 88-272, title II, § 216(a), 78 Stat. 56; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(a)(37), 1906(b)(13)(A), title XXI, § 2137(e), 90 Stat. 1770, 1834, 1931.) ERENcEs IN TEXT The Investment Company Act of 1940, referred to in par. (2), is act Aug. 22, 1940, ch. 686, title I, 54 Stat. 789, as amended, which is classified generally to sub- chapter I (§80a-1 et seq.) of chapter 2D of Title 15, Commerce and Trade. Section 2(a)(15) of such Act is classified to section 80a-2 of Title 15. For complete classification of this Act to the Code, see section 80:i- 51 of Title 15 and Tables volume. AMENDMENTS 1976-Par. (2). Pub. L. 94-455, §§ 1901(a)(37), 1906(b)(13)(A). struck out "(other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer)" following "to purchase or carry obligations" rnd "or his dele- gate" following "Secretary". Pars. (3), (4). Pub. L. 94-455, § 2137(e), added pars. (3) and (4). 1964-Par. (2), Pub. L. 88-272 provided that interest on face-amount certificates issued by a face-amount certificate company, and interest on amounts received for the purchase of such certificates to be issued by such institution, shall not be considered interest on in- debtedness to purchase or carry obligations the inter- est on which is wholly exempt from the taxes under this subtitle, to the extent the average amount of such obligations held by such institution during the taxable year doesn't exceed 15 percent of the average total assets held by such institution during the taxable year. EFFECTIVE DATE OF 1976 AMEMrENT Amendment of par. (2) by section 1901(a)(37) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Amendment of pars. (3) and (4) by section 2137(e) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1975, see section 2137(e) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendments note under section 852 of this title. EFFECTIVE DATE OF 1964 AMENDME qT Section 216(b) of Pub. L. 88-272 provided that: "The amendment made by subsection (a) [to this section] shall apply with respect to taxable years ending after the date of the enactment of this Act [February 21, 1964]." CRoss RErcES Double deductions prohibited by certain insurance companies, see section 832 of this title. Interest paid deductible, see section 163 of this title. Tax-exempt interest relating to estates and trusts, see section 643 of this title. SECTION RsaIUMR TO IN OTHER SECTIONS This section is referred to in sections 163, 643, 861, 4940, 4942, 6362 of this title. § 266. Carrying charges No deduction shall be allowed for amounts paid or accrued for such taxes and carrying charges as, under regulations prescribed by the Secretary, are chargeable to capital account with respect to property, if the taxpayer elects, ih accordance with such regulations, to treat such taxes or charges as so chargeable. (Aug. 16, 1954, ch. 736, 68A Stat. 78; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMEDmENTs 1976-Pub. L. 94-455 struck out "or his .elegate" fol- lowing "Secretary". CRoss RznEREscs Adjustment to losses for carrying charges, see sec- tion 1016 of this title. Capital expenditures not deductible, see section 263 of this title. Interest paid deductible, see section 163 of this title. Taxes deductible, see section 164 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 163, 189, 1016 of this title. § 267. Losses, expenses, and iiteret with respect to transactions between related taxpayers (a) Deductions disallowed No deduction shall be allowed- (1) Losses In respect of losses from sales or exchanges of property (other than losses in cases of dis- tributions in corporate liquidations), directly or indirectly, between persons specified within any one of the paragraphs of subsec- tion (b). (2) Unpaid expenses and interest In respect of expenses, otherwise deductible under section 162 or 212, or of interest, other- wise deductible under section 163,- (A) If within the period consisting of the taxable year of the taxpayer and 2 months after the close thereof (I) such ex- penses or interest are not paid, and (ii) the amount thereof is not includible in the gross income of the person to whom the payment is to be made; and (B) If, by reason of the method of ac- counting of the person to whom the pay- ment is to be made, the amount thereof is not, unless paid, includible in the gross income of such person for the taxable year in which or with which the taxable year of the taxpayer ends; and (C) If, at the close of the taxable year of the taxpayer or at any time within 2Y2 months thereafter, both the taxpayer and the person to whom the payment is to be Page 214
TITLE 26-INTERNAL REVENUE CODE made are persons specified within any one of the paragraphs of subsection (b). (b) Relationships The persons referred to in subsection (a) are: (1) Members of a family, as defined in sub- section (c)(4); (2) An individual and a corporation more than 50 percent in value of the outstanding stock of which is owned, directly or indirectly, by or for such individual; (3) Two corporations more than 50 percent in value of the outstanding stock of each of which is owned, directly or indirectly, by or for the same individual, if either one of such corporations, with respect to the taxable year of the corporation preceding the date of the sale or exchange was, under the law applica- ble to such taxable year, a personal holding company or a foreign personal holding com- pany; (4) A grantor and a fiduciary of any trust; (5) A fiduciary of a trust and a fiduciary of another trust, if the same person is a grantor of both trusts; (6) A fiduciary of a trust and a beneficiary of such trust; (7) A fiduciary of a trust and a beneficiary of another trust, if the same person is a gran- tor of both trusts; (8) A fiduciary of a trust and a corporation more than 50 percent in value of the out- standing stock of which is owned, directly or indirectly, by or for the trust or by or for a person who is a grantor of the trust; or (9) A person and an organization to which section 501 (relating to certain educational and charitable organizations which are exempt from tax) applies and which is con- trolled directly or indirectly by such person or (if such person is an individual) by mem- bers of the family of such individual. (c) Constructive ownership of stock For purposes of determining, in applying sub- section (b), the ownership of stock- (1) Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned propor- tionately by or for its shareholders, partners, or beneficiaries; (2) An individual shall be considered as owning the stock owned, directly or indirect- ly, by or for his family; (3) An individual owning (otherwise than by the application of paragraph (2)) any stock in a corporation shall be considered as owning the stock owned, directly or indirectly, by or for his partner; (4) The family of an individual shall include only his brothers and sisters (whether by the whole or half blood), spouse, ancestors, and lineal descendants; and (5) Stock constructively owned by a person by reason of the application of paragraph (1) shall, for the purpose of applying paragraph (1), (2), or (3), be treated as actually owned by such person, but stock constructively owned by an individual by reason of the application of paragraph (2) or (3) shall not be treated as owned by him for the purpose of again apply- ing either of such paragraphs in order to make another the constructive owner of such stock. (d) Amount of gain where loss previously disallowed If- (1) in the case of a sale or exchange of prop- erty to the taxpayer a loss sustained by the transferor is not allowable to the transferor as a deduction by reason of subsection (a)(1) (or by reason of section 24(b) of the Internal Revenue Code of 1939); and (2) after December 31, 1953, the taxpayer sells or otherwise disposes of such property (or of other property the basis of which in his hands is determined directly or indirectly by reference to such property) at a gain, then such gain shall be recognized only to the extent that it exceeds so much of such loss as is properly allocable to the property sold or oth- erwise disposed of by the taxpayer. This subsec- tion applies with respect to taxable years ending after December 31, 1953. This subsec- tion shall not apply if the loss sustained by the transferor Is not allowable to the transferor as a deduction by reason of section 1091 (relating to wash sales) or by reason of section 118 of the Internal Revenue Code of 1939. (Aug. 16, 1954, ch. 736, 68A Stat. 78.) REFERENCES IN TEXT Sections 24(b) and 118 of the Internal Revenue Code of 1939, referred to in subsec. (d), were classified to sections 24(b) and 118 of former Title 26, Internal Revenue Code. Sections 24(b) and 118 were repealed by section 7851(a)(1) of this title. For table of compari- sons of the 1939 Code to the 1954 Code, see Table I preceding section 1 of this title. See, also, section 7851(e) of this title for provision that references in the 1954 Code to a provision of the 1939 Code, not then applicable, shall be deemed a reference to the corre- sponding provision of the 1954 Code, which is then ap- plicable. CROSS REFERENCES Corporate and individual losses deductible, see sec- tion 165 of this title. Interest paid deductible, see section 163 of this title. Subsection (c) of this section applicable to unincor- porated business enterprises, see section 1361 of this title. Transaction between partners, see section 707 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 44, 48, 50B, 103, 163, 170, 178, 179, 274, 280A, 341, 465, 503, 613A, 631, 707, 1235, 1237, 4946, 4975 of this title; title 29 sec- tion 1108. § 268. Sale of land with unharvested crop Where an unharvested crop sold by the tax- payer is considered under the provisions of sec- tion 1231 as "property used in the trade or busi- ness", in computing taxable income no deduc- tion (whether or not for the taxable year of the sale and whether for expenses, depreciation, or otherwise) attributable to the production of such crop shall be allowed. (Aug. 16, 1954, ch. 736, 68A Stat. 80.) CROSS REFERENCES Adjusment to basis for deductions disallowed under thL, section, see section 1016 of this title. Page 215 § 268
TITLE 26-INTERNAL REVENUE CODE SECTION REFEIUED TO IN OTHER SECTIONS This section Is referred to in section 1016 of this title. § 269. Acquisitions made to evade or avoid income tax (a) In general If- (1) any person or persons acquire, or ac- quired on or after October 8, 1940, directly or indirectly, control of a corporation, or (2) any corporation acquires, or acquired on or after October 8, 1940, directly or indirectly, property of another corporation, not con- trolled, directly or indirectly, immediately before such acquisition, by such acquiring corporation or its stockholders, the basis of which property, in the hands of the acquiring corporation, is determined by reference to the basis in the hands of the transferor corpora- tion, and the principal purpose for which such acqui- sition was made is evasion or avoidance of Fed- eral income tax by securing the benefit of a de- duction, credit, or other allowance which such person or corporation would not otherwise enjoy, then the Secretary may disallow such de- duction, credit, or other allowance. For pur- poses of paragraphs (1) and (2), control means the ownership of stock possessing at least 50 percent of 'the total combined voting power of all classes of stock entitled to vote or at least 50 percent of the total value of shares of all classes of stock of the corporation. (b) Power of Secretary to allow deduction, etc., in part In any case to which subsection (a) applies the Secretary Is authorized- (1) to allow as a deduction, credit, or allowance any part of any amount disallowed by such subsection, if he determines that such allowance will not result in the evasion or avoidance of Federal income tax for which the acquisition was made; or (2) to distribute, apportion, or allocate gross income, and distribute, apportion, or allocate the deductions, credits, or allowances the benefit of which was sought to be secured, be- tween or among the corporations, or proper- ties, or parts thereof, involved, and to allow such deductions, credits, or allowances so dis- tributed, apportioned, or allocated, but to give effect to such allowance only to such extent as he determines will not result in the evasion or avoidance of Federal income tax for which the acquisition was made; or (3) to exercise his powers in part under paragraph (1) and in part under paragraph (2). (Aug. 16, 1954, ch. 736, 68A Stat. 80; Feb. 26, 1964, Pub. L. 88-272, title II, § 235(c)(2), 78 Stat. 126; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§1901(a)(38), 1906(b)(13)(A), 90 Stat. 1771, 1834.) AMENDMENTS 1976-Subsecs. (a), (b). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" wherever appearing. Subsec. (c). Pub. L. 94-455, § 1901(a)(38), struck out subsec. (c) relating to presumptions in the case of dis- proportionate purchase price. 1964-Subsec. (a). Pub. L. 88-272 substituted "the Secretary or his delegate may disallow such deduction, credit, or other allowance" for "such deduction, credit or other allowance shall not be allowed". Er crivE DATE OF 1964 AENDMENT Amendment by Pub. L. 88-272 applicable to taxable years ending after Dec. 31, 1963, see section 235(d) of Pub. L. 88-272 set out as an Effective Date of 1964 Amendment note under section 1551 of this title. CROSS REFERENCES Disallowance of surtax exemption and accumulated earnings credit, see section 1551 of this title. SECTION REFEIUED TO IN OTHER SECTIONS This section is referred to In section 1551 of this title. [§270. Repealed. Pub. L. 91-172, title II, § 213(b), Dec. 30, 1969, 83 Stat. 572] Section, act Aug. 16, 1954, ch. 736, 68A Stat. 81, re- lated to the limitation on deductions allowable to cer- tain individuals. See section 183 of this title. EFFECTIVE DATE OF REPEAL Repeal of section applicable to taxable years begin- ning after Dec. 31, 1969, see section 213(d) of Pub. L. 91-172, set out as an Effective Date note under section 183 of this title. § 271. Debts owed by political parties, etc. (a) General rule In the case of a taxpayer (other than a bank as defined in section 581) no deduction shall be allowed under section 166 (relating to bad debts) or under section 165(g) (relating to worthlessness of securities) by reason of the worthlessness of any debt owed by a political party. (b) Definitions (1) Political party For purposes of subsection (a, the term "political party" means- (A) a political party; (B) a national, State, or local committee of a political party; or (C) a committee, association, or organiza- tion which accepts contributions or makes expenditures for the purpose of influencing or attempting to influence the election of presidential or vice-presidential electors or of any individual whose name is presented for election to any Federal, State, or local elective public office, whether or not such individual is elected. (2) Contributions For purposes of paragraph (1)(C), the term "contributions" includes a gift, subscription, loan, advance, or deposit, of money, or any- thing of value, and includes a contract, prom- ise, or agreement to make a contribution, whether or not legally enforceable. (3) Expenditures For purposes of paragraph (1)(C), the term "expenditures" includes a payment, distribu- tion, loan, advance, deposit, or gift, of money, or anything of value, and includes a contract, promise, or agreement to make an expendi- ture, whether or not legally enforceable. § 269 Page 216
TITLE 26-INTERNAL REVENUE CODE (c) Exception In the case of a taxpayer who uses an accrual method of accounting, subsection (a) shall not apply to a debt which accrued as a receivable on a bona fide sale of goods or services in the ordinary course of the taxpayer's trade or busi- ness if- (1) for the taxable year in which such re- ceivable accrued, more than 30 percent of all receivables which accrued in the ordinary course of the trades and businesses of the taxpayer were due from political parties, and (2) the taxpayer made substantial continu- ing efforts to collect on the debt. (Aug. 16, 1954, ch. 736, 68A Stat. 82; Oct. 4, 1976, Pub. L. 94-455, title XXI, § 2104(a), 90 Stat. 1901.) AMENDMENTS 1976-Subsec. (c). Pub. L. 94-455 added subsec. (c). EFFECTIVE DATE OF 1976 AMENDMENT Section 2104(b) oi Pub. L. 94-455 provided that: "The amendment made by subsection (a) [enacting subsec. (c) of this section] shall apply to taxable years beginning after December 31, 197t." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 166, 276, 527 of this title. § 272. Disposal of coal or domestic iron ore Where the disposal of coal or iron ore is cov- ered by section 631, no deduction shall be al- lowed for expenditures attributable to the making and administering of the contract under which such disposition occurs and to the preservation of the economic interest retained under such contract, except that if in any tax- able year such expenditures plus the adjusted depletion basis of the coal or iron ore disposed of in such taxable year exceed the amount real- ized under such contract, such excess, to the extent not availed of as a reduction of gain under section 1231, shall be a loss deductible under section 165(a). This section shall not apply to any taxable year during which there is no income under the contract. (Aug. 16, 1954, ch. 736, 68A Stat. 82; Feb. 26, 1964, Pub. L. 88-272, title II, § 227(a)(3), (b)(3), 78 Stat. 98.) AMENDMENTS 1964-Pub. L. 88-272 inserted "or domestic iron ore" in the section catchline, and "or iron ore" wherever appearing in the text. EFFECTIVE DATE OF 1964 AMENDMENT Section 227(c) of Pub. L. 88-272 provided that: "The amendments made by this section (to sections 272, 631, 1016, 1231, and 1402, and to the analysis preced- ing sections 261 and 631 of this title, and to section 411 of Title 42, Public Health and Welfare] shall apply with respect to amounts received or accrued in taxablk years beginning after December 31, 1963, attributable to iron ore mined in such taxable years." CROSS REFERENCES Adjustment to basis for deductions disallowed under this section, see section 1016 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 631, 1016 of this title. § 273. llolders of life or terminable interest Amounts paid under the laws of a State, the District of Columbia, a possession of the United States, or a foreign country as income to the holder of a life or terminable interest acquired by gift, bequest, or inheritance shall not be re- duced or diminished by any deduction for shrinkage (by whatever name called) in the value of such interest due to the lapse of time. (Aug. 16, 1954, ch. 736, 68A Stat. 83; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(c)(2), 90 Stat. 1803.) AMENDMENTS 1976-Pub. L. 94-455 struck out reference to amounts paid under laws of a Territory. EFFECTIVE DATE OF 1976 AMENDMENTS Amendment by section 1901(c) of Pub. L. 94-455 ef- fective for taxable years beginning after Dec. 31, 197G, see section 1901(d) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 2 of this title. § 274. Disallowance of certain entertainment, etc., ex- penses (a) Entertainment, amusement, or recreation (1) In general No deduction otherwise allowable under this chapter shall be allowed for any item- (A) Activity With respect to an activity which is of a type generally considered to constitute en- tertainment, amusement, or recreation, unless the taxpayer establishes that the item was directly related to, or, in the case of an item directly preceding or following a substantial and bona fide business discus- sion (including business meetings at a con- vention or otherwise), that such item was associated with, the active conduct of the taxpayer's trade or business, or (B) Facility With respect to a facility used in connec- tion with an activity referred to .in subpara- graph (A), unless the taxpayer establishes that the facility was used primarily for the furtherance of the taxpayer's trade or busi- ness and that the item was directly related to the active conduct of such trade or busi- ness, and such deduction shall in no event exceed the portion of such item directly related to, or, in the case of an item described in subpar- agraph (A) directly preceding or following a substantial and bona fide business discussion (including business meetings at a convention or otherwise), the portion of such item associ- ated with, the active conduct of the taxpay- er's trade or business. (2) Special rules For purposes of applying paragraph (1)- (A) Dues or fees to any social, athletic, or sporting club or organization shall be treat- ed as items with respect to facilities. Page 217
TITLE 26-INTERNAL REVENUE CODE (B) An activity described in section 212 shall be treated as a trade or business. (b) Gifts (1) Limitation No deduction shall be allowed under section 162 or section 212 for any expense for gifts made directly or indirectly to any individual to the extent that such expense, when added to prior expenses of the taxpayer for gifts made to such individual during the same tax- able year, exceeds $25. For purposes of this section, the term "gift" means any item ex- cludable from gross income of the recipient under section 102 which is not excludable from his gross income under any other provi- sion of this chapter, but such term does not include- (A) an item having a cost to the taxpayer not in excess of $4.00 on which the name of the taxpayer is clearly and permanently im- printed and which is one of a number of identical items distributed generally by the taxpayer, (B) a sign, display rack, or other promo- tional material to be used on the business premises of the recipient, or (C) an item of tangible personal property having a cost to the taxpayer not in excess of $100 which is awarded to an employee by reason of length of service or for safety achievement. (2) Special rules (A) In the case of a gift by a partnership, the limitation contained in paragraph (1) shall apply to the partnership as well as to each member thereof. (B) For purposes of paragraph (1), a hus- band and wife shall be treated as one tax- payer. (c) Certain foreign travel (I) In general In the case of any individual who travels outside the United States away from home in pursuit of a trade or business or in pursuit of an activity described in section 212, no deduc- tion shall be allowed under section 162, or sec- tion 212 for that portion of the expenses of such travel otherwise allowable under such section which, under regulations prescribed by the Secretary, is not allocable to such trade or business or to such activity. (2) Exception Paragraph (1) shall not apply to the ex- penses of any travel outside the United States away from home if- (A) such travel does not exceed one week, or (B) the portion of the time of travel out- side the United States away from home which is not attributable to the pursuit of the taxpayer's trade or business or an activ- ity 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 out- side the United States does not include any travel from one point in the United States to another point in the United States. (d) Substantiation required No deduction shall be allowed- (1) under section 162 or 212 for any travel- ing expense (including meals and lodging while away from home), (2) for any item with respect to an activity which is of a type generally considered to constitute entertainment, amusement, or re- creation, or with respect to a facility used in connection with such an activity, or (3) for any expense for gifts, unless the taxpayer substantiates by adequate records or by sufficient evidence corroborating his own statement (A) the amount of such ex- pense or other item, (B) the time and place of the travel, entertainment, amusement, recrea- tion, or use of the facility, or the date and de- scription of the gift, (C) the business purpose of the expense or other item, and (D) the business relationship to the taxpayer of persons enter- tained, using the facility, or receiving the gift. The Secretary may by regulations provide that some or all of the requirements of the preced- ing sentence shall not apply in the case of an expense which does not exceed an amount pre- scribed pursuant to such regulations, (e) Specific exceptions to application of subsection (a) Subsection (a) shall not apply to- (1) Business meals Expenses for food and beverages furnished to any individual under circumstances which (taking into account the surroundings in which furnished, the taxpayer's trade, busi- ness, or income-producing activity and the re- lationship to such trade, business, or activity of the persons to whom the food and bever- ages are furnished) are of a type generally considered to be conducive to a business dis- cussion. (2) Food and beverages for employees Expenses for food and beverages (and facili- ties used in connection therewith) furnished on the business premises of the taxpayer pri- marily for his employees. (3) Expenses treated as compensation Expenses for goods, services, and facilities, to the extent that the expenses are treated by the taxpayer, with respect to the recipient of the entertainment, amusement, or recrea- tion, as compensation to an employee on the taxpayer's return of tax under this chapter and as wages to such employee for purposes of chapter 24 (relating to withholding of income tax at source on wages). (4) Reimbursed expenses Expenses paid or incurred by the taxpayer, in connection with the performance by him of services for another person (whether or not such other person is his employer), under a reimbursement or other expense allowance arrangement with such other person, but this paragraph shall apply- (A) where the services are performed for an employer, only if the employer has not treated such expenses in the manner pro- vided in paragraph (3), or (B) where the services are performed for a person other than an employer, only if the Page 218 § 274
TITLE 26-INTERNAL REVENUE CODE taxpayer accounts (to the extent provided by subsection (d)) to such person. (5) Recreational, etc., expenses for employees Expenses for recreational, social, or similar activities (including facilities therefor) pri- marily for the benefit of employees (other than employees who are officers, sharehold- ers or other owners, or highly compensated employees). For purposes of this paragraph, an individual owning less than a 10-percent interest in the taxpayer's trade or business shall not be considered a shareholder or other oner, and for such purposes an individual shall be treated as owning any interest owned by a member of his family (within the mean- ing of section 267(c)(4)). (6) Employees, stockholder, etc., business meetings Expenses incurred by a taxpayer which are directly related to business meetings of his employees, stockholders, agents, or directors. (7) Meetings of business leagues, etc. Expenses directly related and necessary to attendance at a business meeting or conven- tion of any organization described in section 501(c)(6) (relating to business leagues, cham- bers of commerce, real estate boards, and boards of trade) and exempt from taxation under section 501(a). (8) Items available to public Expenses for goods, services, and facilities made available by the taxpayer to the general public. (9) Entertainment sold to customers Expenses for goods or services (including the use of facilities) which are sold by the taxpayer in a bona fide transaction for an adequate and full consideration in money or money's worth. For purposes of this subsection, any item re- ferred to in subsection (a) shall be treated as an expense. (f) Interest, taxes, casualty losses, etc. This section shall not apply to any deduction allowable to the taxpayer without regard to its connection with his trade or business (or with his income-producing activity). In the case of a taxpayer which is not an individual, the preced- ing sentence shall be applied as if it were an in- dividual. (g) Treatment of entertainment, etc., type facility For purposes of this chapter, if deductions are disallowed under subsection (a) with respect to any portion of a facility, such portion shall be treated as an asset which is used for person- al, living, and family purposes (and not as an asset used In the trade or business). (h) Foreign conventions (1) Deductions with respect to not more than 2 for- eign conventions per year allowed If any individual attends more than 2 for- eign conventions during his taxable year- (A) he shall select not more than 2 of such conventions to be taken into account for purposes of this subsection, and (B) no deduction allocable to his atten- dance at any foreign convention during such taxable year (other than a foreign con- vention selected under subparagraph (A)) shall be allowed under section 162 or 212. (2) Deductible transportation cost cannot exceed cost of coach or economy air fare In the case of any foreign convention, no deduction for the expenses of transportation outside the United States to and from the site of such convention shall be allowed under section 162 or 212 in an amount which ex- ceeds the lowest coac, or economy rate at the time of travel charged by a commercial airline for transportation to and from such site during the calendar month in which such convention begins. If there is no such coach or economy rate, the preceding sentence shall be applied by substituting "first class" for "coach or economy". (3) Transportation costs deductible in full only if at least one-half of the days are devoted to busi- ness related activities In the case of any foreign convention, a de- duction for the full expenses of transporta- tion (determined after the application of paragraph (2)) to and from the site of such convention shall be allowed only if more than one-half of the total days of the trip, exclud- ing the days of transportation to and from the site of such convention, are devoted to business related activities. If less than one- half of the total days of the trip, excluding the days of transportation to and from the site of the convention, are devoted to business related activities, no deduction for tile ex- penses of transportation shall be allowed which exceeds the percentage of the days of the trip devoted to business related activities. (.1) )eductions for subsistence expenses not allowed unless the individual attends two-thirds of business activities In the case of any foreign convention, no deduction for subsistence expenses shall be allowed except as follows: (A) a deduction for a full day of subsis- tence expenses while at the convention shall be allowed if there are at least 6 hours of scheduled business activities during such day and the individual attending tile con- vention has attended at least two-thirds of these activities, and (B) a deduction for one-half day of subsis- tence expenses while at tie convention shall be allowed if there are at least 3 hours of scheduled business activities during such day and the individual attending the con- vention has attended at least two-thirds of these activities. Notwithstanding subparagraphs (A) and IB), a deduction for subsistence expenses for all of the days or half days, as the case may be, of the convention shall be allowed if the individ- ual attending the convention has attended at least two-thirds of the scheduled business ac- tivities, and each such full day consists of at least 6 hours of scheduled business activities and each such half day consists of at least 3 hours of scheduled business activities. (5) Deductible subsistence costs cannot exceed per diem rate for United States civil servants In the case of any foreign convention, no deduction for subsistence expenses while at the convention or traveling to or from such Page 219 § 27.1
TITLE 26-INTERNAL REVENUE CODE convention shall be allowed at a rate in excess of the dollar per diem rate for the site of the convention which has been established under section 5702(a) of title 5 of the United States Code and which is in effect for the calendar month in which the convention begins. (6) Definitions and special rules For purposes of this subsection- (A) Foreign convention defined The term "foreign convention" means any convention, seminar, or similar meeting held outside the United States, its posses- sions, and the Trust Territory of the Pacif- Ic. (B) Subsistence expenses defined The term "subsistence expenses" means lodging, meals, and other necessary ex- penses for the personal sustenance and comfort of the traveler. Such term includes tips and taxi and other local transportation expenses. (C) Allocation of expenses in certain cases In any case where the transportation ex- penses or the subsistence expenses are not separately stated, or where there is reason to believe that the stated charge for trans- portation expenses or subsistence expenses or both does not properly reflect the amounts properly allocable to such pur- poses, all amounts paid for transportation expenses and subsistence expenses shall be treated as having been paid solely for sub- sistence expenses. (D) Subsectii, to apply to employer as well as to traveler This subsection shall apply to deductions otherwise allowable under section 162 or 212 to any person, whether or not such person is the individual attending the for- eign convention. For purposes of the pre- ceding sentence such person shall be treat- ed, with respect to each individual, as having selected the same 2 foreign conven- tions as were selected by such individual. (7) Reporting requirements No deduction shall be allowed under section 162 or 212 for transportation or subsistence expenses allocable to attendance at a foreign convention unless the taxpayer claiming the deduction attaches to the return of tax on which the deduction is claimed- (A) a written statement signed by the in- dividual attending the convention which in- cludes- (I) information with respect to the total days of the trip, excluding the days of transportation to and from the site of such convention, and the number of hours of each day of the trip which such indi- vidual devoted to scheduled business ac- tivities, (it) a program of the scheduled business activities of the convention, and (iii) such other information as may be required in regulations prescribed by the Secretary; and (B) a written statement signed by an offi- cer of the organization or group sponsoring the convention which includes- (i) a schedule of the business activities of each day of the convention, (I) the number of hours which the indi- vidual attending the convention attended such scheduled business activities, and (iii) such other information as may be required in regulations prescribed by the Secretary. (i) Regulatory authority The Secretary shall prescribe such regula- tions as he may deem necessary to carry out the purposes of this section, including regula- tions prescribing whether subsection (a) orsub- section (b) applies in cases where both guch subsections would otherwise apply, (Added Pub. L. 87-834, §4(a)(1), Oct. 16, 1962, 76 Stat. 974, and amended Pub. L. 88-272, title II, §217(a), Feb. 26, 1964, 78 Stat. 56; Pub. L. 94-455, title VI, § 602(a), title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat, 1572, 1834.) AMENDMENTS 1976-Subsecs. (c)(1), (d). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (h). Pub. L. 94-455, § 602(a), added subsec. (h). Former subsec. (h) redesignated as (1). Subsec. (i). Pub. L. 94-455, §§ 602(a), 1906(b)(13)(A), redesignated subsec. (h) as (I) and in subsec. (i) as so redesignated struck out "or his delegate" following "Secretary". 1964-Subsec. (c). Pub. L. 88-272 limited subsec. (c) to individuals traveling outside the United States. EFFECTIVE DATE OF 1976 AMENDMENT Section 602(b) of Pub. L. 94-455 provided that: "The amendments made by this section [enacting subsec. (h) of this section] shall apply to conventions begin- ning after December 31, 1976." EFFECTIVE DATE OF 1964 AMENDMENT Section 217(b) of Pub. L. 88-272 provided that: "The amendment made by subsection (a) [to subsec. (c) of this section] shall apply with respect to taxable years ending after December 31, 1962, but only in respect of perlois after such date." EFFECTIVE DATE Section applicable with respect to taxable years ending after Dec. 31, 1962, but only in respect of peri- ods after such date, see section 4(c) of Pub. L. 87-834, set out as an Effective Date of 1962 Amendment note under section 162 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 276 of this title. § 275. Certain taxes (a) General rule No deduction shall be allowed for the follow- ing taxes: (1) Federal income taxes, including- (A) the tax imposed by section 3101 (relat- ing to the tax on employees under the Fed- eral Insurance Contributions Act); (B) the taxes imposed by sections 3201 and 3211 (relating to the taxes on railroad employees and railroad employee represen- tatives); and (C) the tax withheld at source on wages under section 3402. (2) Federal war profits and excess profits taxes. § 275 Page 220
TITLE 26-INTERNAL REVENUE CODE (3) Estate, inheritance, legacy, succession, and gift taxes. (4) Income, war profits, and excess profits taxes imposed by the authority of any foreign country or possession of the United States, if the taxpayer chooses to take to any extent the benefits of section 901 (relating to the foreign tax credit). (5) Taxes on real property, to the extent that section 164(d) requires such taxes to be treated as imposed on another taxpayer. (6) Taxes imposed by chapters 41, 42, 43, and 44. (b) Cross reference For disallowance of certain other taxes, see section 164(c). (Added Pub. L. 88-272, title II, § 207(b)(3)(A), Feb. 26, 1964, 78 Stat. 42, and amended Pub. L. 93-406, title II, § 1016(a)(1), Sept. 2, 1974, 88 Stat. 929; Pub. L. 94-455, title XIII, § 1307(d)(2)(A), title XVI, § 1605(b)(1), title XIX, § 1901(a)(39), Oct. 4, 1976, 90 Stat. 1727, 1754, 1771.) REFERENCES 64 TEXT The Federal Insurance Contributions Act, referred to in text, is act Aug. 16, 1954, ch. 736, §§3101, 3102, 3111, 3112, 3121 to 3126, 68A Stat. 415, as amended, which is classified generally to chapter 21 (§ 3101 et seq.) of this title. For complete classification of this Act to the Code, see section 3126 of this title and Tables volume. AMENDMENTS 1976-Subsec. (a)(1)(C). Pub. L. 94-455, § 1901(a)(39), struck out ", and corresponding provisions of prior rev- enue laws" following "under section 3402". Subsec. (a)(6). Pub. L. 94-455. §§ 1307(d)(2)(A), 1605(b)(1), added references to taxes imposed by chap- ters 41 and 44. 1974-Subsec. (a). Pub. L. 93-406 added par. (6). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (a)(l)(C) by section 1901(a)(39) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. For effective date of amendment of subsec. (a)(6) by section 1307(d)(2)(A) of Pub. L. 94-455, see section 1307(e) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 501 of this title. For effective date of amendment of subsec. (a)(6) by section 1605(b)(1) of Pub. L. 94-455, see section 1608(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 856 of this title. EFFECTIVE DATE OF 1974 AMENDMENT Amendment by Pub. L. 93-406 applicable, except as otherwise provided in section 1017(c) through (h) of Pub. L. 93-406, for plan years beginning after Sept. 2, 1974, but, in the case of plans in existence on Jan. 1, 1974, amendment by Pub. L. 93-406 applicable for plan years beginning after Dec. 31, 1975, see section 1017 of Pub. L. 93-406, set out as a note under section 410 of this title. EFFECTIVE DATE Section applicable to taxable years beginning after Dec. 31, 1963, see section 207(c) of Pub. L. 88-272. set out as an Effective Date of 1964 Amendment note under section 164 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 535, 545, 556, 901, 903, 908, 4971, 4972 of this title. § 276. Certain indirect contributions to political par- ties (a) Disallowance of deduction No deduction otherwise allowable under this chapter shall be allowed for any amount paid or incurred for- (1) advertising in a convention program of a political party, or in any other publication if any part of the proceeds of such publication directly or indirectly inures (or is intended to inure) to or for the use of a political party or a political candidate, (2) admission to any dinner or program, if any part of the proceeds of such dinner or program directly or indirectly inures (or is in- tended to inure) to or for the use of a politi- cal party or a political candidate, or (3) admission to an inaugural ball, inaugu- ral gala, inaugural parade, or inaugural con- cert, or to any similar event which is identi- fied with a political party or a political candi- date. (b) Definitions For purposes of this section- (1) Political party The term "political party" means- (A) a political party; (B) a National, State, or local committee of a political party; or (C) a committee, association, or organiza- tion, whether incorporated or not, which di- rectly or indirectly accepts contributions (as defined in section 271(b)(2)) or make expen- ditures (as defined in section 271(b)(3)) for the purpose of influencing or attempting to influence the selection, nomination, or elec- tion of any individual to any Federal, State, or local elective public office, or the election of presidential and vice-presidential elec- tors, whether or not such individual or elec- tors are selected, nominated, or elected. (2) Proceeds inuring to or for the use of political candidates Proceeds shall be treated as inuring to or for the use of a political candidate only if- (A) such proceeds may be used directly or indirectly for the purpose of furthering his candidacy for selection, nomination, or elec- tion to any elective public office, and (B) such proceeds are not received by such candidate in the ordinary course of a trade or business (other than the trade or business of holding elective public office). (c) Cross reference For disallowance of certain entertainment, etc., ex- penses, see section 274. (Added Pub. L. 89-368, title III, §301(a), Mar. 15, 1966, 80 Stat. 66, and amended Pub. L. 90- 364, title I, § 108(a), June 28, 1968, 82 Stat. 269; Pub. L. 93-443, title IV, § 406(d), Oct. 15, 1974, 88 Stat. 1296.) AMENDMENTS 1974-Subsec. (c). Pub. L. 93-443 redesignated former subsec. (d) as (c) and struck out existing Page 221 § 276
TITLE 26-INTERNAL REVENUE CODE subsec. (c) relating to advertising in a convention pro- gram of a national political convention. Subsec. (d). Pub. L. 93-443 redesignated former subsec. (d) as (c). 1968-Subsec. c). Pub. L. 90-364 added subsec. (c). Former subsec. (c) redesignated (d). Subsec. d). Pub. L. 90-364 redesignated former subsec. Wc) as (d). EFFECTIVE DATE OF 1974 AMENDMENT Amendment by Pub. L. 93-443 applicable with re- spect to taxable years beginning after Dec. 31, 1974, see section 410(c)(1) of Pub. L. 93-443, set out as an Ef- fective Date of 1974 Amendment note under section 431 of Title 2, The Congress. EFFECTIVE DATE OF 1968 AMENDMENT Section 108(b) of Pub. L. 90-364 provided that: "The amendments made by subsection (a) [enacting subsec. Cc) of this section] shall apply with respect to amounts paid or incurred on or after January 1. 1968." EFFECTIVE DATE Section 301(c) of Pub. L. 89-368 provided that: "The amendments made by subsections (a) and (b) [adding this section] shall apply to taxable years beginning after December 31, 1965, but only with respect to amounts paid or incurred after the date of the enact- ment of this Act [Mar. 15, 1966]." PROGRAM ADVERTISING FOR PRESIDENTIAL AND VICE- PRESIDENTIAL NOMINATING CONVENTIONS Pub. L. 93-625, § 10(g), Jan. 3, 1975, 88 Stat. 2119, re- pealed Pub. L. 90-346, June 18, 1968, 82 Stat. 183, pro- viding for advertising in a convention program of a na- tional political convention, applicable with respect to amounts paid or incurred on or after Jan. 1, 1968. § 277. Deductions incurred by certain membership or- ganizations in transactions with members (a) General rule In the case of a social club or other member- ship organization which is operated primarily to furnish services or goods to members and which is not exempt from taxation, deductions for the taxable year attributable to furnishing services, insurance, goods, or other items of value to members shall be allowed only to the extent of income derived during such year from members or transactions with members (includ- ing income derived during such year from insti- tutes and trade shows which are primarily for the education of members). If for any taxable year such deductions exceed such income, the excess shall be treated as a deduction attribut- able to furnishing services, insurance, goods, or other items of value to members paid or in- curred in the succeeding taxable year. The de- ductions provided by sections 243, 244, and 245 (relating to dividends received by corporations' shall not be allowed to any organization to which this section applies for the taxable yetr. (b) Exceptions Subsection (a) shall not apply to any organi- zation- (1) which for the taxable year is subject to taxation under subchapter H or L, (2) which has made an election before Octo- ber 9, 1969, under section 456(c) or which is affiliated with such an organization, or (3) which for each day of any taxable year is a national securities exchange subject to regulation under the Securities Exchange Act of 1934 or a contract market subject to regu- lation under the Commodity Exchange Act. (Added Pub. L. 91-172, title I, § 121(b)(3)(A). Dec. 30, 1969, 83 Stat. 540, and amended Pub. L. 94-568, § 1(c), Oct. 20, 1976, 90 Stat. 2697.) REFERENCES IN TEXT The Securities Exchange Act of 1934, referred to in subsec. (b)(3), is act June 6, 1934, ch. 404, 48 Stat. 881, as amended, which is classified principally to chapter 2B § 78a et seq.) of Title 15, Commerce and Trade. For complete classification of this Act to the Code, see section 78a of Title 15, and Tables volume. The Commodity Exchange Act, referred to in subsec. (b)(3), is act Sept. 21, 1922, ch. 369, 42 Stat. 998, as amended, which is classified'generally to chapter 1 (§ 1 et seq.) of Title 7, Agriculture. For complete classifica- tion of this Act to the Code, see Tables volume. AMENDMENTS 1976-Subsec. (a). Pub. L. 94-568 provided that the deductions provided by sections 243, 244, and 245 (re- lating to dividends received by corporations) shall not be allowed to any organization to which this section applies for the taxable year. EFFECTIVE DATE OF 1976 AMENDMENT Amendment by Pub. L. 94-568 applicable to taxable years beginning after Oct. 20, 1976, see section 1(d) of Pub. L. 94-568, set out as an Effective Date of 1976 Amendment note under section 501 of this title. EFFECTIVE DATE Section applicable to taxable years beginning after Dec. 31, 1970, see section 121(g) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 511 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 404 of this title. § 278. Capital expenditures incurred in planting and developing citrus and almond groves; certain cap. ital expeniditures of farming syndicates (a) General rule Except as provided in subsection (c), any amount (allowable as a deduction without regard to this section), which is attributable to the planting, cultivation, maintenance, or devel- opment of any citrus or almond grove (or part thereof), and which Is incurred before the close of the fourth taxab~e year beginning with the taxable year in which the trees were planted, shall be charged to capital account. For pur- poses of the preceding sentence, the portion of a citrus or almond grove planted in one taxable year shall be treated separately from the por- tion of such grove planted in another taxable year. (b) Farming syndicates Except as provided in subsection (c), in the case of any farming syndicate (as defined in section 464(c)) engaged in planting, cultivating, maintaining, or developing a grove, orchard, or vineyard in which fruit or nuts are grown, any amount- (1) which would be allowable as a deduction but for the provisions of this subsection, (2) which is attributable to the planting, cultivation, maintenance, or development of such grove, orchard, or vineyard, and (3) which is incurred in 'a taxable year before the first taxable year in which such grove, orchard, or vineyard bears a crop or yield in commercial quantities, shall be charged to capital account. Page 222
TITLE 26-INTERNAL REVENUE CODE (c) Exceptions Subsections (a) and (b) shall not apply to amounts allowable as deductions (without regard to this section) attributable to a grove, orchard, or vineyard which was replanted after having been lost or damaged (while in the hands of the taxpayer) by reason of freezing temperatures, disease, drought, pests, or casual- ty. (Added Pub. L. 91-172, title II, § 216(a), Dec. 30, 1969, 83 Stat. 573, and amended Pub. L. 91-680, § 1(a), (b), (d), Jan. 12, 1971, 84 Stat, 2064; Pub. L. 94-455, title II, §207(b)(1), (2), Oct. 4, 1976, 90 Stat. 1538.) AMENDMENTS 1976.-Pub. L. 94-455, § 207(b)(2)(A), added "; certain capital expenditures of farming syndicates" in the sec- tion catchline. Subsec. (a). Pub. L. 94-455, § 207(b)(2)(B), substitut- ed "subsection (c)" for "subsection (b)". Subsec. (b). Pub. L. 94-455, § 207(b)(1), added subsec. (b). Former subsec. (b) redesignated as (c) and amend- ed. Subsec. (c). Pub. L. 94-455, § 207(b)(1), redesignated subsec. (b) as (c) and in subsec. (c) as so redesignated added references to subsec. (b) and to orchards and vineyards and struck out provisions making particular references to citrus or almond groves planted or re- planted before Dec. 30, 1969, in the case of citrus groves, or before Dec. 30, 1970, in the case of almond groves. 1971-Pub. L. 91-680, § 1(b), added "and almond" fol- lowing "citrus" in the section catchline. Subsec. (a). Pub. L. 91-680, § l(a), added "or almond" following "citrus" wherever appearing therein. Subsec. (b). Pub. L. 91-680, § l(a), added "or almond" following "citrus". Subsec. (b)(2). Pub. L. 91-680, § 1(d), substituted "before (A) December 30, 1969, in the case of a citrus grove, or (B) December 30, 1970, in the case of an almond grove" for "prior to the enactment of this sec- tion". EFFECTIVE DATE OF 1976 AMENDMENT Section 207(b)(3) of Pub. L. 94-455 provided that: "The amendments made by this subsection [amending this section] shall apply to taxable years beginning after December 31, 1975. The amendments made by this subsection shall not apply in the case of a grove, orchard, or vineyard referred to in the amendment made by subsection (b)(1) [which redesignated subsec. (b) as (c), added subsec. (b), and amended subsec. (c) as so redesignated] which was planted or replanted on or before December 31, 1975. For purposes of the pre- ceding sentence, a tree or vine which, on or before De- cember 31, 1975, was planted at a place other than the grove, orchard, or vineyard of the taxpayer but which, on such date, was owned by the taxpayer (or with re- spect to which the taxpayer had a binding contract to purchase) shall be treated as planted on December 31, 1975, in the grove, orchard, or vineyard of the taxpay- er." EFFECTIVE DATE OF 1971 AMENDMENT Section 2 of Pub. L. 91-680 provided that: "The amendments made by the first section of this Act [amending this section] shall apply to taxable years beginning after the date of the enactment of this Act [Jan. 12, 1971]." EFFECTIVE DATE Section 216(c) of Pub. L. 91-172 provided that: "The amendments made by this section [enacting this sec- tion] shall apply to taxable years beginning after De- cember 31, 1969." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 464 of this title. § 279. Interest on indebtedness incurred by corpora- tion to acquire stock or assets of another corpo- ration (a) General rule No deduction shall be allowed for any interest paid or incurred by a corporation during the taxable year with respect to its corporate acqui- sition indebtedness to the extent that such in- terest exceeds- (1) $5,000,000, reduced by (2) the amount of interest paid or incurred by such corporation during such year on obli- gations (A) issued after December 31, 1967, to provide consideration for an acquisition de- scribed in paragraph (1) of subsection (b), but (B) which are not corporate acquisition in- debtedness. (b) Corporate acquisition indebtedness For purposes of this section, the term "corpo- rate acquisition indebtedness" means any obli- gation evidenced by a bond, debenture, note, or certificate or other evidence of indebtedness issued after October 9, 1969, by a corporation (hereinafter in this section referred to as "issu- ing corporation") if- (1) such obligation is issued to provide con- sideration for the acquisition of- (A) stock in another corporation (herein- after in this section referred to as "acquired corporation"), or (B) assets of another corporation (herein- after in this section referred to as "acquired corporation") pursuant to a plan under which at least two-thirds (in value) of all the assets (excluding money) used in trades and businesses carried on by such corpora- tion are acquired, (2) such obligation is either- (A) subordinated to the claims of trade creditors of the issuing corporation general- ly, or (B) expressly subordinated in right of payment to the payment of any substantial amount of unsecured indebtedness, whether outstanding or subsequently issued, of the issuing corporation, (3) the bond or other evidence of indebted- ness is either- (A) convertible directly or indirectly into stock of the issuing corporation, or (B) part of an investment unit or other ar- rangement which includes, in addition to such bond or other evidence of indebted- ness, an option to acquire, directly or indi- rectly, stock in the issuing corporation, and (4) as of a day determined under subsection (c)(1), either- (A) the ratio of debt to equity (as defined in subsection (c)(2)) of the issuing corpora- tion exceeds 2 to 1, or (B) the projected earnings (as defined in subsection (c)(3)) do not exceed 3 times the annual interest to be paid or incurred (de- termined under subsection (c)(4)). (c) Rules for application of subsection (b)(4) For purposes of subsection (b)(4)- Page 223 § 279
TITLE 26-INTERNAL REVENUE CODE (1) Time of determination Determinations are to be made as of the last day of any taxable year of the issuing corporation in which it issues any obligation to provide consideration for an acquisition de- scribed in subsection (b)(1) of stock in, or assets of, the acquired corporation. (2) Ratio of debt to equity The term "ratio of debt to equity" means the ratio which the total indebtedness of the issuing corporation bears to the sum of its money and all its other assets (in an amount equal to their adjusted basis for determining gain) less such total indebtedness. (3) Projected earnings (A) The term "projected earnings" means the "average annual earnings" (as defined in subparagraph (B)) of- (I) the issuing corporation only, if clause (ii) does not apply, or (ii) both the issuing corporation and the acquired corporation, in any case where the issuing corporation has acquired con- trol (as defined in section 368(c)), or has acquired substantially all of the proper- ties, of the acquired corporation. (B) The average annual earnings referred to in subparagraph (A) is, for any corpora- tion, the amount of its earnings and profits for any 3-year period ending with the last day of a taxable year of the issuing corpora- tion described in paragraph (1), computed without reduction for- (i) interest paid or incurred, (ii) depreciation or amortization allowed under this chapter, (iii) liability for tax under this chapter, and (iv) distributions to which section 301(c)(1) applies (other than such distri- butions from the acquired to the issuing corporation), and reduced to an annual average for such 3-year period pursuant to regulations pre- scribed by the Secretary. Such regulations shall include rules for cases where any cor- poration was not in existence for all of such 3-year period or such period includes only a portion of a taxable year of any corpora- tion. (4) Annual interest to be paid or incurred The term "annual interest to be paid or in- curred" means- (A) if subparagraph (B) does not apply, the annual interest to be paid or incurred by the issuing corporation only, determined by reference to its total indebtedness out- standing, or (B) if projected earnings are determined under clause (1i) of paragraph (3)(A), the annual interest to be paid or incurred by both the issuing corporation and the ac- quired corporation, determined by reference to their combined total indebtedness out- standing. (5) Special rules for banks and lending or finance companies With respect to any corporation which is a bank (as defined in section 581) or is primar- ily engaged in a lending or finance business- (A) in determining under paragraph (2) the ratio of debt to equity of such corpora- tion (or of the affiliated group of which such corporation is a member), the total in- debtedness of such corporation (and the assets of such corporation) shall be reduced by an amount equal to the total indebted- ness owed to such corporation which arises out of the banking business of such corpo- ration, or out of the lending or finance busi- ness of such corporation, as the case may be; (B) in determining under paragraph (4) the annual interest to be paid or incurred by such corporation (or by the issuing and acquired corporations referred to in para- graph (4)(B) or by the affiliated group of which such corporation is a member) the amount of such interest (determined with- out regard to this paragraph) shall be re- duced by an amount which bears the same ratio to the amount of such interest as the amount of the reduction for the taxable year under subparagraph (A) bears to the total indebtedness of such corporation; and (C) in determining under paragraph (3)(B) the average annual earnings, the amount of the earnings and profits for the 3-year period shall be reduced by the sum of the reductions under subparagraph (B) for such period. For purposes of this paragraph, the term "lending or finance business" means a busi- ness of making loans or purchasing or dis- counting accounts receivable, notes, or install- ment obligations. (d) Taxable years to which applicable In applying this section- (1) First year of disallowance The deduction of interest on any obligation shall not be disallowed under subsection (a) before the first taxable year of the issuing corporation as of the last day of which the application of either subparagraph (A) or subparagraph (B) of subsection (b)(4) results in such obligation being corporate acquisition indebtedness. (2) General rule for succeeding years Except as provided in paragraphs (3), (4), and (5), if an obligation is determined to be corporate acquisition indebtedness as of the last day of any taxable year of the issuing corporation, it shall be corporate acquisition indebtedness for such taxable year and all subsequent taxable years. (3) Redetermination where control, etc., is acquired If an obligation is determined to be corpo- rate acquisition indebtedness as of the close of a taxable year of the issuing corporation in which clause (i) of subsection (c)(3)(A) ap- plied, but would not be corporate acquisition indebtedness if the determination were made as of the close of the first taxable year of such corporation thereafter in which clause (ii) of subsection (c)(3)(A) could apply, such obligation shall be considered not to be corpo- rate acquisition indebtedness for such later taxable year and all taxable years thereafter. §279 Page 224
TITLE 26-INTERNAL REVENUE CODE (4) Special 3-year rule If an obligation which has been determined to be corporate acquisition indebtedness for any taxable year would not be such indebted- ness for each of any 3 consecutive taxable years thereafter if subsection (b)(4) were ap- plied as of the close of each of such 3 years, then such obligation shall not be corporate acquisition indebtedness for all taxable years after such 3 consecutive tcxable years. (5) 5 percent stock rule In the case of obligations issued to provide consideration for the acquisition of stock in another corporation, such obligations shall be corporate acquisition indebtedness for a tax- able year only if at some time after October 9, 1969, and before the close of such year the is- suing corporation owns 5 percent or more of the total combined voting power of all classes of stock entitled to vote of such other corpo- ration. (e) Certain nontaxable transactions An acquisition of stock of a corporation of which the issuing corporation is in control (as defined in section 368(c)) in a transaction in which gain or loss is not recognized shall be deemed an acquisition described in paragraph (1) of subsection (b) only if immediately before such transaction (1) the acquired corporation was in existence, and (2) the issuing corpora- tion was not in control (as defined in section 368(c)) of such corporation. (f) Exemption for certain acquisitions of foreign cor- porations For purposes of this section, the term "corpo- rate acquisition indebtedness" does not include any indebtedness issued to any person to pro- vide consideration for the acquisition of stock in, or assets of, any foreign corporation sub- stantially all of the income of which, for the 3- year period ending with the date of such acqui- sition or for such part of such period as the for- eign corporation was in existence, is from sources without the United States. (g) Affiliated groups In any case in which the issuing corporation is a member of an affiliated group, the applica- tion of this section shall be determined, pursu- ant to regulations prescribed by the Secretary, by treating all of the members of the affiliated group in the aggregate as the issuing corpora- tion, except that the ratio of debt to equity of, projected earnings of, and annual interest to be paid or incurred by any corporation (other than the issuing corporation determined without regard to this subsection) shall be included in the determinations required under subpara- graphs (A) and (B) of subsection (b)(4) as of any day only If such corporation is a member of the affiliated group on such day, and, in deter- mining projected earnings of such corporation under subsection (c)(3), there shall be taken into account only the earnings and profits of such corporation for the period during which it was a member of the affiliated group. For pur- poses of the preceding sentence, the term "af- filiated group" has the meaning assigned to such term by section 1504(a), except that all corporations other than the acquired corpora- tion shall be treated as includible corporations (without any exclusion under section 1504(b)) and the acquired corporation shall not be treat- ed as an includible corporation. (h) Changes in obligation For purposes of this section- (1) Any extension, renewal, or refinancing of an obligation evidencing a preexisting in- debtedness shall not be deemed to be the issu- ance of a new obligation. (2) Any obligation which is corporate acqui- sition indebtedness of the issuing corporation is also corporate acquisition indebtedness of any corporation which becomes liable for such obligation as guarantor, endorser, or in- demnitor or which assumes liability for such obligation in any transaction. (I) Certain obligations ii sued after October 9, 1969 For purposes of this section, an obligation shall not be corporate acquisition indebtedness If issued after October 9, 1969, to provide con- sideration for the acquisition of- (1) stock or assets pursuant to a binding written contract which was in effect on Octo- ber 9, 1969, and at all times thereafter before such acquisition, or (2) stock in any corporation where the issu- ing corporation, on October 9, 1969, and at all times thereafter before such acquisition, owned at least 50 percent of the total com- bined voting power nf all classes of stock enti- tled to vote of the acquired corporation. (j) Effect on other provisions No inference shall be drawn from any provi- sion in this section that any instrument desig- nated as a bond, debenture, note, or certificate or other evidence of indebtedness by its issuer represents an obligation or indebtedness of such issuer in applying any other provision of this title. (Added Pub. L. 91-172, title IV, §411(a), Dec. 30, 1969, 83 Stat. 604, and amended Pub. L. 94- 455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 94-514, § l(a), Oct. 15, 1976, 90 Stat. 2443.) AMENDMENTS 1976-Subsec. (c)(3)(B). Pub. L. 94-455 struck out "or his delegate" following "Secretary". Subsec. (g). Pub. L. 94-455 struck out "or his dele- gate" following "Secretary". Subsec. (I). Pub. L. 94-514 struck out provisions that par. (2) would cease to apply when (at any time on or after October 9, 1969) the issuing corporation has ac- quired control (as defined in section 368(c)) of the ac- quired corporation. EFFECTIVE DATE OF 1976 AMENDMENT Section l(b) of Pub. L. 94-514 provided that: "The amendment made by subsection (a) [amending subsec. (i) of this section] shall apply to taxable years ending after October 9, 1969. If refund or credit of any over- payment of income tax resulting from the amendment made by subsection (a) [amending subsec. (i) of this section] is prevented on the date of the enactment of this Act [Oct. 15, 1976], or at any time within one year after such date, by the operation of any law or rule of law, refund or credit of such overpayment may, never- theless, be made or allowed if claim therefor is filed within one year from such date." EFFECTIVE DATE Section 411(c) of Pub. L. 91-172 provided that: "The amendments made by this section [enacting this see- § 279 Page 225
TITLE 26-INTERNAL REVENUE CODE tion] shall apply to the determination of the allowabi- lity of the deduction of interest paid or incurred with respect to indebtedness Incurred after October 9, 1969." § 280. Certain expenditures incurred in production of films, books, records, or similar property (a) General rule Except in the case of a corporation (other than an electing small business corporation (as defined in section 1371(b)) or a personal hold- ing company (as defined in section 542)) and except in the case of production costs which are charged to capital account, amounts attribut- able to the production of a film, sound record- ing, book, or similar property which are other- wise deductible under this chapter shall be al- lowed as deductions only in accordance with the provisions of subsection (b). (b) Proration of production cost over income period Amounts referred to in subsection (a) are de- ductible only for those taxable years ending during the period during which the taxpayer reasonably may be expected to receive substan- tially all of the income he will receive from any such film, sound recording, book, or similar property. The amount deductible for any such taxable year is an amount which bears the same ratio to the sum of all such amounts (at- tributable to such film, sound recording, book, or similar property) as the income received from the property for that taxable year bears to the sum of the income the taxpayer may rea- sonably be expected to receive during such period. (c) Definitions For purposes of this section- (1) Film The term "film" means any motion picture film or video tape. (2) Sound recording The term "sound recording" means works that result from the fixation of a series of musical, spoken, or other sounds, regardless of the nature of the material objects, such as discs, tapes, or other phonorecordings, in which such sounds are embodied. (Added Pub. L. 94-455, title II, § 210(a), Oct. 4, 1976, 90 Stat. 1544.) EFFECTIVE DATE Section 210(c) of Pub. L. 94-455 provided that: "The amendment made by this section [enacting this sec- tion and amending the analysis of sections preceding section 261 of this title] applies to amounts paid or in- curred after December 31, 1975, with respect to prop- erty the principal production of which begins after December 31, 1975." § 280A. Disallowance of certain expenses in connec- tion with business use of home, rental of vaca- tion homes, etc. (a) General rule Except as otherwise provided in this section, in the case of a taxpayer who is an individual or an electing small business corporation, no de- duction otherwise allowable under this chapter shall be allowed with respect to the use of a dwelling unit which Is used by the taxpayer during the taxable year as a residence. (b) Exception for interest, taxes, casualty losses, etc. Subsection (a) shall not apply to any deduc- tion allowable to the taxpayer without regard to its connection with his trade or business (or with his income-producing activity). (c) Exceptions for certain business or rental use; limitation on deductions for such use (1) Certain business use Subsection (a) shall not apply to any item to the extent such item is allocable to a por- tion of the dwelling unit which is exclusively used on a regular basis- (A) as the taxpayer's principal place of business, (B) as a place of business which is used by patients, clients, or customers in meeting or dealing with the taxpayer in the normal course of his trade or business, or (C) in the case of a separate structure which is not attached to the dwelling unit, in connection with the taxpayer's trade or business. In the case of an employee, the preceding sentence shall apply only if the exclusive use referred to in the preceding sentence is for the convenience of his employer. (2) Certain storage use Subsection (a) shall not apply to any item to the extent such item is allocable to space within the dwelling unit which is used on a regular basis as a storage unit for the inven- tory of the taxpayer held for use in the tax- payer's trade or business of selling products at retail or wholesale, but only if the dwelling unit is the sole fixed location of such trade or business. (3) Rental use Subsection (a) shall not apply to any item which is attributable to the rental of the dwelling unit or portion thereof (determined after the application of subsection (e)). (4) Limitation on deductions In the case of a use described in paragraph (1) or (2), and in the case of a use described in paragraph (3) where the dwelling unit is used by the taxpayer during the taxable year as a residence, the deductions allowed under this chapter for the taxable year by reason of being attributed to such use shall not exceed the excess of- (A) the gross income derived from such use for the taxable year, over (B) the deductions allocable to such use which are allowable under this chapter for the taxable year whether or not such unit (or portion thereof) was so used. (d) Use as residence (1) In general For purposes of this section, a taxpayer uses a dwelling unit during the taxable year as a residence if he uses such unit (or portion thereof) for personal purposes for a number of days which exceeds the greater of- (A) 14 days, or (B) 10 percent of the number of days during such year for which such unit is rented at a fair rental. For purposes of subparagraph (B), a unit shall not be treated as rented at a fair rental § 280 Page 226
TITLE 26-INTERNAL REVENUE CODE for any day for which it is used for personal purposes. (2) Personal use of unit For purposes of this section, the taxpayer shall be deemed to have used a dwelling unit for personal purposes for a day if, for any part of such day, the unit is used- (A) for personal purposes by the taxpayer or any other person who has an interest in such unit, or by any member of the family (as defined in section 267(c)(4)) of the tax- payer or such other person; (B) by any individual who uses the unit under an arrangement which enables the taxpayer to use some other dwelling unit (whether or not a rental is charged for the use of such other unit); or (C) by any individual (other than an em- ployee with respect to whose use section 119 applies), unless for such day the dwelling unit is rented for a rental which, under the facts and circumstances, is fair rental. The Secretary shall prescribe regulations with respect to the circumstances under which use of the unit for repairs and annual maintenance will not constitute personal use under this paragraph. (e) Expenses attributable to rental (1) In general In any case where a taxpayer who is an in- dividual or an electing small business corpora- tion uses a dwelling unit for personal pur- poses on any day during the taxable year (whether or not he is treated under this sec- tion as using such unit as a residence), the amount deductible under this chapter with respect to expenses attributable to the rental of the unit (or portion thereof) for the tax- able year shall not exceed an amount which bears the same relationship to such expenses as the number of days during each year that the unit (or portion thereof) is rented at a fair rental bears to the total number of days during such year that the unit (or portion thereof) is used. (2) Exception for deductions otherwise allowable This subsection shall not apply with respect to deductions which would be allowable under this chapter for the taxable year whether or not such unit (or portion thereof) was rented. (f) Definitions and special rules (1) Dwelling unit defined For purposes of this section- (A) In general The term "dwelling unit" includes a house, apartfment, condominium, mobile home, boat, or similar property, and all structures or other property appurtenant to such dwelling unit. (B) Exception The term "dwelling unit" does not include that portion of a unit which is used exclu- sively as a hotel, motel, inn, or similar es- tablishment. (2) Personal use by electing small business corpora- tion In the case of an electing small business corporation, subparagraphs (A) and (B) of subsection (d)(2) shall be applied by substi- tuting "any shareholder of the electing small business corporation" for "the taxpayer" each place it appears. (3) Coordination with section 183 If subsection (a) applies with respect to any dwelling unit (or portion thereof) for the tax- able year- (A) section 183 (relating to activities not engaged in for profit) shall not apply to such unit (or portion thereof) for such year, but (B) such year shall be taken into account as a taxable year for purposes of applying subsection (d) of section 183 (relating to 5- year presumption). (g) Special rule for certain rental use Notwithstanding any other provision of this section or section 183, if a dwelling unit is used during the taxable year by the taxpayer as a residence and such dwelling unit is actually rented for less than 15 days during the taxable year, then- (1) no deduction otherwise allowable under this chapter because of the rental use of such dwelling unit shall be allowed, and (2) the income derived from such use for the taxable year shall not be included in the gross income of such taxpayer under section 61. (Added Pub. L. 94-455, title VI, § 601(a), Oct. 4, 1976, 90 Stat. 1569.) EFFECTIVE DATE Section 601tc) of Pub. L. 94-455 provided that: "The amendments made by this section [enacting this sec- tion and amending the analysis of sections preceding section 261 of this title] shall apply to taxable years beginning after December 31, 1975." § 280B. Demolition of certain historic structures (a) General rule In the case of the demolition of a certified historic structure (as defined in section 191(d)(1))- (1) no deduction otherwise allowable under this chapter shall be allowed to the owner or lessee of such structure for- (A) any amount expended for such demo- lition, or (B) any loss sustained on account of such demolition; and (2) amounts described in paragraph (1) shall be treated as properly chargeable to capital account with respect to the land on which the demolished structure was located. (b) Special rule for Registered Historic Districts For purposes of this section, any building or other structure located in a Registered Historic District shall be treated as a certified historic structure unless the Secretary of the Interior has certified, prior to the demolition of such structure, that such structure is not of historic significance to the district. (Added Pub. L. 94-455, title XXI, §2124(b)(1), Oct. 4, 1976, 90 Stat. 1918.) EFFECTIVE DATE Section 2124(b)(3) of Pub. L. 94-455 provided that: "The amendments made by this subsection [enac';ing Page 227 § 280B
TITLE 26-INTERNAL REVENUE CODE this section and amending the analysis of sections pre- ceding section 261 of this title] shall apply with re- spect to demolitions commencing after June 30, 1976, and before January 1, 1981." PART X-TERMINAL RAILROAD CORPO- RATIONS AND THEIR SHAREHOLDERS Sec. 281. Terminal railroad corporations and their share- holders. AMENDMENTS 1962-Pub. L. 87-870, § 1(a), Oct. 23, 1962, 76 Stat. 1158, added Part X and item 281. § 281. Terminal railroad corporations and their share- holders (a) Computation of taxable income of terminal rail. road corporations (1) In general In computing the taxable income of a ter- minal railroad corporation- (A) such corporation shall not be consid- ered to have received or accrued- (1) the portion of any liability of any railroad corporation, with respect to relat- ed terminal services provided by such cor- poration, which is discharged by crediting such liability with an amount of related terminal income, or (it) the portion of any charge which would be made by such corporation for re- lated terminal services provided by it, but which is not made as a result of taking re- lated terminal income into account in computing such charge; and (B) no deduction otherwise allowable under this chapter shall be disallowed as a result of any discharge of liability described in subparagraph (A)(i) or as a result of any computation of charges in the manner de- scribed in subparagraph (A)(ii). (2) Limitation In the case of any taxable year ending after the date of the enactment of this section, paragraph (1) shall not apply to the extent that it would (but for this paragraph) operate to create (or increase) a net operating loss for the terminal railroad corporation for the tax- able year. (b) Computation of taxable income of shareholders Subject to the limitation in subsection (a)(2), in computing the taxable income of any share- holder of a terminal railroad corporation, no amount shall be considered to have been re- ceived or accrued or paid or incurred by such shareholder as a result of any discharge of li- ability described in subsection (a)(1)(A)(i) or as a result of any computation of charges in the manner described in subsection (a)(1)(A)(ii). (c) Agreement required In the case of any taxable year, subsections (a) and (b) shall apply with respect to any dis- charge of liability described in subsection (a)(1)(A)(l), and to any computation of charges in the manner described in subsection (a)(1)(A)(ii), only if such discharge or computa- tion (as in the case may be) was provided for in a written agreement, to which all of the share- holders of the terminal railroad corporation were parties, entered into before the beginning of such taxable year. (d) Definitions For purposes of this section- (1) Terminal railroad corporation The term "terminal railroad corporation" means a domestic railroad corporation which Is not a member, other than as a common parent corporation, of an affiliated group (as defined in section 1504) and- (A) all of the shareholders of which are domestic railroad corporations subject to part I of the Interstate Commerce Act (49 U.S.C. 1 and following); (B) the primary business of which is the providing of railroad terminal and switch- ing facilities and services to domestic rail- road corporations subject to part I of the Interstate Commerce Act and to the ship- pers and passengers of such railroad corpo- rations; (C) a substantial part of the services of which for the taxable year is rendered to one or more of its shareholders; and (D) each shareholder of which computes its taxable income on the basis of a taxable year beginning or ending on the same day that the taxable year of the terminal rail- road corporation begins or ends. (2) Related terminal income The term "related terminal income" means the income (determined in accordance with regulations prescribed by the Secretary) of a terminal railroad corporation derived- (A) from services or facilities of a charac- ter ordinarily and regularly provided by ter- minal railroad corporations for railroad cor- porations or for the employees, passengers, or shippers of railroad corporations; (B) from the use by persons other than railroad corporations of portions of a facili- ty, or a service which is used primarily for railroad purposes; (C) from any railroad corporation for ser- vices or facilities provided by such terminal railroad corporation in connection with rail- road operations; and (D) from the United States in payment for facilities or services in connection with mail handling. For purposes of subparagraph (B), a substan- tial addition, constructed after the date of the enactment of this section, to a facility shall be treated as a separate facility. (3) Related terminal services The term "related terminal services" in- cludes only services, and the use of facilities, taken into account in computing related ter- minal income. (e) Regulations The Secretary shall prescribe such regula- tions as may be necessary to carry out the pur- poses of this section. (Added Pub. L. 87-870, § 1(a), Oct. 23, 1962, 76 Stat. 1158, and amended Pub. L. 94-455, title XIX, §§ 1901(a)(40), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1771, 1834.) Page 228
TITLE 26-INTERNAL REVENUE CODE REFERENCES IN TEXT The date of the enactment of this section, referred to in subsecs. (a)(2), (d)(2), refers to the date of enact- ment of Pub. L. 87-870, which was approved Oct. 23, 1962. The Interstate Commerce Act, referred to in subsec. (d)(1)(A), (B), is act Feb. 4, 1887, ch. 104, 24 Stat. 379, as amended. Part I of the Interstate Commerce Act is classified generally to chapter I (§ 1 et Feq.) of Title 49, Transportation. For complete classification of this Act to the Code, see note captioned Interstate Commerce Act set out under section 27 of Title 49 and Tables volume. AMENDMENTS 1976-Sub&ec. (d)(1)(A). Pub. L. 94-455, §1901(a) (40)(A), added "(49 U.S.C. 1 and following)" after "In- terstate Commerce Act". Subsec. (e). Pub. L. 94-455, §§ 1901(a)(40)(B), 1906(b)(13)(A), redesignated subsec. (f) as (e) and in subsec. (e) as so redesignated struck out "or his dele- gate" following "Secretary". Former subsec. (e), which made special provision for the application of this sec- tion to taxable years ending before Oct. 23, 1962, was struck out. Subsec. (f). Pub. L. 94-4.5, § 1901(a)(40)(B), redesig- nated subsec. (f) as (e). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (d)(1)(A), (e), (f) by section 1901(a)(40) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE Section 2(a) of Pub. L. 87-870 provided that: "The amendments made by the first section of this Act [en- acting this section] shall apply with respect to taxable years beginning after December 31, 1953, and ending after August 16, 1954." INTERNAL REVENUE CODE OF 1939; INCLUSION OF TERmI- NAL RAILROAD CORPORATIONS AND THEIR SHAREHOLD- ERS PROVISION Section 2(b) of Pub. L. 87-870 provided that: "Provi- sions having the same effect as section 281 of the In- ternal Revenue Code of 1954 (as added by the first sec- tion of this Act) [this section] shall be deemed to be included in the Internal Revenue Code of 1939, effec- tive with respect to all taxable years to which such Code applies." Subchapter C-Corporate Distributions and Adjustments Part I. Distributions by corporations. II. Corporate liquidations. III. Corporate organizations and reorganizations. IV. Insolvency reorganizations. V. Carryovers. VI. Treatment of certain corporate interests as stock or Indebtedness. EVII. Repealed.] AMENDMENTS 1976-Pub. L. 94-455, title XIX, § 1901(b)(15), Oct. 4. 1976, 90 Stat. 1796 struck out Part VII "Effective date of subehapter C." 1969-Pub. L. 91-172, title IV, § 415(b), Dec. 30, 1969, 83 Stat. 614, redesignated former Part VI as Part VII and added Part VI. SUBCHAPTER REFERRED TO IN OTHER SECTIONS This subchapter is referred to in sections 997, 1011, 1012, 1016, 1081 of this title. PART I-DISTRIBUTIONS BY CORPORATIONS Subpart A. Effects on recipients. B. Effects on corporation. C. Definitions; constructive ownership of stock. SUBPART A-EFFECTS ON RECIPIENTS Sec. 301. Distributions of property. 302. Distributions in redemption of stock. .03. Distributions in redemption of stock to pay death taxes. 304. Redemption through use of related corporations. 305. Distributions of stock and stock rights. 306. Dispositions of certain stock. 307. Basis of stock and stock rights acquired in distri- butions. § 301. Distributions of property (a) In general Except as otheiwise provided in this chapter, a distribution of property (as defined in section 317(a)) made by a corporation to a shareholder with respect to its stock shall be treated in the manner provided in subsection (c). (b) Amount distributed (1) General rule For purposes of this section, the amount of any distribution shall be- (A) Noncorporate distributees If the shareholder is not a corporation, the amount of money received, plus the fair market value of the other property re- ceived. (B) Corporate distributees If the shareholder is a corporation, unless subparagraph (D) applies, the amount of money received, plus whichever of the fol- lowing is the lesser; (I) the fair market value of the other property received; or (ii) the adjusted basis (in the hands of the distributing corporation immediately before the distribution) of the other prop- erty received, increased in the amount of gain to the distributing corporation v. Ich is recognized under subsection (b), (c), or (d) of section 311, under section' 341.f), or under section 617(d)(1), 1245(a). 1250(a), 1251(c), 1252(a), or 1254(a). (C) Certain corporate dintributees of foreign cor- poration Notwithstanding subparagraph (B), if the shareholder is a corporation and the distrib- uting corporation is a foreign corporation, the amount taken into account with respect to property (other than money) shall be the fair market value of such property; except that if any deduction is allowable under sec- tion 245 with respect to such distribution, then the amount taken into account shall be the sum (determined under regulations prescribed by the Secretary) of- (I) the proportion of the adjusted basis of such property (or, if lower, Its fair market value) properly attributable to gross income which is effectively connect- ed with the conduct of a trade or business within the United States, and (ii) the proportion of the fair market value of such property properly attribut- 71-999 0 - 78 -17 (Vol. 7) Page 229
TITLE 26-INTERNAL REVENUE CODE able to gross income which is not effec- tively connected with the conduct of a trade or business within the United States. For purposes of clause (i), the gross income of a foreign corporation for any period before its first taxable year beginning after December 31, 1966, which is effectively con- nected with the conduct of a trade or busi- ness within the United States is an amount equal to the gross income for such period from sources within the United States. For purposes of clause (ii), the gross income of a foreign corporation for any period before its first taxable year beginning after De- cember 31, 1966, which is not effectively connected with the conduct of a trade or business within the United States is an amount equal to the gross income for such period from sources without the United States. (D) Foreign corporate distributees In the case of a distribution to a share- holder which is a foreign corporation, if Cie amount received by the foreign corporation is not effectively connected with the con- duct by it of a trade or business within the United States, the amount of the money re- ceived, plus the fair market value of the other property received. (2) Reduction for liabilities The amount of any distribution determined under paragraph (1) shall be reduced (but not below zero) by- (A) the amount of any liability of the cor- poration assumed by the shareholder in connection with the distribution, and (B) the amount of any liability to which the property received by the shareholder is subject immediately before, and immediate- ly after, the distribution. (3) Determination of fair market value For purposes of this section, fair market value shall be determined as of the date of the distribution. (c) Amount taxable In the case of a distribution to which subsec. tion (a) applies- (1) Amount constituting dividend That portion of the distribution which is a dividend (as defined in section 316) shall be included in gross income. (2) Amount applied against basis That portion of the distribution which is not a dividend shall be applied against and reduce the adjusted basis of the stock. (3) Amount in excess of basis (A) In general Except as provided in subparagraph (B), that portion of the distribution which is not a dividend, to the extent that it exceeds the adjusted basis of the stock, shall be treated as gain from the sale or exchange of proper- ty. (B) Distributions out of increase in value accrued before March 1, 1913 That portion of the distribution which is not a dividend, to the extent that it exceeds the adjusted basis of the stock and to the extent that it is out of increase in value ac- crued before March 1, 1913, shall be exempt from tax. (d) Basis The basis of property received in a distribu- tion to which subsection (a) applies shall be- (1) Noncorporate distributees If the shareholder is not a corporation, the fair market value of such property. (2) Corporate distributees If the shareholder is a corporation, unless paragraph (3) applies, whichever of the fol- lowing is the lesser: (A) the fair market value of such proper- ty; or (B) the adjusted basis (in the hands of the distributing corporation immediately before the distribution) of such property, in- creased in the amount of gain to the distrib- uting corporation which is recognized under subsection (b), (c), or (d) of section 311, under section 341(f), or under section 617(d)(1), 1245(a), 1250(a), 1251(c), 1252(a), or 1254(a). (3) Foreign corporate distributees In the case of a distribution of property to a shareholder which is a foreign corporation, if the amount received by the foreign corpora- tion is not effectively connected with the con- duct by it of a trade or business within the United States, the fair market value of the property received. (4) Certain corporate distributees of foreign corpo. ration In the case of property described in subpar- agraph (C) of s ibsection (b)(1), the basis shall be determned by substituting the amount determined under such subparagraph (C) for the amount described in paragraph (2) of this subsection. (e) Special rules (1) For distributions in redemption of stock, see sec- tion 302. (2) For distributions in partial or complete liquidation, see part 11 (sec. 331 and following). (3) For distributions in corporate organizations and re. organizations, see part III (sec. 351 and following). (4) For partial exclusion from gross income of divi- dends received by individuals, see section 116. (Aug. 16, 1954, ch. 736, 68A Stat. 84; Feb. 2, 1962, Pub. L. 87-403, § 2(a), 76 Stat. 5; Oct. 16, 1962, Pub. L. 87-834, §§ 5(a), (b), 13(f)(2), 76 Stat. 977, 1035; Feb. 26, 1964, Pub. L. 88-272, title II, § 231(b)(2), 78 Stat. 105; Aug. 22, 1964, Pub. L. 88-484, § 1(b)(1), 78 Stat. 597; Sept. 12, 1966, Pub. L. 89-570, § 1(b)(2), 80 Stat. 762; Nov. 13, 1966, Pub. L. 89-809, title I, § 104(f), 80 Stat. 1559; Dec. 30, 1969, Pub. L. 91-172, title II, § 211(b)(1), (2), title IX, § 905(b)(2), 83 Stat. 570, 714; Dec. 10, 1971, Pub. L. 92-178, title III, § 312(a), 85 Stat. 526; Oct. 4, 1976, Pub. L. 94- 455, title II, § 205(c)(1)(B), (C), title XIX, § 1901(a)(41), (b)(32)(A), 1906(b)(13)(A), 90 Stat. 1535, 1771, 1800, 1834.) § 301 Page 230
TITLE 26-INTERNAL REVENUE CODE AMENDMENTS 1976-Subsec. (b)(1)(B)(ii). Pub. L. 94-455. § 205(c)(1)(B), substituted "1252(a), or 1254(a)" for "or 1252(a)". Subsec. (b)(1)(C). Pub. L. 94.455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (d)(2)(B). Pub. L. 94-455, § 205(c)(1)(C), sub. stituted "1252(a), or 1254(a)" for "or 1252(a)". Subsec. (e). Pub. L. 94-455, § 1901(a)(41), (b)(32)(A), redesignated former subsec. (g) as (e). Former subsec. (e), which related to exceptions for certain distribu- tions by personal service corporations, was struck out. Subsec. (f). Pub. L. 94-455, § 1901(b)(32)(A), struck out subsec. (f), which related to special rules for distri- bution of antitrust stock to corporations. Subsec. (g). Pub. L. 94.-455, § 1901(b)(32)(A), redesig- nated subsec. (g) as (e). 1971-Subsec. (b)(1)(B). Pub. L. 92-178, §312(a)(1), substituted "corporation, unless subparagraph (D) ap- plies" for "corporation" where first appearing. Subsec. (b)(1)(D). Pub. L. 92-178, §312(a)(2), added subpar. (D). Subsec. (d)(2). Pub. L. 92-178, § 312(a)(3), substituted "corporation, unless paragraph (3) applies" for "corpo- ration" where first appearing. Subsec. (d)(3). Pub. L. 92-178, § 312(a)(4), added par. (3). Former par. (3) redesignated (4). Subsec. (d)(4). Pub. L. 92-178, § 312(a)(4). redesignat- ed former par. (3) as (4). 1969-Subsec. (b)(1)(B)(ii). Pub. L. 91-172, §§ 211(b)(1), 905(b)(2), substituted "1250(a), 1251(c), or 1252(a)" for "or 1250(a)" and inserted reference to sec- tion 311(a). Subsec. (d)(2)(B). Pub. L. 91-172, §§211(b)(2), 905(b)(2). substituted "1250(a), 1251(c), or 1252(a)", for "or 1250(a)" and inserted reference to section 311(a). 1966-Subsec. (b)(1)(B)(ii). Pub. L. 89-570 included reference to section 617(d)(1). Subsec. (b)(1)(C). Pub. L. 89-809 substituted "gross income which is effectively connected with the con- duct of a trade or business within the United States" for "gross income from sources within the United States" in clause (i), "gross income which is not effec- tively connected with the conduct of a trade or busi- ness within the United States" for "gross income from sources without the United States" in clause (ii), and added material following clause (ii) setting out the treatment to be accorded gross income for any period before the first taxable year beginning after December 31, 1966. Subrec. (d)(2)(B). Pub. L. 89-570 included reference to section 617(d)(1). 1964-Subsec. (b). Pub. L. 88-484 included the amount of the gain recognized under section 341(f). Pub. L. 88-272 inserted reference to section 1250(a). Subsec. (d). Pub. L. 88-484 included the amount of the gain recognized under section 341(f). Pub. L. 88-272 inserted reference to section 1250(a). 1962-Subsec. (b)(1)(B). Pub. L. 87-834, § 13(f)(2), substituted "subsection (b) or (c) of section 311 or under section 1245(a)" for "subsection (b) or (c) of sec- tion 311". Subsec. (b)(1)(C). Pub. L. 87-834, § 5(a), added subsec. (b)(1)(C). Subsec. (d)(2). Pub. L. 87-834, § 13(f)(2), substituted "subsection (b) or (c) of section 311 or under section 1245(a)" for "subsection (b) or (c) of section 311". Subsec. (d)(3). Pub, L. 87-834, § 5(b). added subsec. (d)(3). Subsec. (f). Pub. L. 87-403 added subsec. (f). Former subsec. (fM redesignated (g). Subsec. (g). Pub. L. 87-403 redesignated former subsec. (M) as (g). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (b)(1)(B)(ii), (d)(2)(B) by section 205(c)(1)(B), (C) of Pub. L. 94-455 effective for taxable years ending after Dec. 31, 1975, see section 205(e) of Pub. L. 94-455, set out as an Effective Date note under section 1254 of this title. Amendment of subsecs. (c), (f), (g) by section 1901 (a)(41). (b)(32)(A) of Pub. L. 94-455 effective for tax- able years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455. set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIvE DATE OF 1971 AMENDMENT Section 412(b) of Pub. L. 92-178 provided that: "The amendments made by subsection (a) [to this section] shall apply with respect to distributions made after November 8, 1971." EFFECTIVE D/TE OF 1969 AMENDMENT Amendment of sub.cecs. (b) and (d) by section 211(b) (1), (2) of Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1969, see section 211(c) of Pub. L. 91-172, set o it as an Effective Date note under section 1251 of this itle. , Amendment of iubsecs. (b) and (d) by section 905(b)(2) of Pub. L 91-172 effective with respect to distributions made after Nov. 30, 1969, see section 905(c) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 311 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-809 applicable with re- spect to taxable years beginning after Dec. 31, 1966, see section 104(n) of Pub. L. 89-809, set out as an Ef- fective Date of 1966 Amendment note under section 11 of this title. Amendment by Pub. L. 89-570 applicable to taxable years ending after Sept. 12, 1966, but only in respect of expenditures paid or incurred after such date, see section 3 of Pub. L. 89-570, set out as an Effective Date note under section 617 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-484 applicable with re- spect to transactions after Aug. 22, 1964, in taxable years ending after such date, see section 2 of Pub. L. 88-484, set out as an Effective Date of 1964 Amend- ment note under section 341 of this title. Amendment by Pub. L. 88-272 applicable to dispobi- tions after Dec. 31, 1963, in taxable years ending after such date, see section 231(c) of Pub. L. 88-272, set out as an Effective Date note under section 1250 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Amendment of subsecs. (b)(1)(B), (d)(2) of this sec- tion by Pub. L. 87-834 applicable to taxable years be- ginning after Dec. 31, 1962, see section 13(g) of Pub. L. 87-834, set out as an Effective Date note under section 1245 of this title. Section 5(d) of Pub. L. 87-834 provided that: "The amendments made by this section [adding subsecs. (b)(1)(C) and (d)(3) of this section and amending sec- tion 245 of this title) shall apply to distributions made after December 31, 1962." Section 2(b) of Pub. L. 87-403 provided that: "The amendments made by ths section [to subsecs. (f) and (g) of this section] shall apply only with respect to dis- tributions made after the date of the enactment of this Act [Feb. 2, 1962]." CROSS REFERENCES Collapsible corporations, treatment of gain to share- holders, see section 341 of this title. Controlled corporations, additional consideration re- ceived in distribution of stock and securities, see sec- tion 356 of this title. Disposition of "section 306 stock" as a redemption, see section 306 of this title. Dividend, definition of, see section 316. Gain or loss on disposition of property, generally, see section 1001 et seq. of this title. Non-application of section to distributions of proper- ty in corporate liquidation, see section 331 of this title. Stock and stock rights, see section 305 of this title. Page 231 § 301
TITLE 26-INTERNAL REVENUE CODE SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 245, 279, 302, 305. 306, 316, 317, 331, 341, 356, 877, 1024, 2107, 2501 of this title. § 302. Distributions in redemption of stock (a) General rule If a corporation redeems its stock (within the meaning of section 317(b)), and if paragraph (1), (2), (3), or (4) of subsection (b) applies, such redemption shall be treated as a distribution in part or full payment in exchange for the stock. (b) Redemptions treated as exchanges (1) Redemptions not equivalent to dividends Subsection (a) shall apply if the redemption is not essentially equivalent to a dividend. (2) Substantially disproportionate redemption of stock (A) In general Subsection (a) shall apply if the distribu- tion is substantially disproportionate with respect to the shareholder. (B) Limitation This paragraph shall not apply unless im- mediately after the redemption the share- holder owns less than 50 percent of the total combined voting power of all classes of stock entitled to vote. (C) Definitions For purposes of this paragraph, the distri- bution is substantially disproportionate if- (i) the ratio which the voting stock of the corporation owned by the shareholder immediately after the redemption bears to all of the voting stock of the corpora- tion at such time, is less than 80 percent of- (ii) the ratio which the voting stock of the corporation owned by the shareholder immediately before the redemption bears to all of the voting stock of the corpora- tion at such time. For purposes of this paragraph, no distribu- tion shall be treated as substantially dispro- portionate unless the shareholder's owner- ship of the common stock of the corpora- tion (whether voting or nonvoting) after and before redemption also meets the 80 percent requirement of the preceding sen- tence. For purposes of the preceding sen- tence, if there is more than one class of common stock, the determinations shall be made by reference to fair market value. (D) Series of redemptions This paragraph shall not apply to any re- demption made pursuant to a plan the pur- pose or effect of which is a series of re- demptions reulting in a distribution which (in the aggregate) is not substantially dis- proportionate with respect to the share- holder. (3) Termination of shareholder's interest Subsection (a) shall apply if the redemption is in complete redemption of all of the stock of the corporation owned by the shareholder, (4) Stock issued by railroad corporations In certain reorganizations Subsection (a) shall apply if the redemption is of stock issued by a railroad corporation (as defined in section 77(m) of the Bankruptcy Act, as amended) pursuant to a plan of reor- ganization under section 77 of the Bankrupt- cy Act. (5) Application of paragraphs In determining whether a redemption meets the requirements of paragraph (1), the fact that such redemption fails to meet the requirements of paragraph (2), (3), or (4) shall not be taken into account. If a redemp- tion meets the requirements of paragraph (3) and also the requirements of paragraph (1), (2), or (4), then so much of subsection (c)(2) as would (but for this sentence) apply in re- spect of the acquisition of an interest in the corporation within the 10-year period begin- ning on the date of the distribution shall not apply. (c) Constructive ownership of stock (1) In general Except as provided in paragraph (2) of this subsection, section 318(a) shall apply in deter- mining the ownership of stock for purposes of this section. (2) For determining termination of interest (A) In the case of a distribution described in subsection (b)(3), section 318(a)(1) shall not apply if- (i) immediately after the distribution the distributee has no interest in the cor- poration (including an interest as officer, director, or employee), other than an in- terest as a creditor, (ii) the distributee does not acquire any such interest (other than stock acquired by bequest or inheritance) within 10 years from the date of such distribution, and (iII) the distributee, at such time and in such manner as the Secretary by regula- tions prescribes, files an agreement to notify the Secretary of any acquisition de- scribed in clause (i) and to retain such re- cords as may be necessary for the applica- tion of this paragraph. If the distributee acquires such an interest in the corporation (other than by bequest or inheritance) within 10 years from the date of the distribution, then the periods of limitation provided in sections 6501 and 6502 on the making of an assessment and the collection by levy or a proceeding in court shall, with respect to any deficiency (including interest and additions to the tax) resulting from such acquisition, include one year immediately following the date on which the distributee (in accordance with regulations prescribed by the Secretary) no- tifies the Secretary of such acquisition; and such assessment and collection may be made notwithstanding any provision of law or rule of law which otherwise would pre- vent such assessment and collection. (B) Subparagraph (A) of this paragraph shall not apply if- (I) any portion of the stock redeemed was acquired, directly or indirectly, within Page 232 § 302
TITLE 26-INTERNAL REVENUE CODE the 10-year period ending on the date of the distribution by the distributee from a person the ownership of whose stock would (at the time of distribution) be at- tributable to the distributee under section 318(a), or (i1) any person owns (at the time of the distribution) stock the ownership of which is attributable to the distributee under section 318(a) and such person ac- quired any stock in the corporation, di- rectly or indirectly, from the distributee within the 10-year period ending on the date of the distribution, unless such stock so acquired from the distributee is re- deemed in the same transaction. The preceding sentence shall not apply If the acquisition (or, in the case of clause (ii), the disposition) by the distributee did not have as one of its principal purposes the avoidance of Federal income tax. (d) Redemptions treated as distributions of property Except as otherwise provided in this sub- chapter, if a corporation redeems its stock (within the meaning of section 317(b)), and if subsection (a) of this section does not apply, such redemption shall be treated as a distribu- tion of property to which section 301 applies. (e) Cross references For special rules relating to redemption- (1) Death Taxes.-Of stock to pay death taxes, see sec. tion 303. (2) Section 306 Stock.-Of section 306 stock, see sec. tion 306. (3) Llquldations.-Of stock in partial or complete liq- uidation, see section 331. (Aug. 16, 1954, ch. 736, 68A Stat. 85; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) REFERENCES IN TEXT Section 77 of the Bankruptcy Act, referred to in subsec. (b)(4), is classified to section 205 of Title 11, Bankruptcy. AMENDMENTS 1976-Subsec. (c)(2). Pub. L. 94-455 struck out "or his delegate" following "Secretary" wherever appear- ing. SAVINGS PROVISIONS Applicability of subsec. (b)(1) to the determination of gross investment income under sections 4940 and 4948(a) of this title, see section 101(l)(8) of Pub. L. 91- 172, set out as a Savings Provisions note under section 4940 of this title. CROSS REFERENCES Disposition of stock to which this section applies, see section 306 of this title. Distribution of property, see section 301 of this title. Earnings and profits, special rule for certain re- demptions, see section 312 of this title. Partial liquidation defined, treatment of certain re- demptions, see section 346 of this title. Redemption through use of related corporations, see section 304 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 48, 301, 304, 306, 311, 312, 318, 346, 1246, 1248 of this title. § 303. Distributions in redemption of stock to pay death taxes (a) In general A distribution of property to a shareholder by a corporation in redemption of part or all of the stock of such corporation which (for Feder- al estate tax purposes) is included in determin- ing the gross estate of a decedent, to the extent that the amount of such distribution does not exceed the sum of- (1) the estate, inheritance, legacy, and suc- cession taxes (including any interest collected as a part of such taxes) imposed because of such decedent's death, and (2) the amount of funeral and administra- tion expenses allowable as deductions to the estate under section 2053 (or under section 2106 in the case of the estate of a decedent nonresident, not a citizen of the United States), shall be treated as a distribution in full pay- ment in exchange for the stock so redeemed. (b) Limitations on application of subsection (a) (1) Period for distribution Subsection (a) shall apply only to amounts distributed after the death of the decedent and- (A) within the period of limitations pro- vided in section 6501(a) for the assessment of the Federal estate tax (determined with- out the application of any provision other than section 6501(a)), or within 90 days after the expiration of such period, (B) if a petition for redetermination of a deficiency in such estate tax has been filed with the Tax Court within the time pre- scribed in section 6213, at any time before the expiration of 60 days after the decision of the Tax Court becomes final, or (C) if an election has been made under section 6166 or 6166A and if the time pre- scribed by this subparagraph expires at a later date than the time prescribed by sub- paragraph (B) of this paragraph, within the time determined under section 6166 or 6166A for the payment of the installments. (2) Relationship of stock to decedent's estate (A) In general Subsection (a) shall apply to a distribu- tion by a corporation only if the value (for Federal estate tax purposes) of all of the stock of such corporation which is included in determining the value of the decedent's gross estate exceeds 50 percent of the excess of- (I) the value of the gross estate of such decedent, over (ii) the sum of the amounts allowable as a deduction under section 2053 or 2054. (B) Special rule for stock of two or more corpo- rations For purposes of the 50 percent require- ments of subparagraph (A), stock of two or more corporations, with respect to each of which there Is Included in determining the value of the decedent's gross estate more than 75 percent in value of the outstanding stock, shall be treated as the stock of a single corporation. For the purpose of the Page 233 § 303
TITLE 26-INTERNAL REVENUE CODE 75 percent requirement of the preceding sentence, stock which, at the decedent's death, represents the surviving spouse's in- terest in property held by the decedent and the surviving spouse as community property shall be treated as having been included in determining the value of the decedent's gross estate. (3) Relationship of shareholder to estate tax Subsection (a) shall apply to a distribution by a corporation only to the extent that the interest of the shareholder is reduced directly (or through a binding obligation to contrib- ute) by any payment of an amount described in paragraph (1) or (2) of subsection (a). (4) Additional requirements for distributions made more than 4 years after decedent's death In the case of amounts distributed more than 4 years after the date of the decedent's death, subsection (a) shall apply to a distribu- tion by a corporation only to the extent of the lesser of- (A) the aggregate of the amounts referred to in paragraph (1) or (2) of subsection (a) which remained unpaid immediately before the distribution, or (B) the aggregate of the amounts referred to in paragraph (1) or (2) of subsection (a) which are paid during the 1-year period be- ginning on the date of such distribution. (c) Stock with substituted basis If- (1) a shareholder owns stock of a corpora- tion (referred to in this subsection as "new stock") the basis of whi.'h is determined by reference to the basis of stock of a corpora- tion (referred to in this subsection as "old stock"), (2) the old stock was included (for Federal estate tax purposes) in determining the gross estate of a decedent, and (3) subsection (a) would apply to a distribu- tion of property to such shareholder in re- demption of the old stock, then, subject to the limitation specified in sub- section (b), subsection (a) shall apply in respect of a distribution in redemption of the new stock. (d) Special rules for generation-skipping transfers Under regulations prescribed by the Secre- tary, where stock in a corporation is subject to tax under section 2601 as a result of a genera- tion-skipping transfer (within the meaning of section 2611(a)), which occurs at or after the death of the deemed transferor (within the meaning of section 2612)- (1) the stock shall be deemed to be included in the gross estate of the deemed transferor; (2) taxes of the kind referred to in subsec- tion (a)(1) which are imposed because of the generation-skipping transfer shall be treated as imposed because of the deemed transfer- or's death (and for this purpose the tax im- posed by section 2601 shall be treated as an estate tax); (3) the period of distribution shall be mea- sured from the date of the generation-skip- ping transfer; and (4) the relationship of stock to the dece- dent's estate shall be measured with refer- ence solely to the amount of the generation- skipping transfer. (Aug. 16, 1954, ch. 736, 68A Stat. 88; Oct. 4, 1976, Pub. L. 94-455, title XX, §§2004(e), 2006(b)(4), 90 Stat. 1871, 1889.) AMENDMENTS 1976-Subsec. (b)(1)(C). Pub. L. 94-455, § 2004(e)(1), added subsec. (b)(l)(C). Subsec. (b)(2)(A). Pub. L. 94-455, § 2004(e)(2)(A), substituted provisions limiting the applicability of subsec. (a) to corporate distributions in which the value of the corporate stock included in decedent's gross estate exceeds 50 percent of the gross estate over deductions allowed under sections 2053 and 2054 for provisions limiting the applicability of subsec. (a) to corporate distributions in which the value of the cor- porate stock included in decedent's gross estate is either more than 35 percent of the gross estate or 50 percent of the taxable estate. Subsec. (b)(2)(B). Pub. L. 94-455, § 2004(e)(2)(B), substituted "the 50 percent requirement" for "the 35 percent and 50 percent requirements". Subsecs. (b)(3), (4). Pub. L. 94-455, § 2004(e)(3), added pars. (3) and (4). Subsec. (c). Pub. L. 94-455, § 2004(e)(4), substituted "limitation specified in subsection (b)" for "limitation specified in subsection (b)(1)". Subsec. d). Pub. L. 94-455, § 2006(b)(4), added subsec. (d). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (b) and (c) by section 2004(e)(1). (2), (3), (4) of Pub. L. 94-455 applicable to estates of decedents dying after Dec. 31, 1976, see sec- tion 2004(g) of Pub. L. 94-455, set out as an Effective Date note under section 6166 of this title. For effective date of amendment of subsec. (d) by section 2006(b)(4) of Pub. L. 94-455, see section 2006(c) of Pub. L. 94-455, set out as an Effective Date note under section 2601 of this title. CROSS REFERENCES Distributions in redemption of stock, see section 302 of this title. Earnings and profits, special rule for certain re- demptions, see section 312 of this title. Redemption through use of related corporations, see section 304 of this title. Special limitations on net operating loss carryovers, exception for decrease resulting from redemption to pay death taxes, see section 382 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 302, 304, 311, 312, 382. 537, 1248, 6166, 6166A of this title. § 304. Redemption through use of related corpora- tions (a) Treatment of certain stock purchases (1) Acquisition by related corporation (other than subsidiary) For purposes of sections 302 and 303, if- (A) one or more persons are in control of each of two corporations, and (B) in return for property, one of the cor- porations acquires stock in the other corpo- ration from the person (or persons) so in control, then (unless paragraph (2) applies) such property shall be treated as a distribution in redemption of the stock of the corporation acquiring such stock. In any such case, the stock so acquired shall be treated as having been transferred by the person from whom acquired, and as having been received by the § 304 Page 234
TITLE 26-INTERNAL REVENUE CODE corporation acquiring it, as a contribution to the capital of such corporation. (2) Acquisition by subsidiary For purposes of sections 302 and 303, if- (A) in return for property, one corpora- tion acquires from a shareholder of another corporation stock in such other corporation, and (B) the issuing corporation controls the acquiring corporation, then such property shall be treated as a dis- tribution in redemption of the stock of the is- suing corporation. (b) Special rules for application of subsection (a) (1) Rules for determinations under section 302(b) In the case of any acquisition of stock to which subsection (a) of this section applies, determinations as to whether the acquisition is, by reason of section 302(b), to be treated as a distribution in part or full payment in ex- change for the stock shall be made by refer- ence to the stock of the issuing corporation. In applying section 318(a) (relating to con- structive ownership of stock) with respect to section 302(b) for purposes of this paragraph, sections 318(a)(2)(C) and 318(a)(3)(C) shall be applied without regard to the 50 percent limi- tation contained therein. (2) Amount constituting dividend (A) Where subsection (a)(1) applies In the case of any acquisition of stock to which paragraph (1) (and not paragraph (2)) of subsection (a) of this section applies, the determination of the amount which is a dividend shall be made solely by reference to the earnings and profits of the acquiring corporation. (B) Where subsection (a)(2) applies In the case of any acquisition of stock to which subsection (a)(2) of this section ap- plies, the determination of the amount which is a dividend shall be made as if the property were distributed by the acquiring corporation to the issuing corporation and immediately thereafter distributed by the issuing corporation. (c) Control (1) In general For purposes of this section, control means the ownership of stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote, or at least 50 percent of the total value of shares of all classes of stock. If a person (or persons) is in control (within the meaning of the preceding sentence) of a corporation which in turn owns at least 50 percent of the total combined voting power of all stock entitled to vote of another corporation, or owns at least 50 per- cent of the total value of the shares of all classes of stock of another corporation, then such person (or persons) shall be treated as in control of such other corporation. (2) Constructive ownership Section 318(a) relating to the constructive ownership of stock) shall apply for purposes of determining control under paragraph (1). For purposes of the preceding sentence, sec- tions 318(a)(2)(C) and 318(a)(3)(C) shall be applied without regard to the 50 percent limi- tation contained therein. (Aug. 16, 1954, ch. 736, 68A Stat. 89; Aug. 31, 1964, Pub. L. 88-554, § 4(b)(1), 78 Stat. 763.) AMENDMENTS 1964-Subsec. (b)(1). Pub. L. 88-554 inserted the ref- erence to section 318(a)(3)(C) of this title. Subsec. (c)(2). Pub. L. 88-554 inserted the reference to section 318(a)(3)(C) of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment by section 4 of Pub. L. 88-554 effective Aug. 31, 1964, except that for purposes of this section and section 302 of this title, such amendments shall not apply to distributions in payment for stock acqui- sitions or redemptions, if such acquisition or redemp- tion occurred before Aug. 31, 1964. see section 4(c) of Pub. L. 88-554 set out as an Effective Date of 1964 Amendment note under section 318 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 318, 368, 999, 6166, 6166A of this title. § 305. Distributions of stock and stock rights (a) General rule Except as otherwise provided in this section, gross income does not include the amount of any distribution of the stock of a corporation made by such corporation to its shireholders with respect to its stock. (b) Exceptions Subsection (a) shall not apply to a distribu- tion by a corporation of its stock, and the distri- bution shall be treated as a distribution of property to which section 301 applies- (1) Distributions in lieu of money If the distribution is, at the election of any of the shareholders (whether exercised before or after the declaration thereof), pay- able either- (A) in its stock, or (B) in property. (2) Disproportionate distributions If the distribution (or a series of distribu- tions of which such distribution is one) has the result of- (A) the receipt of property by some share- holders, and (B) an increase in the proportionate inter- ests of other shareholders in the assets or earnings and profits of the corporation. (3) Distributions of common and preferred stock If the distribution (or a series of distribu- tions of which such distribution is one) has the result of- (A) the receipt of preferred stock by some common shareholders, and (B) the receipt of common stock by other common shareholders. (4) Distributions on preferred stock If the distribution is with respect to pre- ferred stock, other than an increase in the conversion ratio of conve: tible preferred stock made solely to take aci ount of a stock dividend or stock split with respect to the stock into which such convertible stock is convertible. Page 235 § 305
TITLE 26-INTERNAL REVENUE CODE (5) Distributions of convertible preferred stock If the distribution is of convertible pre- ferred stock, unless it is established to the satisfaction of the Secretary that such distri- bution will not have the result described in paragraph (2). (c) Certain transactions treated as distributions For purposes of this section and section 301, the Secretary shall prescribe regulations under which a change in conversion ratio, a change in redemption price, a difference between redemp- tion price and issue price, a redemption which is treated as a distribution to which section 301 applies, or any transaction (including a recapi- talization) having a similar effect on the inter- est of any shareholder shall be treated as a dis- tribution with respect to any shareholder whose proportionate interest in the earnings and profits or assets of the corporation is in- creased by such change, difference, redemption, or similar transaction. (d) Definitions (1) Rights to acquire stock For purposes of this section, the term "stock" includes rights to acquire such stock. (2) Shareholders For purposes of subsections (b) and (c), the term "shareholder" includes a holder of rights or of convertible securities. (e) Cross references For special rules- (1) Relating to the receipt of stock and stock rights in corporate organizations and reorganizations, see part III (sec. 351 and following). (2) In the case of a distribution which results in a gift, see section 2501 and following. (3) In the case of a distribution which has the effect of the payment of compensation, see section 61(a)(1). (Aug. 16, 1954, ch. 736, 68A Stat. 90; Dec. 30, 1969, Pub. L. 91-172, title IV, § 421(a), 83 Stat. 614; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Subsecs. (b)(5), (c). Pub. L. 94-455 struck out "or his delegate" following "Secretary". 1969-Subsec. (a). Pub. L. 91-172 substituted refer- ence to this section, for reference to subsec. (b), and omitted reference to rights to acquire its stock. Subsec. (b). Pub. L. 91-172 omitted reference to rights to acquire its stock, in the material preceding par. (1). redesignated former par. (2) as par. (1) and added pars. (2) to (5). Former par, (1) providing for the extent to which distribution of preference divi- dends were to be treated as distribution of property to which section 301 applied, was stricken. Subsec. (c). Pub. L. 91-172 added subsee. (c). Former subsec. (c) was redesignated as subsec. (e). Subsec. (d). Pub. L. 91-172 added subsec. (d). Subsec. (e). Pub. L. 91-172 redesignated former subsec. (c) as (e). EFFECTIvE DATE OF 1969 AMENDMENT Section 421(b) of Pub. L. 91-172 provided that: "(1) Except as otherwise provided in this subsection, the amendment made by subsection (a) [amending this section] shall apply with respect to distributions (or deemed distributions) made after January 10, 1969, in taxable years ending after such date. "C2)(A) Section 305(b)(2) of the Internal Revenue Code of 1954 (as added by subsection (a)) [subsec. (b)(2) of this section] shall not apply to a distribution (or deemed distribution) of stock made before January 1, 1991, with respect to stock (i) outstanding on Janu- ary 10, 1969, 0i) issued pursuant to a contract binding on January 10, 1969, on the distributing corporation, (ill) which is additional stock of that class of stock which (as of January 10, 1969) had the largest fair market value of all classes of stock of the corporation (taking into account only stock outstanding on Janu- ary 10, 1969, or issued pursuant to a contract binding on January 10, 1969), (iv) described in subparagraph (C)(iii), or Cv) issued in a prior distribution described in clause Ci), (i), (ii), or (iv). "(B) Subparagraph (A) shall apply only if- "(i) the stock as to which there is a receipt of prop- erty was outstanding on January 10, 1969 (or was Issued pursuant to a contract binding on January 10, 1969, on the distributing corporation), and "(i) if such stock and any stock described in sub- paragraph (A)Ci) were also outstanding on January 10, 1968, a distribution of property was made on or before January 10, 1969, with respect to such stock, and a distribution of stock was made on or before January 10, 1969, with respect to such stock de- scribed in subparagraph (AM(i). "(C) Subparagraph CA) shall cease to apply when at any time after October 9, 1969, the distributing corpo- ration issues any of its stock (other than in a distribu- tion of stock with respect to stock of the same class) which is not- "(i) nonconvertible preferred stock. "ii) additional stock of that clasLs of stock which meets the requirements of subparagraph (A)(iii), or "Cill) preferred stock which is convertible into stock which meets the requi'ements of subpara- graph (A(iii) at a fixed conversion ratio which takes account of all stock dividends and stock splits with respect to the stock into which such convertible stock is convertible. "(D) For purposes of this paragraph, the term 'stock' includes rights to acquire such stock. "(3) In cases to which Treasury Decision 6990 (pro- mulgated January 10, 1969) would not have applied, in applying paragraphs (1) and (2) April 22, 1969, shall be substituted for January 10, 1969. "(4) Section 305(b)(4) of the Internal Revenue Code of 1954 (as added by subsection Ca)) [subsec. (b)(4) of this section] shall not apply to any distribution (or deemed distribution) with respect to preferred stock (including any increase in the conversion ratio of con- vertible stock) made before January 1, 1991, pursuant to the terms relating to the issuance of such stock which were in effect on January 10, 1969. "(5) With respect to distributions made or consid- ered as made after January 10, 1969, in taxable years ending after such date, to the extent that the amend- ment made by subsection (a) [amending this section] does not apply by reason of paragraph (2), (3), or (4) of this subsection, section 305 of the Internal Revenue Code of 1954 (this section] (as in effect before the amendment made by subsection Ca)) shall continue to apply." CROSS REFERENCES Basis of stock and stock rights acquired in a distribu- tion to which this section applies, see section 307 of this title. Definition of "section 306 stock" as including stock distributions not includible as gross income by reason of this section, see section 306 of this title. Earnings and profits, distributions not subject to tax by reason of this section, see section 312 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 306, 307, 312, 425, 1101 of this title. § 306. Dispositions of certain stock (a) General rule If a shareholder sells or otherwise disposes of section 306 stock (as defined in subsection (c))- § 306 Page 236
TITLE 26-INTERNAL REVENUE CODE (1) DispositIons other than redemptions If such disposition is not a redemption (within the meaning of section 317(b))- (A) The amount realized shall be treated as ordinary income. This subparagraph shall not apply to the extent that- (I) the amount realized, exceeds (ii) such stock's ratable share of the amount which would have been a divi- dend at the time of distribution if (in lieu of section 306 stock) the corporation had distributed money in an amount equal to the fair market value of the stock at the time of distribution. (B) Any excess of the amount realized over the sum of- (i) the amount treated under subpara- graph (A) as ordinary income, plus (i) the adjusted basis of the stock, shall be treated as gain from the sale of such stock. (C) No loss shall be recognized. (2) Redemption If the disposition is a redemption, the amount realized shall be treated as a distribu- tion of property to which section 301 applies. (b) Exceptions Subsection (a) shall not apply- (1) Termination of shareholder's interest (A) Not in redemption If the disposition- (I) is not a redemption; (ii) is not, directly or indirectly, to a person the ownership of whose stock would (under section 318(a)) be attribut- able to the shareholder; and (iii) terminates the entire stock interest of the shareholder in the corporation (and for purposes of this clause, section 318(a) shall apply). (B) In redemption If the disposition is a redemption and sec- tion 302(b)(3) applies. (2) Liquidations If the section 306 stock is redeemed in a dis- tribution in partial or complete liquidation to which part II (see. 331 and following) applies. (3) Where gain or loss is not recognized To the extent that, under any provision of this subtitle, gain or loss to the shareholder is not recognized with respect to the disposition of the section 306 stock. (4) Transactions not in avoidance If it is established to the satisfaction of the Secretary- (A) that the distribution, and the disposi- tion or redemption, or (B) in the case of a prior or simultaneous disposition (or redemption) of the stock With respect to which the section 306 stock disposed of (or redeemed) was issued, that the disposition (or redemption) of the sec- tion 306 stock, was not In pursuance of a plan having as one of its principal purposes the avoidance of Federal Income tax. (c) Section 306 stock defined (1) In general For purposes of this subchapter, the term "section 306 stock" means stock which meets the requirements of subparagraph (A), (B), or (C) of this paragraph. (A) Distributed to seller Stock (other than common stock issued with respect to common stock) which was distributed to the shareholder selling or otherwise disposing of such stock if, by reason of section 305(a), any part of such distribution was not includible in the gross income of the shareholder. (B) Received in a corporate reorganization or separation Stock which is not common stock and- (1) which was received, by the share- holder selling or otherwise disposing of such stock, in pursuance of a plan of reor- ganization (within the meaning of section 368(a)), or in a distribution or exchange to which section 355 (or so much of section 356 as relates to section 355) applied, and (if) with respect to the receipt of which gain or loss to the shareholder was to any extent not recognized by reason of part III, but only to the extent that either the effect of the transaction was substantially the same as the receipt of a stock divi- dend, or the stock was received in ex- change for section 306 stock. For purposes of this section, a receipt of stock to which the foregoing provisions of this subparagraph apply shall be treated as a distribution of stock. (C) Stock having transferred or substituted basis Except as otherwise provided in subpara- graph (B), stock the basis of which (in the hands of the shareholder selling or other- wise disposing of such stock) is determined by reference to the basis (in the hands of such shareholder or any other person) of section 306 stock. (2) Exception where no earnings and profits For purposes of this section, the term "sec- tion 306 stock" does not include any stock no part of the distribution of which would have been a dividend at the time of the distribu- tion if money had been distributed in lieu of the stock. (d) Stock rights For purposes of this section- (1) stock rights shall be treated as stock, and (2) stock acquired through the exercise of stock rights shall be treated as stock distrib- uted at the time of the distribution of the stock rights, to the extent of the fair market value of such rights at the time of the distri- bution. (e) Convertible stock For purposes of subsection (c)- (1) if section 306 stock was issued with re- spect to common stock and later such section 306 stock is exchanged for common stock in the same corporation (whether or not such exchange is pursuant to a conversion privi- lege contained in the section 306 stock), then Page 237
TITLE 26-INTERNAL REVENUE CODE (except as provided in paragraph (2)) the common stock so received shall not be treated as section 306 stock; and (2) common stock with respect to which there is a privilege of converting into stock other than common stock (or into property), whether or not the conversion privilege is contained in such stock, shall not be treated as common stock. (f) Source of gain The amount treated under subsection (a)(1)(A) as ordinary income shall, for purposes of part I of subchapter N (sec. 861 and follow. ing, relating to determination of sources of income), be treated as derived from the same source as would have been the source If money had been received from the corporation as a dividend at the time of the distribution of such stock. If under the preceding sentence such amount is determined to be derived from sources within the United States, such amount shall be considered to be fixed or determinable annual or periodical gains, profits, and income within the meaning of section 871(a) or section 881(a), as the case may be. (g) Change in terms and conditions of stock If a substantial change is made in the terms and conditions of any stock, then, for purposes of this section- (1) the fair market value of such stock shall be the fair market value at the time of the distribution or at the time of such change, whichever such value is higher; (2) such stock's ratable share of the amount which would have been a dividend if money had been distributed in lieu of stock shall be determined as of the time of distribution or as of the time of such change, whichever such ratable share is higher; and (3) subsection (c)(2) shall not apply unless the stock meets the requirements of such sub- section both at the time of such distribution and at the time of such change. (h) Stock received in distributions and reorganiza. tions to which 1939 Code applied If stock- (1) was received in a distribution or reorga- nization to which the Internal Revenue Code of 1939 (or the corresponding provisions of prior law) applied, (2) such stock would have been section 306 stock if this Code applied to such distribution or reorganization, and (3) such stock is disposed of or redeemed on or after June 22, 1954, then the foregoing subsections of this section shall not apply in respect of such disposition or redemption. The extent to which such disposi- tion or redemption shall be treated as a divi- dend shall be determined as if the Internal Revenue Code of 1939 (as modified by the pro- visions of this Code other than the foregoing subsections of this section) continued to apply in respect of such disposition or redemption. (Aug. 16, 1954, ch. 736, 68A Stat. 90; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(b)(3)(J), 1906(b)(13)(A), 90 Stat. 1793, 1834.) REFERENCES IN TEXT The Internal Revenue Code of 1939, referred to in subsec, (h), is act Feb. 10, 1939, ch. 2, 53 Stat. 1, as amended. Prior to the enactment of the Internal Rev- enue Code of 1954, the 1939 Code was classified to former Title 26, Internal Revenue Code. For table of comparisons of the 1939 Code to the 1954 Code, see Table I preceding section 1 of this title. AMENDMENTS 1976-Subsec. (a)(1)(A). Pub. L. 94-455, §1901(b)(3)(J), substituted "ordinary Income" for "gain from the sale of property which is not a capital asset". Subsec. (a)(1)(B)(i). Pub. L. 94-455, § 1901(b)(3)(J), substituted "ordinary income" for "gain from the sale of property which is not a capital asset". Subsec. (b)(4). Pub. L. 94-455, § 1906(b)(13)(A), struck out "'or his delegate" following "Secretary". Subsec. (M. Pub. L. 94-455, § 1901(b)(3)(J), substitut- ed "ordinary income" for "gain from the sale of prop- erty which is not a capital asset". EFFEcTxvE DATE OF 1976 AMENDMENT Amendment of subsecs. (a)(l)(A), (B), (f) by section 1901(b)(3(J) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. CROSS REFERENCES Constructive ownership of stock, see section 318 of this title. Distributions in redemption of stack, see section 302 of this title. Effective date, section 303 shall apply only with re- spect to dispositions (or redemptions) occurring on or after June 22, 1954, see section 391 of this title. Receipt of additional consideration, exchanges for section 306 stock, see section 356 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in secl.ions 302, 318, 356 of this title. § 307. Basis of stock and stock rights acquired in dis. tributions (a) General rule If a shareholder in a corporation receives its stock or rights to acquire its stock (referred to in this subsection as "new stock") in a distribu- tion to which section 305(a) applies, then the basis of such new stock and of the stock with respect to which it is distributed (referred to in this section as "old stock"), respectively, shall, in the shareholder's hands, be determined by allocating between the old stock and the new stock the adjusted basis of the old stock. Such allocation shall be made under regulations pre- scribed by the Secretary. (b) Exception for certain stock rights (1) In general If- (A) a corporation distributes rights to ac- quire its stock to a shareholder in a distri- bution to which section 305(a) applies, and (B) the fair market value of such rights at the time of the distribution is less than 15 percent of the fair market value of the old stock at such time, then subsection (a) shall not apply and the basis of such rights shall be zero, unless the taxpayer elects under paragraph (2) of this subsection to determine the basis of the old Page 238 § 307
TITLE 26-INTERNAL REVENUE CODE stock and of the stock rights under the method of allocation provided in subsection (a). (2) Election The election referred to in paragraph (1) shall be made in the return filed within the time prescribed by law (including extensions thereof) for the taxable year in which such rights were received. Such election shall be made in such manner as the Secretary may by regulations prescribe, and shall be irrevo- cable when made. (c) Cross reference For basis of stock and stock rights distributed before June 22, 1954, see section 1052. (Aug. 16, 1954, ch. 736, 68A Stat. 93; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Subsecs. (a), (b)(2). Pub. L. 94-455 struck out "or his delegate" following "Secretary". CRoss REFERENCES Capital gains and losses, determination of period for which taxpayer has held stock or rights to acquire stock received on a distribution, if basis is determined under this section, see section 1223 of this title. Corporate- Liquidations, basis of property received in corpo- rate liquidations, see section 334 of this title. Organizations, basis to distributees, see section 358 of this title. Effect on earnings and profits of receipt of tax free distributions, see section 312 of this title. SECTION REFEREIU TO IN OTHER SECTIONS This section is referred to in sections 312, 1223 of this title. SUBPART B-EFFECTS ON CORPORATION Sec. 311. Taxability of corporation on distribution. 312. Effect on earnings and profits. § 311. Taxability of corporation on distribution (a) General rule Except as provided in subsections (b), (c), and (d) of this section and section 453(d), no gain or loss shall be recognized to a corporation on the distribution, with respect to its stock, of- (1) its stock (or rights to acquire its stock), or (2) property, (b) LIFO inventory (1) Recognition of gain If a corporation inventorying goods under the method provided in section 472 (relating to last-in, first-out inventories) distributes in- ventory assets (as defined in paragraph (2)(A)), then the amount (if any) by which- (A) the inventory amount (as defined in paragraph (2)(B)) of such assets under a method authorized by section 471 (relating to general rule for inventories), exceeds (B) the inventory amount of such assets under the method provided in section 472, shall be treated as gain to the corporation recognized from the sale of such inventory assets. (2) Definitions For purposes of paragraph (1)- (A) Inventory assets The term "inventory assets" means stock in trade of the corporation, or other proper- ty of a kind which would properly be in- cluded in the inventory of the corporation if on hand at the close of the taxable year. (B) Inventory amount The term "inventory amount" means, in the case of inventory assets distributed during a taxable year, the amount of such inventory assets determined as if the tax- able year closed at the time of such distri- bution. (3) Method of determining inventory amount For purposes of this subsection, the inven- tory amount of assets under a method autho- rized by section 471 shall be determined- (A) if the corporation uses the retail method of valuing inventories under section 472, by using such method, or (B) if subparagraph (A) does not apply, by using cost or market, whichever is lower. (c) Liability in excess of basis If- (1) a corporation distribute property to a shareholder with respect to its stock, (2) such property is subject to a liability, or the shareholder assumes a liability of the cor- poration in connection with the distribution, and (3) the amount of such liability exceeds the adjusted basis (in the hands of the distribut- ing corporation) of such property, then gain shall be recognized to the distribut- ing corporation in an amount equal to such excess as if the property distributed had been sold at the time of the distribution. In the case of a distribution of property subject to a liabil- ity which is not a'umed by the shareholder, the amount of gain to be recognized under the preceding sentence shall not exceed the excess, if any, of the fair market value of such proper- ty over its adjusted basis. (d) Appreciated property used to redeem stock (1) In general If- (A) a corporation distributes property (other than an obligation of such corpora- tion) to a shareholder in a redemption (to which subpart A applies) of part or all of his stock in such corporation, and (B) the fair market value of such property exceeds its adjusted basis (in the hands of the distributing corporation), then a gain shall be recognized to the distrib- uting corporation in an amount equal to such excess as if the property distributed had been sold at the time of the distribution. Subsec- tions (b) and (c) shall not apply to any distri- bution to which this subsection applies. (2) Exceptions and limitations Paragraph (1) shall not apply to- (A) a distribution in complete redemption of all of the stock of a shareholder who, at all times within the 12-month period ending on the date of such distribution, owns at Page 239 § 311
TITLE 26-INTERNAL REVENUE CODE least 10 percent in value of the outstanding stock of the distributing corporation, but only if the redemption qualifies under sec- tion 302(b)(3) (determined without the ap- plication of section 302(c)(2)(A)(ii)); (B) a distribution of stock or an obligation of a corporation- (I) which is engaged in at least one trade or business, (ii) which has not received property con- stituting a substantial part of its assets from the distributing corporation, in a transaction to which section 351 applied or as a contribution to capital, within the 5-year period ending on the date of the distribution, and (iii) at least 50 percent in value of the outstanding stock of which is owned by the distributing corporation at any time within the 9-year period ending one year before the date of the distribution; (C) a distribution of stock or securities pursuant to the terms of a final judgment rendered by a court with respect to the dis- tributing corporation in a court proceeding under the Sherman Act (15 U.S.C. 1-7) or the Clayton Act (15 U.S.C. 12-27), or both, to which the United States is a party, but only if the distribution of such stock or se- curities in redemption of the distributing corporation's stock is in furtherance of the purposes of the judgment; (D) a distribution to the extent that sec- tion 303(a) (relating to distributions in re- demption of stock to pay death taxes) ap- plies to such distribution; (E) a distribution to a private foundation in redemption of stock which is described in section 537(b)(2)(A) and (B); (F) a distribution by a corporation to which part I of subehapter M (relating to regulated investment companies) applies, if such distribution is in redemption of its stock upon the demand of the shareholder; and (H)' a distribution of stock to a distribu- tee which is not an organization exempt from tax under section 501(a), if with re- spect to such distributee, subsection (a)(1) or (b)(1) of section 1101 (relating to distri- butions pursuant to Bank Holding Compa- ny Act) applies to such distribution. (Aug. 16, 1954, ch. 736, 68A Stat. 94; Dec. 30, 1969, Pub. L. 91-172, title IX, § 905(a), (b)(1), 83 Stat. 713, 714; Oct. 2, 1976, Pub. L. 94-452, § 2(b), 90 Stat. 1511; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(a)(42)(A), (B)(i), (C), 90 Stat. 1771.) REFERENCES IN TEXT The Sherman Act, referred to in subsec. (d)(2)(C), is act July 2, 1890, ch. 647, 26 Stat. 209, as amended, which is classified to sections 1 to 7 of Title 15, Com- merce and Trade. For complete classification of this Act to the Code, see Short Title note set out under section 1 of Title 15 and Tablts volume. The Clayton Act, referred to in subsec. (d)(2)(C), is act Oct. 15, 1914, ch. 323, 38 Stat. 730, as amended, and is set out as sections 12, 13, 14 to 19, 20, 21, and 22 to 27 of Title 15, Commerce and Trade, and sections 52 and 53 of Title 29, Labor. Sections 9 and 21 to 25 of 'So in original. Subsec. (G) has been redesignated subsec. (F). the act were repealed by act June 25, 1948, ch. 645, § 21, 62 Stat. 862, eff. Sept. 1, 1948, and their provi- sions are now covered by sections 402, 660, 3285, and 3691 of Title 18, Crimes and Criminal Procedure, except that section 23 of the act is obsolete and not now covered. Sections 17 to 19 of the act were repealed by act June 25, 1948, ch. 646, § 39. 62 Stat. 992, eff. Sept. 1, 1948, and their provisions are now covered by rule 65 of the Federal Rules of Civil Procedure, Title 28. App., Judiciary and Judicial Procedure. For com- plete classification of this Act to the Code, see Tables volume. The Bank Holding Company Act, referred to in subsec. (d)(2)(H), probably means act May 9, 1956, ch. 240, 70 Stat. 133, as amended, which is classified prin- cipally to chapter 17 (§ 1841 et seq.) of Title 12, Banks and Banking. See section 1103 of Title 26. For complete classification of this Act to the Code, see Short Title note set out under section 1841 of Title 12 and Tables volume. AMENDMENTS 1976-Subsec. (d)(1)(B). Pub. L. 94-455, §1901(a) (42)(A), substituted "then a gain shall be recognized" for "then again shall be recognized". Subsec. (d)(2). Pub. L. 94-452 and Pub. L. 94-455 § 1901(a)(42)(B)(i), (C), struck out subpar. (C). relating to certain distributions before Dec. 1, 1974, struck out "26 Stat. 209;" before "15 U.S.C. 1-7)" and "38 Stat. 730;" before "15 U.S.C. 12-27)" in subpar. (D), added subpar. (H), and redesignated subpars. (D) through (0), as so amended, as subpars. (C) to (F), ruspectively. 1969-Subsec. (a). Pub. L. 91-172, § 905(b)(1), insert- ed reference to subsec. (d). Subsec. (d). Pub. L. 91-172, § 905(a), added subsec. (d). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (d)(1). (2) by section 1901(a)(42)(A), (C) of Pub. L. 94-455 effective for tax- able years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Section 1901(a)(42)(B)(ii) of Pub. L. 94-455 provided that: "The amendments made by clause (i) [repealing subsec. (d)(2)(C) of this section and redesignating sub- secs. (d)(2)(D), (E), (F), (G), as subsecs. (d)(2)(C), (D), (E), (F) of this section] shall apply only with respect to distributions after November 30, 1974." Section 2(d)(4) of Pub. L. 94-452 provided that: "The amendment made by subsection (b) [amending this section] shall take effect on October 1, 1977, with re- spect to distributions after December 31, 1975, in tax- able years ending after December 31, 1975." EFFECTIVE DATE OF 1969 AMENDMENT Section 905(c) of Pub. L. 91-172, as amended by Pub. L. 91-675, Jan. 12, 1071, 84 Stat. 2059, provided that: "(1) Except as provided in paragraphs (2), (3). (4), and (5), the amendments made by subsections (a) and (b) [adding subsec, (d) of this section and amending sections 301(b)(1)(B)(ii), (d)(2)(B) and 312(c)(3) of this title] shall apply with respect to distributions after November 30, 1969. "(2) The amendments made by subsections (a) and (b) shall not apply to a distribution before April 1, 1970, pursuant to the terms of- "(A) a written contract which was binding on the distributing corporation on November 30, 1969, and at all times thereafter before the distribution, "(B) an offer made by the distributing corporation before December 1, 1969, "(C) an offer made in accordance with a request for a ruling filed by the distributing corporation with the Internal Revenue Service before December 1, 1969, or "(D) an offer made in accordance with a registra- tion statement filed with the Securities and Ex- change Commission before December 1, 1969. Page 240
TITLE 26-INTERNAL REVENUE CODE For purposes of subparagraphs (B), (C), and (D), an offer shall be treated as an offer only if it was in writ- ing and not revocable by its express terms. "(3) The amendments made by subsections (a) and (b) [adding subsec. (d) of this section and amending sections 301(bl(l)(B)(ii), (d)(2)(B), and 312(c)(3) of this title] shall not apply to a distribution by a corpo- ration of specific property In redemption of stock out- standing on November 30, 1969, If- "(A) every holder of such stock on such date had the right to demand redemption of his stock in such specific property, and "(B) the corporation had such specific property on hand on such date in a quantity sufficient to redeem all of such stock. For purposes of the preceding sentence, stock shall be considered to have been outstanding on November 30, 1969, If It could have been acquired on such date through the exercise of an existing right of conversion contained in other stock held on such date. "(4) The amendments made by subsections (a) and (b) [adding subsec. (d), of this section and amending sections 301(b)(1)(B)(ii), (d)(2)(B), and 312(c)(3) of this title] shall not apply to a distribution by a corpo- ration of property (held on December 1, 1969, by the distributing corporation or a corporation which was a wholly owned subsidiary of the distributing corpora- tion on such date) in redemption of stock outstanding on November 30, 1969, which is redeemed and canceled before July 31, 1971, If- "(A) such redemption is pursuant to a resolution adopted before November 1, 1969, by the Board of Directors authorizing the redemption of a specific amount of stock constituting more than 10 percent of the outstanding stock of the corporation at the time of the adoption of such resolution; and "(B) more than 40 percent of the stock authorized to be redeemed pursuant to such resolution was re- deemed before December 30, 1969, and more than one-half of the stock so redeemed was redeemed with property other than money. "(5) The amendments made by subsections (a) and (b) [adding subsec. (d) of this section and amending sections 301(b)(1)(B)(ii), (d)(2)(B) and 312(c)(3) of this title] shall not apply to a distribution of stock, by a corporation organized prior to December 1, 1969, for the principal purpose of providing an equity participa- tion plan for employees of the corporation whose stock is being distributed (hereinafter referred to as the 'employer corporation') if- "(A) the stock being distributed was owned by the distributing corporation on November 30, 1969, "(B) the stock being redeemed was acquired before January 1, 1973, pursuant to such equity participa- tion plan by the shareholder presenting such stock for redemption (or by a predecessor of such share- holder), "(C) the employment of the shareholder present- ing the stock for redemption (or the predecessor of such shareholder) by the employer corporation com- menced before January 1, 1971, "(D) at least 90 percent in value of the assets of the distributing corporation on November 30, 1969, consisted of common stock of the employer corpora- tion, and "CE) at least 50 percent of the outstanding voting stock of the employer corporation is owned by the distributing norporation at any time within the nine- year period ending one year before the date of such distribution." CROSS REFERENcEs Corporate- Liquidations, gain or loss on sales or exchanges with certain liquidations, see section 337 of this title, Organizations, nonrecognition of gain or loss to corporations, see section 361 of this title. Distributions of property, corporate distributees, see section 301 of this title, Effect on earnings and profits, adjustment shall be made for any gain recognized under subscetion (b) or (c) of this section, see section 312 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 301, 312, 995 of this title. § 312. Effect on earnings and profits (a) General rule Except as otherwise provided in this section, on the distribution of property by a corporation with respect to its stock, the earnings and prof- its of the corporation (to the extent thereof) shall be decreased by the sum of- (1) the amount of money, (2) the principal amount of the obligations of such corporation, and (3) the adjusted basis of the other property, so distributed. (b) Certain inventory assets (1) In general On the distribution by a corporation, with respect to Its stock, of inventory assets (as de- fined in paragraph (2)(A)) the fair market value of which exceeds the adjusted basis thereof, the earnings and profits of the corpo- ration- (A) shall be increased by the amount of such excess; and (B) shall be decreased by whichever of the following is the lesser: (i) the fair market value of the inven- tory assets distributed, or (ii) the earnings and profits (as in- creased under subparagraph (A)). (2) Definitions (A) Inventory assets For purposes of paragraph (1), the term "inventory assets" means- (i) stock in trade of the corporation, or other property of a kind which would properly be included in the inventory of the corporation if on hand at the close of the taxable year; (ii) property held by the corporation primarily for sale to customers in the or- dinary course of its trade or business; and (iII) unrealized receivables or fees, except receivables from sales or ex- changes of assets other than assets de- scribed in this subparagraph. (B) Unrealized receivables or fees For purposes of subparagraph (A)(iii), the term "unrealized receivables or fees" means, to the extent not previously includi- ble in income under the method of account- ing used by the corporation, any rights (contractual or otherwise) to payment for- (I) goods delivered, or to be delivered, to the extent that the proceeds therefrom would be treated as amounts received from the sale or exchange of property other than a capital asset, or (it) services rendered or to be rendered. (c) Adjustments for liabilities, etc. In making the adjustments to the earnings and profits of a corporation under subsection (a) or (b), proper adjustment shall be made for- Page 241 § 312
TITLE 26-INTERNAL REVENUE CODE (1) the amount of any liability to which the property distributed is subject, (2) the amount of any liability of the corpo- ration assumed by a shareholder in connec- tion with the distribution, and (3) any gain to the corporation recognized under subsection (b), (c), or (d) of section 311, under section 341(f), or under section 617(d)(1), 1245(a), 1250(a), 1251(c), 1252(a), or 1254(a). (d) Certain distributions of stock and securities (1) In general The distribution to a distributee by or on behalf of a corporation of its stock or securi- ties, of stock or securities in another corpora- tion, or of property, in a distribution to which this title applies, shall not be considered a dis- tribution of the earnings and profits of any corporation- (A) if no gain to such distributee from the receipt of such stock or securities, or prop- erty, was recognized under this title, or (B) if the distribution was not subject to tax in the hands of such distributee by reason of section 305(a). (2) Prior distributions In the case of a distribution of stock or se- curities, or property, to which section 115(h) of the Internal Revenue Code of 1939 (or the corresponding provision of prior law) applied, the effect on earnings and profits of such dis- tribution shall be determined under such sec- tion 115(h), or the corresponding provision of prior law, as the case may be. (3) Stock or securities For purposes of this subsection, the term "stock or securities" includes rights to acquire stock or securities. (e) Special rule for partial liquidations and certain redemptions In the case of amounts distributed in partial liquidation (whether before, on, or after June 22, 1954) or in a redemption to which section 302(a) or 303 applies, the part of such distribu- tion which is properly chargeable to capital ac- count shall not be treated as a distribution of earnings and profits. (f) Effect on earnings and profits of gain or loss and of receipt of tax-free distributions (1) Effect on earnings and profits of gain or loss The gain or loss realized from the sale or other disposition (after February 28, 1913) of property by a corporation- (A) for the purpose of the computation of the earnings and profits of the corporation, shall (except as provided in subparagraph (B)) be determined by using as the adjusted basis the adjusted basis (under the law ap- plicable to the year in which the sale or other disposition was made) for determining gain, except that no regard shall be had to the value of the property as of March 1, 1913; but (B) for purposes of the computation of the earnings and profits of the corporation for any period beginning after February 28, 1913, shall be determined by using as the adjusted basis the adjusted basis (under the law applicable to the year in which the sale or other disposition was made) for deter- mining gain. Gain or loss so realized shall increase or de- crease the earnings and profits to, but not beyond, the extent to which such a realized gain or loss was recognized in computing tax- able income under the law applicable to the year in which such sale or disposition was made. Where, in determining the adjusted basis used in computing such realized gain or loss, the adjustment to the basis differs from the adjustment proper for the purpose of de- termining earnings and profits, then the latter adjustment shall be used in determin- ing the increase or decrease above provided. For purposes of this subsection, a loss with respect to which a deduction is disallowed under section 1091 (relating to wash sales of stock or securities), or the corresponding pro- vision of prior law, shall not be deemed to be recognized. (2) Effect on earnings and profits of receipt of tax- free distributions Where a corporation receives (after Febru- ary 28, 1913) a distribution from a second cor- poration which (under the law applicable to the year in which the distribution was made) was not a taxable dividend to the sharehold- ers of the second corporation, the amount of such distribution shall not increase the earn- ings and profits of the first corporation in the following cases: (A) no such increase shall be made in re- spect of the part of such distribution which (under such law) is directly applied in re- duction of the basis of the stock in respect of which the distribution was made; and (B) no such increase shall be made if (under such law) the distribution causes the basis of the stock in respect of which the distribution was made to be allocated be- tween such stock and the property received (or such basis would, but for section 307(b), be so allocated). (g) Earnings and profits-increase in value accrued before March 1, 1913 (1) If any increase or decrease in the earn- ings and profits for any period beginning after February 28, 1913, with respect to any matter would be different had the adjusted basis of the property involved been deter- mined without regard to its March 1, 1913, value, then, except as provided in paragraph (2), an increase (properly reflecting such dif- ference) shall be made in that part of the earnings and profits consisting of increase in value of property accrued before March 1, 1913. (2) If the application of subsection (f) to a sale or other disposition after February 28, 1913, results in a loss which is to be applied in decrease of earnings and profits for any period beginning after February 28, 1913, then, notwithstanding subsection (f) and in lieu of the rule provided in paragraph (1) of this subsection, the amount of such loss so to be applied shall be reduced by the amount, if any, by which the adjusted basis of the prop- erty used in determining the loss exceeds the adjusted basis computed without regard to the value of the property on March 1, 1913, § 312 Page 242
TITLE 26-INTERNAL REVENUE CODE and if such amount so applied in reduction of the decrease exceeds such loss, the excess over such loss shall increase that part of the earnings and profits consisting of increase in value of property accrued before March 1, 1913. (h) Allocation in certain corporate separations In the case of a distribution or exchange to which section 355 (or so much of section 356 as relates to section 355) applies, proper allocation with respect to the earnings and profits of the distributing corporation and the controlled cor- poration (or corporations) shall be made under regulations prescribed by the Secretary. (I) Distribution of proceeds of loan insured by the United States If a corporation distributes property with re- spect to its stock and if, at the time of distribu- tion- (1) there is outstanding a loan to such cor- poration which was made, guaranteed, or in- sured by the United States (or by any agency or instrumentality thereof), and (2) the amount of such loan so outstanding exceeds the adjusted basis of the property constituting security for such loan, then the earnings and profits of the corpora- tion shall be increased by the amount of such excess, and (immediately after the distribution) shall be decreased by the amount of such excess. For purposes of paragraph (2), the ad- justed basis of the property at the time of dis- tribution shall be determined without regard to any adjustment under section 1016(a)(2) (relat- ing to adjustment for depreciation, etc.). For purposes of this subsection, a commitment to make, guarantee, or insure a loan shall be treat- ed as the making, guaranteeing, or insuring of a loan. (j) Earnings and profits of foreign investment compa- nies (1) Allocation within affiliated group In the case of a sale or exchange of stock in a foreign investment company (as defined in section 1246(b)) by a United States person (as defined in section 7701(a)(30)), if such compa- ny is a member of an affiliated group, then the accumulated earnings and profits of all members of such affiliated group shall be al- located, under regulations prescribed by the Secretary, in such manner as is proper to carry out the purposes of section 1246. (2) Affiliated group defined For purposes of paragraph (1) of this sub- section, the term "affiliated group" has the meaning assigned to such term by section 1504(a); except that (A) "more than 50 per- cent" shall be substituted for "80 percent or more", and (B) all corporations shall be treat- ed as includible corporations (without regard to the provisions of section 1504(b)). (3) Partial liquidations and redemptions If a foreign investment company (as defined in section 1246) distributes amounts in partial liquidation or in a redemption to which sec- tion 302(a) or 303 applies, the part of such distribution which is properly chargeable to earnings and profits shall be an amount which Is not in excess of the ratable share of the earnings and profits of the company accu- mulated after February 28, 1913, attributable to the stock so redeemed. (k) Effect of depreciation on earnings and profits (I) General rule For purposes of computing the earnings and profits of a corporation for any taxable year beginning after June 30, 1972, the allowance for depreciation (and amortization, if any) shall be deemed to be the amount which would be allowable for such year if the straight line method of depreciation had been used for each taxable year beginning after June 30, 1972. (2) Exceptions If for any taxable year beginning after June 30, 1972, a method of depreciation was used by the taxpayer which the Secretary has de- termined results in a reasonable allowance under section 167(a), and which is not- (A) a declining balance method, (B) the sum of the years-digit method, or (C) any other method a",owable solely by reason of the applicatiun of subsection (b)(4) or (j)(1)(C) of section 167, then the adjustment to earnings and profits for depreciation for such year shall be deter- mined under the method so used (in lieu of under the straight line method). (3) Certain foreign corporations The provisions of paragraph (1) shall not apply in computing the earnings and profits of a foreign corporation for any taxable year for which less than 20 percent of the gross income from all sources of such corporation is derived from sources within the United States. (Aug. 16, 1954, ch. 736, 68A Stat. 95; Feb. 2, 1962, Pub. L. 97-403, § 3(a), 76 Stat. 6; Oct. 16, 1962, Pub. L. 87-834, §§13(f)(3), 14(b)(1), 76 Stat. 1035, 1040; Feb. 26, 1964, Pub. L. 88-272, title II, § 231(b)(3), 78 Stat. 105; Aug. 22, 1964, Pub. L. 88-484, § 1(b)(1), 78 Stat. 597; Sept. 12, 1966, Pub. L. 89-570, § 1(b)(3), 80 Stat. 762; Dec. 30, 1969, Pub. L. 91-172, title II, § 211(b)(3), title IV, § 442(a), title IX, § 905(b)(2), 83 Stat. 570, 628, 714; Oct. 4, 1976, Pub. L. 94-455, title II, § 205(c)(1)(D), title XIX, §§ 1901(a)(43), (b)(32)(B)(i), 1906(b)(13)(A), 90 Stat. 1535, 1771, 1800, 1834.) REFERENCES IN TEXT Section 115(h) of the Internal Revenue Code of 1939, referred to in subsec. (d)(2), was classified to sec- tion 115(h) of former Title 26, Internal Revenue Code. Section 115(h) was repealed by section 7851(a)(1) of this title. For table of comparisons of the 1939 Code to the 1954 Code, see Table I preceding section 1 of this title. See, also, section 7851(e) of this title for provi- sion that references in the 1954 Code to a provision of the 1939 Code, not then applicable, shall be deemed a reference to I le corresponding provision of the 1954 Code, then applicable. AMENDMENTS 1976-Subsec. (c)(3). Pub. L. 94-455, §205(c)(1)(D), substituted "1252(a), or 1254(a)" for "or 1252(a)". Subsec. (d)(1). Pub. L. 94-455, § 1901(a)(43)(A), sub- stituted "this title" for "this Code" wherever appear- ing. Subsec. (11). Pub. L. 94-455, §§ 1901(a)(43)(B), 1906(b)(13)(A), redesignated former subsec. (i) as (h), Page 243
TITLE 26-INTERNAL REVENUE CODE and as so redesignated, struck out "or his delegate" following "Secretary". Former subsec. (h), which relat- ed to the earnings and profits of personal service cor- porations, was struck out. Subsec. (i). Pub. L. 94-455. § 1901(a)(43)(B), (C), re- designated former subsec. (j) as i), and as so redesig- nated, among other changes, substituted "paragraph (2)" for "subparagraph (B) of the preceding sentence" and "of this subsection" for "of this paragraph" and struck out provisions relating to the effective date of this subsec. Former subsec. (l) redesignated (j). Subsec. (j). Pub. L. 94-455. §§ 1901(a)(43)(D), (b)(32)(B)(i), 1906(b)(13)(A), redesignated former subsec. (1) as (j), and as so redesignated, struck out in par. (1) "or his delegate" following "Secretary" and in par. (3) provision relating to the effective date of such paragraph. Former subsec. C) redesignated i). Subsec. (k). Pub. L. 94-455, §§ 1901(b)(32)(B)(), 1906(b)(13)(A), redesignated former subsec. (m) as (k) and, as so redesignated, struck out in par. (2) "or his delegate" following "Secretary". Former subsec. (k), relating to the special adjustment on disposition of antitrust stock received as a dividend, was struck out. Subsec. (l). Pub. L. 94-455, § 1901(b)(32)(B)(i) rede- signated subsec. (1) as (j). Subsec. (m). Pub. L. 94-455, § 1901(b)(32)(B)(i), rede- signated subsec. (m) as (k). 1969-Subsec. (c)(3). Pub. L. 91-172, §§211(b)(3), 905(b)(2), substituted "1250(a), 1251(c), or 1252(a)", for "or 1250(a)" and inserted reference to section 311(d). Subsec. (m). Pub. L. 91-172, §442(a), added subsec. (m). 196-Subsec. (c)(3). Pub. L. 89-570 included refer- ence to section 617(d)(1). 1964-Subsec. (c)(3). Pub. L. 88-484 authorized ad- justment for the amount of the gain recognized under section 341(f). Pub. L. 88-272 inserted the reference to section 1250(a). 1962-Subsec. (c)(3). Pub. L. 87-834, § 13(f)(3), in- cluded any gain recognized under section 1245(a). Subsec. (k). Pub. L. 87-403 added subsec. Ck). Subsec. (1). Pub. L. 87-834, § 14(b)(1), added subsec. (1). EnFEcTxv DATE OF 1976 Ammmrr Amendment of subsec. (c)(3) by section 205(c)(1)(D) of Pub. L. 94-455 effective for taxable years ending n Iter Dec. 31, 1975, see section 205(e) of Pub. L. 94-455, sct out as an Effective Date of 1976 Amendment note under section 1254 of this title. Amendment of subsecs. (d)(1), (h), Ci), (J) by section 1901(a)(43) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Amendment of subsecs. (M, (k), (l), (m) by section 1901(b)(32) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1969 AimEmuNr Amendment of subsec. (c)(3) by section 211(b)(3) of Pub. L. 91-172 applicable to taxable years beginning after December 31, 1969, see section 211(c) of Pub. L. 91-172, set out as an Effective Date note under section 1251 of this title. Amendment of subsec. (c)(3) by section 905(b)(2) Pub. L. 91-172 effective with respect to distributions made after Nov. 30, 1969, see section 905(c) of Pub. L. 91-172, set out as an Effective Date of 1969 Amend- ment note under section 311 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-570 applicable to taxable years ending after Sept. 12, 1966, but only in respect of expenditures paid or incurred after such date, see section 3 of Pub. L. 89-570, set out as an Effective Date note undtr section 617 of this title. EFFECTIvE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-484 applicable with re- spect to transactions after Aug. 22, 1964 in taxable years ending after such date, see section 2 of Pub. L. 88-484, set out as an Effective Date of 1964 Amend- ment note under section 341 of this title. Amendment of section by Pub. L. 88-272 applicable to dispositions after Dec. 31, 1963, in taxable years ending after such date, see section 231(c) of Pub. L. 88-272, set out as an Effective Date note under section 1250 of this title. EFFECTIvE DATE OF 1962 AMENDMENT Amendment of subsec. (c)(3) of this section by Pub. L. 87-834 applicable to taxable years beginning after Dec. 31, 1962, see section 13(g) of Pub. L. 87-834, set out as an Effective Date note under section 1245 of this title, Section 3(g) of Pub. L. 87-403 provided that: "The amendments made by this section [to sections 312, 535, 543, 545, 556 and 561 of this title] shall apply only with respect to distributions made after the date of the einactment of this Act [Feb. 2, 1962]." Subsec. (l) of this section applicable with respect to taxable years beginning after Dec. 31, 1962, see section 14(c) of Pub. L. 87-834, set out as an Effective Date note under section 1246 of this title. SECTION REmuERI TO IN OTERM SECTIONS This section is referred to in sections 338, 964, 1248, 1377 of this title. SUBPART C-DEFINITIONS; CONSTRUCTIVE OWNERSHIP OF STOCK Sec. 316. Dividend defined. 317. Other definitions. 318. Constructive ownership of stock. § 316. Dividend defined (a) General rule For purposes of this subtitle, the term "divi- dend" means any distribution of property made by a corporation to its shareholders- (1) out of its earnings and profits accumu- lated after February 28, 1913, or (2) out of its earnings and profits of the tax- able year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of the earnings and profits at the time the distribu- tion was made. Except as otherwise provided in this subtitle, every distribution is made out of earnings and profits to the extent thereof, and from the most recently accumulated earnings and prof- its. To the extent that any distribution is, under any provision of this subchapter, treated as a distribution of property to which section 301 applies, such distribution shall be treated as a distribution of property for purposes of this subsection. (b) Special rules (1) Certain insurance company dividends The definition in subsection (a) shall not apply to the term "dividend" as used in sub- chapter L in any case where the reference is to dividends of insurance companies paid to policyholders as such. (2) Distributions by personal holding companies (A) In the case of a corporation which- § 316 Page 244
TITLE 26-INTERNAL REVENUE CODE (1) under the law applicable to the tax- able year In which the distribution Is made, is a personal holding company (as defined in section 542), or (it) for the taxable year in respect of which the distribution is made under sec- tion 563(b) (relating to dividends paid after the close of the taxable year), or jec- tion 547 (relating to deficiency dividends), or the corresponding provisions of prior law, is a personal holding company under the law applicable to b1ich taxable year, the term "dividend" also means any distri- bution of property (whether or not a divi- dend as defined in subsection (a)) made by the corporation to its shareholders, to the extent of its undistributed personal holding company income (determined under section 545 without regard to distributions under this paragraph) for such year. (B) For purposes of subparagraph (A), tile term "distribution of property" includes a distribution in complete liquidation occur- ring within 24 months after the adoption of a plan of liquidation, but-- (!) only to the extent of the amounts ditributed to distributees other than cor- porate shareholders, and (ii) only to the extent that the corpora- tion designates such amounts as a divi- dend distribution and duly notifies such distributees of such designation, under regulations pren;cribed by the Secretary, but (i11) not in excess of the sum of such dis- tributees' allocable share of the undistri- buted personal holding company income for such year, computed without regard to this subparagraph or section 562(b). (3) Deficiency dividend distributions by a real estate investment trust The term "dividend" also means any distri- bution of property (whether or not a dividend as defined in subsection (a)) which consti- tutes a "deficiency dividend" as defined in section 859(d). (Aug. 16, 1954, ch. 736, 68A Stat. 98; Mar, 13, 1956, ch. 83, § 5(1), 70 Stat. 49; Feb. 26, 1964, Pub. L. 88-272, title II, § 225(f)(1), 78 Stat. 87; Oct. 4, 1976, Pub. L. 94-455, title XVI, § 1601(d), title XIX, § 1906(b)(13)(A), 90 Stat. 1746, 1834.) AMENDMENTS 1976-Subsec. (b)(2)(B)(ii). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (b)(3). Pub. L. 94-455, § 1601(d), added subsec. (b)(3). 1964-Subsec. (b)(2). Pub. L. 88-272 inserted the definition of "distribution of property". 1956-Subsec. (b)(1). Act Mar. 13, 1956, substituted "subchapter L" for "sections 803(e), 821(a)(2), and 832(c)(11)". ErTcrziv DATE OF 1976 AMENrmENT For effective date of subsec. (b)(3) added by section 1601(d) of Pub. L. 94-455, see section 1608(a) of Pub. L. 94-455, set out as an Effective Date note under section 859 of this title. EFFECTIVE DATE OF 1964 AxemaETr Section 225() of Pub. L. 88-272 provided that: "(1) The amendments made by this section [adding section 1022 and redesignating section 1022 as 1023, amending sections 316, 331, 333, 381, 541, 542. 543, 544, 545, 551, 553, 554, 562, 856, 1016, 1361, 6501 and the analysis preceding section 1011, and enacting provi- sions set out as a note undcr section 333 of this title] (other than by subsections (c)(1), f), (g), and (J) [adding section 1022, redeslgnating section 1022 as 1023, amending sections 316, 331, 333, 542(c)(2), 551, 562, 1016, and the analysis preceding section 1011 of this title]) shall apply to taxable years beginning after December 31, 1963. "(2) The amendment made by subsection (c)(1) [to section 542(c)(2) of this title] shall apply to taxable years beginning after October 16, 1962. "(3) The amendments made by subsections if) and (g) [to sections 316, 331, 333, 551 and 562 of this title] shall apply to distributions made in any taxable year of the distributing corporation beginning after Decem- ber 31, 1963. "(4) The amendments made by subsection (j) [adding section 1022, redesignating section 1022 as 1023 amending section 1016 and the analysis preceding section 1011 of this title] shall apply in respect of de. cedents dying after December 31, 1963. "(5) Subsection (h) [set out as a note under section 333 of this title] shall apply to taxable years beginning after December 31, 1963." EFFECTIVE DATE OF 1956 AmENDMENT Amendment by act Mar. 13, 1956, applicable only to taxable years beginning after Dec. 31, 1954, see section 6 of act Mar. 13, 1956, set out as an Effective Date of 1956 Amendment note under section 821 of this title. CRoss REFERENcEs Consent dividend as not including an amount speci- fied in a consent which would not constitute a divi- dend as defined in this section, see section 565 of this title. Dividends received from certain foreign corpora- tions, deduction in amount equal to percent of divi- dends received out of earnings and profits specified In subsection (a)(1) of this section, see section 245 of this title. Liquidc.tions before Jan. 1, 1966, see section 225(h) of Pub. L. 88-272, set out as a note under section 333 of this title. Rules applicable in determining dividends eligible for dividends paid credit deduction, see section 562 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in ,.ctions 245, 301, 331, 562, 565, 959, 1373, 1375, 6042 of this title; title 46 sec- tion 1177. § 317. Other definitions (a) Property For purposes of this part, the term "proper- ty" Laeans money, securities, and any other property; except that such term does not in- clude stock in the corporation making the dis- tribution (or rights to acquire such stock). (b) Redemption of stock For purposes of this part, stock shall be treat- ed as redeemed by a corporation if the corpora- tion acquires its stock from a shareholder in ex- change for property, whether or not the stock so acquired is cancelled, retired, or held as trea- sury stock, (Aug. 16, 1954, ch. 736, 68A Stat. 99.) CRoss REFERENCES Dispositions other than redemptions, see section 306 of this title. 71-999 0 - 78 - 18 (Vol. 7) Page 245
TITLE 26-INTERNAL REVENUE CODE Distributions of property, see section 301 of this title. Redemptions treated as distributions of property, see section 302 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 301, 302, 306, 593 of this title. § 318. Constructive ownership of stock (a) General rule For purposes of those provisions of this sub- chapter to which the rules contained in this section are expressly made applicable- (1) Members of family (A) In general An individual shall be considered as owning the stock owned, directly or Indi- rectly, by or for- (i) his spouse (other than a spouse who is legally separated from the individual under a decree of divorce or separate maintenance), and (Ii) his children, grandchildren, and par- ents. (B) Effect of adoption For purposes of subparagraph (A)(il), a le- gally adopted child of an individual shall be treated as a child of such individual by blood. (2) Attribution from partnerships, estates, trusts, and corporations (A) From partnerships and estates Stock owned, directly or indirectly, by or for a partnership or estate shall be consid- ered as owned proportionately by its part- ners or beneficiaries. (B) From trusts (I) Stock owned, directly or indirectly, by or for a trust (other than an employ- ees' trust described in section 401(a) which is exempt from tax under section 501(a)) shall be considered as owned by its beneficiaries in proportion to the actuar- ial interest of such beneficiaries in such trust. (ii) Stock owned, directly or indirectly, by or for any portion of a trust of which a person is considered the owner under sub- part E of part I of subchapter J (relating to grantors and others treated as substan- tial owners) shall be considered as owned by such person. (C) From corporations If 50 percent or more in value of the stock in a corporation is owned, directly or indi- rectly, by or for any person, such person shall be considered as owning the stock owned, directly or indirectly, by or for such corporation, in that proportion which the value of the stock which such person so owns bears to the value of all the stock in such corporation. (3) Attribution to partnerships, estates, trusts, and corporations (A) To partnerships and estates Stock owned, directly or indirectly, by or for a partner or a beneficiary of an estate shall be considered as owned by the part- nership or estate. (B) To trusts (i) Stock owned, directly or indirectly, by or for a beneficiary of a trust (other than an employees' trust described in sec- tion 401(a) which is exempt from tax under section 501(a)) shall be considered as owned by the trust, unless such benefi- ciary's interest in the trust is a remote contingent interest. For purposes of this clause, a contingent interest of a benefi- ciary in a trust shall be considered remote if, under the maximum exercise of discre- tion by the trustee in favor of such bene- ficiary, the value of such interest, com- puted actuarially, is 5 percent or less of the value of the trust property. (i1) Stock owned, directly or indirectly, by or for a person who is considered the owner of any portion of a trust under sub. part E of part I of subchapter J (relating to grantors and others treated as substan- tial owners), shall be considered as owned by the trust. (C) To corporations If 50 percent or more in value of the stock in a corporation is owned, directly or indi- rectly, by or for any person, such corpora- tion shall be considered as owning the stock owned, directly or indirectly, by or for such person. (4) Options If any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this para- graph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock. (5) Operating rules (A) In general Except as provided in subparagraphs (B) and (C), stock constructively owned by a person by reason of the application of para- graph (1), (2), (3), or (4), shail, for purposes of applying paragraphs (1), (2), (3), and (4), be considered as actually owned by such person. (B) Members of family Stock constructively owned by an individ- ual by reason of the application of para- graph (1) shall not be considered as owned by him for purposes of again applying para- graph (1) in order to make another the con- structive owner of such stock. (C) Partnerships, estates, trusts, and corporations Stock constructively owned by a partner- ship, estate, trust, or corporation by reason of the application of paragraph (3) shall not be considered as owned by it for purposes of applying paragraph (2) in order to make an- other the constructive owner of such stock. (D) Option rule in lieu of family rule For purposes of this paragraph, if stock may be considered as owned by an individ- ual under paragraph (1) or (4), it shall be considered as owned by him under para- graph (4). Page 246 § 318
TITLE 26-INTERNAL REVENUE CODE (b) Cross references For provisions to which the rules contained in subsec- tion (a) apply, see- (1) section 302 (relating to redemption of stock); (2) section 304 (relating to redemption by related cor. porations); (3) section 306(b)(l)(A) (relating to disposition of sec- tion 306 stock); (4) section 334(b)(3)(C) (relating to basis of property received In certain liquidations of subsidiaries'); (5) section 382(a)(3) (relating to special limitations on net operating loss carryovers); (6) section 856(d) (relating to definition of rents from real property in the case of real estate investment trusts); (7) section 958(b) (relating to constructive ownership rules with respect to controlled foreign corporations); and (8) section 6038(d)(1) (relating to information with re- spect to certain foreign corporations). (Aug. 16, 1954, ch. 736, 68A Stat, 99; Sept. 14, 1960, Pub. L. 86-779, § 10(h), 74 Stat. 1009; Oct. 16, 1962, Pub. L. 87-834, § 20(d)(1), 76 Stat. 1063; Aug. 31, 1964, Pub. L. 88-554, § 4(a), (b)(2), 78 Stat. 762, 763.) AMENDMENTS 1964-Subset. (a). Pub. L. 88-554, § 4(a), eliminated sidewisi attribution by providing that when stock is attributed to a partnership, estate, trust, or corpora- tion from a partner, shareholder, or beneficiary, this stock is not to be attributed again to another partner, beneficiary, or shareholder. Subsec. (b). Pub. L. 88-554, § 4(b)(2), added para- graph (7), and redesignated former paragraph (7) as (8). 1962-Subsec. (b). Pub. L. 87-834 added paragraph (7). 1960-Subsec. (b). Pub. L. 86-779 added paragraph (6). EFFECTIVE DATE OF 1964 AMENDMENT Section 4(c) of Pub. L. 88-554 provided that: "The amendments made by this section (to sections 304, 318, 382, 856, 958, and 6038 of this title] shall take effect on the date of the enactment of this Act, [Aug. 31, 1964], except that, for purposes of sections 302 and 304 of the Internal Revenue Code of 1954 [sections 302 and 304 of this title], such amendments shell not apply with respect to distributions in payment for stock acquisitions or redemptions, if such acquisitions or redemptions occurred before the date of the enact- ment of this Act [Aug. 31, 1964]." EFFECTIVE DATE OF 1960 AMENDMENT Amendment by Pub. L. 86-779 applicable with re- spect to taxable years of real estate investment trusts beginning after Dec. 31, 1960, see section 10(k) of Pub. L. 86-779, set out as an Effective Date note under sec- tion 856 of this title. CROSS REFERENCES Basis of property received in liquidations, purchase defined, see section 334 of this title. Distributions in redemption of stock, this section to apply in determining ownership, see section 302 of this title. Redemption through use of related corporations, this section to apply to determining control, see sec- tion 304 of this title. Special limitations on net operating loss carryovers, this section to apply in determining ownership of stock, see section 382 of this title. Termination of shareholder's interest, this section to apply, see section 306 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 103, 129, 302, 304, 306, 334, 367, 382, 545, 856, 958, 995, 1379, 6038 of this title. PART II-CORPORATE LIQUIDATIONS Subpart A. Effects of recipients. B. Effects on corporation. C. Collapsible corporations. D. Definition. AMENDMENTS 1976-Pub. L. 94-455, title XIX, § 1901(b)(12)(B), Oct. 4. 1976, 90 Stat. 1795, struck out in table of Sub- parts for Part II of Subchapter C of Chapter 1 in Sub- part (C) "; foreign personal holding companies" fol- lowing "corporations". PART REFrmEM TO IN OTHER SECTIONS This part is referred to in section 306 of this title. SUBPART A-EFFECTS ON RECIPIENTS Sec. 331. Gain or loss to shareholder in corporate liquida- tions. 332. Complete liquidations of subsidiaries. 333. Election as to recognition of gain in certain liqui- dations. 334. Basis of property received in liquidations. § 331. Gain or loss to shareholders In corporate liqul. dations (a) General rule (1) Complete liquidations Amounts distributed in complete liquida- tion of a corporation shall be treated as in full payment in exchange for the stock. (2) Partial liquidations Amounts distributed in partial liquidation of a corporation (as defined in section 346) shall be treated as in part or full payment in exchange for the stock. (b) Nonapplication of section 301 Section 301 (relating to effects on share- holder of distributions of property) shall not apply to any distribution of property (other than a distribution referred to in paragraph (2)(B) of section 316(b)) in partial or complete liquidation. (e) Cross reference For general rule for determination of the amount of gain or loss recognized, see section 1001. (Aug. 16, 1954, ch. 736, 68A Stat. 101; Feb. 26, 1964, Pub. L. 88-272, title II, § 225(f)(2), 78 Stat. 88; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(b)(28)(A), 90 Stat. 1799.) AMENDMENTS 1976-Subsec. (c). Pub. L. 94-455 substituted "refer- ence" for "references" in subsec. catchline and struck out cross reference relating to general rule for deter- mination of the amount of gain or loss to the distribu- tee and substituted "1001" for "1002". 1964-Subsec. (b). Pub. L. 88-272 inserted "(other than a distribution referred to in paragraph (2)(B) of section 316(b))". EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (c) by section 1901(b)(28)(A) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272 applicable to distribu- tion made in any taxable year of the distributing ;r- Page 247 § 331
TITLE 26-INTERNAL REVENUE CODE poration beginning after Dec. 31, 1963, see section 225(l) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 316 of this title. LIQUIDATIONS BEFORE JANUARY 1, 1966 Section 225(h) of Pub. L. 88-272 provided that in the case of corporations referred to in former subsec. (g)(3) of this section the amendments made by section 225 of Pub. L. 88-272 do not apply if there is a com- plete liquidation of such corporation and if the distri- bution of all the property under such liquidation occurs before Jan. 1, 1966, except for certain liquida- tions to which section 332 of this title applies. CROSS REFERENCES Distributions in redemption of stock, see section 302 of this title. Earnings and profits, special rule for partial liquida- tions, see section 312 of this title. Gain or loss on sales or exchanges in connection with certain liquidations, see section 337 of this title. Liquidations before Jan. 1, 1966, see section 225(h) of Pub. L. 88-272, set out as a note under section 333 of this title. SECTION REFERRED TO IN OTHER SECTIONS This sectin is referred to in sections 302, 1246, 1248, 1372, 6162 ot this title. § 332. Complete liquidations of subsidiaries (a) General rule No gain or loss shall be recognized on the re- ceipt by a corporation of property distributed in complete liquidation of another corporation. (b) Liquidations to which section applies For purposes of subsection (a), a distribution shall be considered to be in complete liquida- tion only if- (1) the corporation receiving such property was, on the date of the adoption of the plan of liquidation, and has continued to be at all times until the receipt of the property, the owner of stock (in such other coporation) pos- sessing at least 80 percent of the total com- bined voting power of all classes of stock enti- tled to vote and the owner of at least 80 per- cent of the total number of shares of all other classes of stock (except nonvoting stock which is limited and preferred as to divi- dends); and either (2) the distribution is by such other corpo- ration in complete cancellation or redemption of all its stock, and the transfer of all the property occurs within the taxable year; in such case the adoption by the shareholders of the resolution under which is authorized the distribution of all the assets of such corpora- tion in complete cancellation or redemption of all its stock shall be considered an adoption of a plan of liquidation, even though no time for the completion of the transfer of the property is specified in such resolution; or (3) such distribution is one of a series of dis- tributions by such other corporation in com- plete cancellation or redemption of all its stock in accordance with a plan of liquidation under which the transfer of all the property under the liquidation is to be completed within 3 years from the close of the taxable year during which is made the first of the series of distributions under the plan, except that if such transfer is not completed within such period, or if the taxpayer does not con- tinue qualified under paragraph (1) until the completion of such transfer, no distribution under the plan shall be considered a distribu- tion in complete liquidation. If such transfer of all the property does not occur within the taxable year, the Secretary may require of the taxpayer such bond, or waiver of the statute of limitations on assess- ment and collection, or both, as he may deem necessarY to insure, if the transfer of the prop- erty is not completed within such 3-year period, or if the taxpayer does not continue qualified under paragraph (1) until the completion of such transfer, the assessment and collection of all income taxes then Imposed by law for such taxable year or subsequent taxable years, to the extent attributable to property so received. A distribution otherwise constituting a distribu- tion in complete liquidation within the meaning of this subsection shall not be considered as not constituting such a distribution merely because it does not constitute a distribution or liquida- tion within the meaning of the corporate law under which the distribution is made; and for purposes of this subsection a transfer of prop- erty of such other corporation to the taxpayer shall not be considered as not constituting a distribution (or one of a series of distributions) in complete cancellation or redemption of all the stock of such other corporation, merely be- cause the carrying out of the plan involves (A) the transfer under the plan to the taxpayer by such other corporation of property, not attrib- utable to shares owned by the taxpayer, on an exchange described in section 361, and (B) the complete cancellation or redemption under the plan, as a result of exchanges described in sec- tion 354, of the shares not owned by the tax- payer, (c) Special rule for indebtedness of subsidiary to parent If- (1) a corporation is liquidated and subsec- tion (a) applies to such liquidation, and (2) on the date of the adoption of the plan of liquidation, such corporation was indebted to the corporation which meets the 80 per- cent stock ownership requirements specified in subsection (b), then no gain or loss shall be recognized to the corporation so indebted because of the transfer of property in satisfaction of such indebted- ness. (Aug. 16, 1954, ch. 736, 68A Stat. 102; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (b). Pub. L. 94-455 struck out "or his delegate" following "Secretary". CROSS REFERENCES Basis of property received in liquidations, see section 334 of this title. Carryovers in corporate acquisitions to which this section applies, see section 381 of this title. Foreign corporations, not considered as a corpora- tion in determining the extent to which gain shall be recognized in the case of exchanges described in this section, see section 367 of this title. Gain or loss on sales or exchanges in connection with certain liquidations, liquidations to which this section applies, see section 337 of this title. § 332 Page 248
TITLE 26-INTERNAL REVENUE CODE Installment obligation, effect of distribution in liqui- dation on recognition of gain or loss, see section 453 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 48, 49, 334, 337, 341, 367, 381, 453, 1101, 1245, 1250, 1251 of this title. § 333. Election as to recognition of gain in certain liq. uldations (a) General rule In the case of property distributed in com- plete liquidation of a domestic corporation (other than a collapsible corporation to which section 341(a) applies), if- (1) the liquidation is made in pursuance of a plan of liquidation adopted, and (2) the distribution is in complete cancella- tion or redemption of all the stock, and the transfer of all the property under the liquida- tion occurs within some one calendar month, then in the case of each qualified electing shareholder (as defined in subsection (c)) gain on the shares owned by him at the time of the adoption of the plan of liquidation shall be rec- ognized only to the extent provided in subsec- tions (e) and f). (b) Excluded corporation For purposes of this section, the term "ex- cluded corporation" means a corporation which at any time between January 1, 1954, and the date of the adoption of the plan of liquidation, both dates inclusive, was the owner of stock possessing 50 percent or more of the total com- bined voting power of all classes of stock enti- tled to vote on the adoption of such plan. (c) Qualified electing shareholders For purposes of this section, the term "quali- fied electing shareholder" means a shareholder (other than an excluded corporation) of any class of stock (whether or not entitled to vote on the adoption of the plan of liquidation) who is a shareholder at the time of the adoption of such plan, and whose written election to have the benefits of subsection (a) has been made and filed in accordance with subsection (d), but- (1) in the case of a shareholder other than a corporation, only if written elections have been so filed by shareholders (other than cor- porations) who at the time of the adoption of the plan of liquidation are owners of stock possessing at least 80 percent of the total combined voting power (exclusive of voting power possessed by stock owned by corpora- tions) of all classes of sotck entitled to vote on the adoption of such plan of liquidation; or (2) in the case of a shareholder which is a corporation, only if written elections have been so filed by corporate shareholders (other than an excluded corporation) which at the time of the adoption of such plan of liquidation are owners of stock possessing at least 80 percent of the total combined voting power (exclusive of voting power possessed by stock owned by an excluded corporation and by shareholders who are not corporations) of all classes of stock entitled to vote on the adoption of such plan of liquidation. (d) Making and filing of elections The written elections referred to in subsec- tion (c) must be made and filed in such manner as to be not in contravention of regulations pre- scribed by the Secretary. The filing must be within 30 days after the date of the adoption of the plan of liquidation. (e) Noncorporate shareholders In the case of a qualified electing shareholder other than a corporation- (1) there shall be recognized, and treated as a dividend, so much of the gain as is not in excess of his ratable share of the earnings and profits of the corporation accumulated after February 28, 1913, such earnings and profits to be determined as of the close of the month in which the transfer in liquidation oc- curred under subsection (a)(2), but without diminution by reason of distributions made during such month; but by including in the computation thereof all amounts accrued up to the date on which the transfer of all the property under the liquidation is cowpleted; and (2) there shall be recognized, and treated as short-term or long-term capital gain, as the case may be, so much of the remainder of the gain as is not in excess of the amount by which the value of that portion of the assets received by him which consists of money, or of stock or securities acquired by the corpora- tion after December 31, 1953, exceeds his rat- able share of such earnings and profits. (f) Corporate shareholders In the case of a qualified electing shareholder which is a corporation, the gain shall be recog- nized only to the extent of the greater of the two following- (1) the portion of the assets received by it which consists of money, or of stock or securi- ties acquired by the liquidating corporation after December 31, 1953; or (2) its ratable share of the earnings and profits of the liquidating corporation accumu- lated after February 28, 19L3, such earnings and profits to be determined as of the close of the month in which the transfer in liquida- tion occurred under subsection (a)(2), , w without diminution by reason of distributin,., made during such month; but by including In the computation thereof all amounts accrued up to the date on which the transfer of all the property under the liquidation is complet- ed. (Aug. 16, 1954, ch. 736, 68A Stat. 103; Feb. 26, 1964, Pub. L. 88-272, title II, § 225(g), 78 Stat. 89; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(a)(44), 1906(b)(13)(A), 1951(b)(6)(A), 90 Stat. 1772, 1834, 1838.) AMENDMENTS 1976-Subsec. (a)(1). Pub. L. 94-455, § 1901(a)(44), struck out "on or after June 22, 1954" following "plan of liquidation adopted". Subsec. (d). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsee. (g). Pub. L. 94-455, § 1951(b)(6)(A), struck out subsec. (g) which related to a special rule for liqui- dations occurring before Jan. 1, 1967. 1964-Subsec. (g). Pub. L. 88-272 added subsection (g). Page 249 § 333
TITLE 26-INTERNAL REVENUE CODE EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (a)(1) by section 1901(a)(44) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31. 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Amendment of subsec. (g) by section 1951(b)(6)(A) of Pub. L. 94-455 effective, except as otherwise ex- pressly provided, for taxable years beginning after Dec. 31, 1976, see section 1951(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 72 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment of section Pub. L. 88-272 applicable to distributions made in any taxable year of the distrib- uting corporation beginning after Dec. 31, 1963, see section 225(l) of Pub. L. 88-272, set out as an Effective Date of 1976 Amendment note under section 316 of this title. SAVINGS PROVISION Section 1951(b)(6)(B) of Pub. L. 94-455 provided that: "Notwithstanding subparagraph (A) [repealing subsec. (g) of this section], if any corporation meets all the requirements of section 333(g)(2)(B) [subsec. (g)(2)(B) of this section], as in effect before its repeal by this Act [see Tables volume for distribution of Pub. L. 94-455], the liquidation of such corporation shall be treated as if paragraphs (2), (3), and (4) of section 333(g) had not been repealed." PHASE-IN OF 12-MONTH HOLDING PERIOD REQUIREMENT Section 1951(b)(6)(C) of Pub. L. 94-455 provided that: "For purposes of subparagraph (B), the period for holding of stock specified in section 333(g)(2)(A)(ii) (subsee. (g)(2)(A)(ii) of this section], as in effect before such repeal, shall- "(i) in the case of taxable years beginning in 1977, be considered to be '9 months'; and "(i) in the case of taxable years beginning after December 31, 1977, be considered to be '1 year'." RECOGNITION OF GAIN IN CERTAIN LIQUIDATIONS Pub. L. 91-172, title IX, § 917, Dec. 30, 1969, 83 Stat. 724, provided that in applying subscs. (e) and (f) of this section to a distribution in liquidation of a corpo- ration during 1970, stock or securities received by a qualified electing shareholder in exchange for his stock in the liquidating corporation was to be consid- ered as if acquired by the liquidating corporation before Jan. 1, 1954 if certain conditions were met. CROSS REFERENCES Basis of property received in liquidation under this section, see section 334 of this title. For application of section 225(h) of Pub. L. 88-272 to taxable years beginning after Dec. 31, 1963, see section 225(l) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 316 of this title. Gain or loss. section as not applicable to any sale or exchange following adoption of a plan of complete liq- uidation to which this section applies, see section 337 of this title. Partial liquidation defined, see section 346 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 334, 337 of this title. § 334. Basis of property received in liquidations (a) General rule If property is received in a distribution in par- tial or complete liquidation (other than a distri- bution to which section 333 applies), and if gain or loss is recognized on receipt of such proper- ty, then the basis of the property in the hands of the distributee shall be the fair market value of such property at the time of the distribution. (b) Liquidation of subsidiary (1) In general If property is received by a corporation in a distribution in complete liquidation of an- other corporation (within the meaning of sec- tion 332(b)), then, except as provided in para- graph (2), the basis of the property in the hands of the distributee shall be the same as It would be in the hands of the transferor. If property is received by a corporation in a transfer to which section 332(c) applies, and if paragraph (2) of this subsection does not apply, then the basis of the property in the hands of the transferee shall be the same as it would be in the hands of the transferor. (2) Exception If property is received by a corporation in a distribution in complete liquidation of an- other corporation (within the meaning of sec- tion 332(b)), and if- (A) the distribution is pursuant to a plan of liquidation adopted not more than 2 years after the date of the transaction de- scribed in subparagraph (B) (or, in the case of a series of transactions, the date of the last such transaction); and (B) stock of the distributing corporation possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote, and at least 80 per- cent of the total number of shares of all other classes of stock (except nonvoting stock which is limited and preferred as to dividends), was acquired by the distributee by purchase (as defined in paragraph (3)) during a 12-month period beginning with the earlier of- (i) the date of the first acquisition by purchase of such stock, or (1i) if any of such stock was acquired in an acquisition which is a purchase within the meaning of the second sentence of paragraph (3), the date on which the dis- tributee is first considered under section 318(a) as owning stock owned by the cor- poration from which such acquisition was made, then the basis of the property in the hands of the distributee shall be the adjusted basis of the stock with respect to which the distribution was made. For purposes of the preceding sentence, under regulations pre- scribed by the Secretary, proper adjustment in the adjusted basis of any stock shall be made for any distribution made to the dis- tributee with respect to such stock before the adoption of the plan of liquidation, for any money received, for any liabilities as- sumed or subject to which the property was received, and for other items. (3) Purchase defined For purposes of paragraph (2)(B), the term "purchase" means any acquisition of stock, but only if- (A) the basis of the stock in the hands of the distributee is not determined (1) in whole or in part by reference to the adjust- § 334 Page 250
TITLE 26-INTERNAL REVENUE CODE ea basis of such stock in the hands of the person from whom acquired, or (ii) under section 1014(a) (relating to property ac- quired from a decedent), (B) the stock is not acquired in an ex- change to which section 351 applies, and (C) the stock is not acquired from a person the ownership of whose stock would, under section 318(a), be attributed to the person acquiring such stock. Notwithstanding subparagraph (C) of this paragraph, for purposes of paragraph (2)(B), the term "purchase" also means an acquisi- tion of stock from a corporation when owner- ship of such stock would be attributed under section 318(a) to the person acquiring such stock, if the stock of such corporation by reason of which such ownership would be at- tributed was acquired by purchase (within the meaning of the preceding sentence). (4) Distributee defined For purposes of this subsection, the term "distributee" means only the corporation which meets the 80 percent stock ownership requirements specified in section 332(b). (c) Property received in liquidation under section 333 If- (1) property was acquired by a shareholder in the liquidation of a corporation in cancella- tion or redemption of stock, and (2) with respect to such acquisition- (A) gain was realized, but (B) as the result of an election made by the shareholder under section 333, the extent to which gain was recognized was de- termined under section 333, then the basis shall be the same as the basis of such stock cancelled or redeemed in the liquida- tion, decreased in the amount of any money re- ceived by the shareholder, and increased in the amount of gain recognized to him.. (Aug. 16, 1954, ch. 736, 68A Stat. 104; Nov. 13, 1966, Pub. L. 89-809, title II, § 202(a), (b), 80 Stat. 1576; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(a)(45), 1906(b)(13)(A), 90 Stat. 1772, 1834.) AMENDMENTS 1976-Subsec. (b)(2). Pub. L. 94-455, §§ 1901(a)(45), 1906(b)(13)(A), struck out in subpar. (A) provision re- lating to distributions made pursuant to a plan of liq- uidation adopted on or before June 22, 1954, and in provisions following subpar. (B)(ii) "or his delegate" following "Secretary". 1966-Subsec. (b)(2)(B). Pub. L. 89-809, § 202(b), in- serted provisions for the determination of the date on which to commence the running of the 12-month period during which the distributee must have ac- quired the stock by purchase by adding clauses (i) and (it). Subsec. (b)(3). Pub. L. 89-809, § 202(a), added provi- sion that, for purposes of par. (2)(B), the term "pur- chase" also means an acquisition of stock from a cor- poration when ownership of such stock would be at- tributed under section 318(a) to the person acquiring such stock, if the stock of such corporation by reason of which such ownership would be attributed was ac- quired by purchase. EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (b)(2) by section 1901(a)(45) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Section 202(d) of Pub. L. 89-809 provided that: "The amendment made by subsection (a) [amending subsec. (b)(3) of this section] shall apply only with respect to acquisitions of stock after December 31, 1965. The amendment made by subsections (b) and (c) [amend- ing subsec. (b)(2)(B) of this section and section 453(d)(4)(A) of this title] shall apply only with respect to distributions made after the date of the enactment of this Act [Nov. 13, 1966]." ADJUSTMENT FOR LIABILITY TO BASIS OF PROPERTY Dis- TRIBUTED IN COMPLETE LIQUIDATION OF CORPORATION PRIOR TO JULY 1. 1957; DEDUCTION FOR UNCOMPENSAT- ED LIABILITY Pub. L. 93-497, § 3, Oct. 29, 1974. 88 Stat. 1534, pro- vided that: "(a) Notwithstanding the provisions of section 334 of the Internal Revenue Code of 1954 [this section] (re- lating to basis of property received in liquidations), no adjustment to the basis of any property distributed in complete liquidation of a corporation prior to July 1, 1957, shall be made for any liability if- "(1) the distributor and distributee did not consid- er the liability relevant to the value of the stock with respect to which the distribution was made, "(2) the distributor and distributee reasonably relied upon a decision of a United States district court specifically adjudicating the amount of the li- ability and its affirmance by the appropriate United States court of appeals, and "(3) the amount of liability so adjudicated was not greater than would be compensated for by insur- ance. The provisions of this section apply without regard to whether such decision was subsequently reversed or modified by that United States court of appeals fol- lowing distribution of such property in complete liqui- dation. "(b) To the extent that the liability described in sub- section (a) is not compensated for by insurance or oth- erwise, the amount thereof shall be allowed as a de- duction under the appropriate provision of the Inter- nal Revenue Code of 1954 [this title] for the taxable year in which payment thereof was made and shall be effective in determining income tax liabilities of all taxable years prior thereto." CROSS REFERENCES Carryovers in corporate acquisitions, exception where basis of assets distributed is determined under subsection (b)(2) of this section, see section 381 of this section. Corporate organizations, basis to distributees, see section 358 of this title. Gain or loss on sales or exchanges in connection with liquidations to which section 332 applies, see sec- tion 337 of this title. Partial liquidation defined, see section 346 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 48, 49, 318, 337, 381, 453, 617 of this title. SUBPART B-EFFECTS ON CORPORATION SeC. 336. General rule. 337. Gain or loss on sales or exchanges in connection with certain liquidations. 338. Effect on earnings and profits. § 336. General rule Except as provided in section 453(d) (relating to disposition of installment obligations), no gain or loss shall be recognized to a corporation Page 251 § 336
TITLE 26-INTERNAL REVENUE CODE on the distribution of property in partial or complete liquidation. (Aug. 16, 1954, ch. 736, 68A Stat. 106.) SECTION REFEURRD TO IN OTHER SECTIONS This section is referred to in section 995 of this title. § 337. Gain or loss on sales or exchanges in connec- tion with certain liquidations (a) General rule If, within the 12-month period beginning on the date on which a corporation adopts a plan of complete liquidation, all of the assets of the corporation are distributed in complete liquida- tion, less assets retained to meet claims, then no gain or loss shall be recognized to such cor- poration from the sale or exchange by It of property within such 12-month period. (b) Property defined (1) In general For purposes of subsection (a), the term "property" does not include- (A) stock in trade of the corporation, or other property of a kind which would prop- erly be included in the inventory of the cor- poration if on hand at the close of the tax- able year, and property held by the corpo- ration primarily for sale to customers in the ordinary course of Its trade or business, (B) installment obligations acquired in re- spect of the sale or exchange (without regard to whether such sale or exchange oc- curred before, on, or after the date of the adoption of the plan referred to in subsec- tion (a)) of stock in trade or other property described in subparagraph (A) of this para- graph, and (C) installment obligations acquired in re- spect of property (other than property de- scribed in subparagraph (A)) sold or ex- changed before the date of the adoption of such plan of liquidation. (2) Nonrecognition with respect to inventory in cer- tain cases Notwithstanding paragraph (1) of this sub- section, if substantially all of the property de- scribed in subparagraph (A) of such para- graph (1) which is attributable to a trade or business of the corporation is, in accordance with this section, sold or exchanged to one person in one transaction, then for purposes of subsection (a) the term "property" in- cludes- (A) such property so sold or exchanged, and (B) installment obligations acquired in re- spect of such sale or exchange. (c) Limitations (1) Collapsible corporations and liquidations to which section 333 applies This section shall not apply to any sale or exchange- (A) made by a collapsible corporation (as defined in section 341(b)), or (B) following the adoption of a plan of complete liquidation, if section 333 applies with respect to such liquidation. (2) Liquidations to which section 332 applies In the case of a sale or exchango following the adoption of a plan of complete liquida- tion, if section 332 applies with respect to such liquidation, then- (A) if the basis of the property of the li- quidating corporation in the hands of the distributee is determined under section 334(b)(1), this section shall not apply; or (B) if the basis of the property of the li- quidating corporation in the hands of the distributee is determined under section 334(b)(2), this section shall apply only to that portion (if any) of the gain which is not greater than the excess of (I) that por- tion of the adjusted basis (adjusted for any adjustment required under the second sen- tence of section 334(b)(2)) of the stock of the liquidating corporation which is alloca- ble, under regulations prescribed by the Secretary, to the property sold or ex- changed, over (ii) the adjusted basis, in the hands of the liquidating corporation, of the property sold or exchanged. This paragraph shall not apply to a sale or exchange by a member of an affiliated group of corporations, as defined in section 1504(a) (but without regard to the exceptions con- tained in section 1504(b)), if each member of such group (including the common parent corporation) which receives, within the 12- month period beginning on the date of the adoption of a plan of complete liquidation by the corporation which made the sale or ex- change, a distribution in complete liquidation from any other member of such group is itself completely liquidated within such 12-month period. (d) Special rule for certain minority shareholders If a corporation adopts a plan of complete liq- uidation, and if subsection (a) does not apply to sales or exchanges of property by such corpora- tion, solely by reason of the application of sub- section (c)(2)(A), then for the first taxable year of any shareholder (other than a corporation which meets the 80 percent stock ownership re- quirement specified in section 322(b)(1)) in which he receives a distribution in complete liq- uidation- (1) the amount realized by such share- holder on the distribution shall be increased by his proportionate share of the amount by which the tax imposed by this subtitle on such corporation would have been reduced if subsection (c)(2)(A) had not been applicable, and (2) for purposes of this title, such share- holder shall be deemed to have paid, on the last day prescribed by law for the payment of the tax imposed by this subtitle on such shareholder for such taxable year, an amount of tax equal to the amount of the increase de- scribed in paragraph (1). (Aug. 16, 1954, ch. 736, 68A Stat. 106; Sept. 2, 1958, Pub. L. 85-866, title I, § 19, 72 Stat. 1615; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(a)(46), 1906(b)(13)(A), title XXI, § 2118(a), 90 Stat. 1772, 1834, 1912.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, § 1901(a)(46)(A), among other changes, struck out provisions limiting the general rule to corporations adopting a plan of complete liquidation on or after June 22, 1954. Page 252 § 337
TITLE 26-INTERNAL REVENUE CODE Subsec, (c)(2). Pub. L. 94-455, §§ 1906(b)(13)(A), 2118(a), struck out in subpar. (B) "or his delegate" fol- lowing "Secretary" and added provisions following subpar. (B) limiting the applicability of this paragraph in certain instances where there is a sale or exchange by a member of an affiliated group of corporations. Subsec. (d). Pub. L. 94-455, § 1901(a)(46)(B), struck out "on or after January 1, 1958" following "adopts a plan of complete liquidation". 1958-Subsec. (d). Pub. L. 85-866 added subsection (d). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (a) and (d) by section 1901(a)(46) of Pub. L.. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Section 2118(b) of Pub. L. 94-455 provided that: "The amendments made by subsection (a) [amending this section] Rhall apply to sales or exchanges made pursuant to a plan of complete liquidation adopted after December 31, 1975". EFFECTIVE DATE OF 1958 AMENDMENT Subsection (d) of this section applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section l(c) of Pub. L. 85-866, set out as an Effective Date of 1958 Amendment note under section 165 of this title. CROSS REFERENCES Gain or loss to shareholders in corporate liquida- tions, see section 331 of this title. Installment obligation, effect of distribution in liqui- dation on recognition of gain or loss, see section 453 of this title. Partial liquidation defined, see section 346 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to :n sections 341, 453, 995, 1248 of this title. § 338. Effect on earnings and profits For special rule relating to the effect on earnings and profits of certain distributions in partial liquidation, see section 312(e). (Aug. 16, 1954, ch. 736, 68A Stat. 107.) SUBPART C-COLLAPSIBLE CORPORATIONS Sec. 341. Collapsible corporations. [342. Repealed.] AMENDMENTS 1976-Pub. L. 94-455, title XIX, § 1901(b)(12)(C), (D), Oct. 4, 1976, 90 Stat. 1795, struck out in Subpart head- ing "; Foreign Personal Holding Companies" following "Collapsible Corporations" and item 342 "Liquidation of certain foreign personal holding companies.". § 341. Collapsible corporations (a) Treatment of gain to shareholders Gain from- (1) the sale or exchange of stock of a col- lapsible corporation, (2) a distribution in partial or complete liq- uidation of a collapsible corporation, which distribution is treated under this part as in part or full payment in exchange for stock, and (3) a distribution made by a collapsible cor- poration which, under section 301(c)(3)(A), is treated, to the extent it exceeds the basis of the stock, in the same manner as a gain from the sale or exchange of property, to the extent that it would be considered (but for the provisions of this section) as gain from the sale or exchange of a capital asset held for more than 9 months shall, except as otherwise provided in this section, be considered as ordi- nary income. (b) Definitions (1) Collapsible corporation For purposes of this section, the term "col- lapsible corporation" means a corporation formed o-- availed of principally for the manu- facture, construction, or production of prop- erty, for the purchase of property which (in the hands of the corporation) is property de- scribed in paragraph (3), or for the holding of stock in a corporation so formed or availed of, with a view to- (A) the sale or exchange of stock by its shareholders (whether in liquidation or oth- erwise), or a distribution to its shareholders, before the realization by the corporation manufacturing, constructing, producing, or purchasing the property of a substantial part of the taxable income to be derived from such property, and (B) the realization by such shareholders of gain attributable to such property. (2) Production or purchase of property For purposes of paragraph (1), a corpora- tion shall be v eemed to have manufactured, constructed, produced, or purchased proper- ty, if- (A) it engaged in the manufacture, con- struction, or production of such property to any extent, (B) it holds property having a basis deter- mined, in whole or in part, by reference to the cost of such property in the hands of a person who manufactured, constructed, pro- duced, or purchased the property, or (C) it holds property having a basis deter. mined, in whole or in part, by reference to the cost of property manufactured, con- structed, produced, or purchased by" the cor- poration. (3) Section 341 assets For purposes of this section, the term "sec- tion 341 assets" means property held for a period of less than 3 years which is- (A) stock in trade of the corporation, or other property of a kind which would prop- erly be included in the inventory of the cor- poration if on hand at the close of the tax- able year; (B) property held by the corporation pri- marily for sale to customers in the ordinary course of its trade or business; (C) unrealized receivables or fees, except receivables from sales of property other than property described in this paragraph; or (D) property described in section 1231(b) (without regard to any holding period therein provided), except such property which is or has been used in connection with the manufacture, construction, pro- duction, or sale of property described in subparagraph (A) or (B). Page 253 § 341
TITLE 26-INTERNAL REVENUE CODE In determining whether the 3-year holding period specified in this paragraph has been satisfied, section 1223 shall apply, but no such period shall be deemed to begin before the completion of the manufacture, construction, production, or purchase. (4) Unrealized receivables For purposes of paragraph (3)(C), the term "unrealized receivables or fees" means, to the extent not previously includible in income under the method of accounting used by the corporation, any rights (contractual or other- wise) to payment for- (A) goods delivered, or to be delivered, to the extent the proceeds therefrom would be treated as amounts received from the sale or exchange of property other than a cap- ital asset, or (B) services rendered or to be rendered. (c) Presumption in certain cases (I) In general For purposes of this section, a corporation shall, unless shown to the contrary, be deemed to be a collapsible corporation if (at the time of the sale or exchange, or the distri- bution, described in subsection (a)) the fair market value of its section 341 assets (as de- fined in subsection (b)(3)) is- (A) 50 percent or more of the fair market value of its total assets, and (B) 120 percent or more of the adjusted basis of such section 341 assets. Absence of the conditions described in sub- paragraphs (A) and (B) shall not give rise to a presumption that the corporation was not a collapsible corporation. (2) Determination of total assets In determining the fair market value of the total assets of a corporation for purposes of paragraph (1)(A), there shall not be taken into account- (A) cash, (B) obligations which are capital assets in the hands of the corporation (and govern- mental obligations described in section 1221(5)), and (C) stock in any other corporation. (d) Limitations on application of section In the case of gain realized by a shareholder with respect to his stock in a collapsible corpo- ration, this section shall not apply- (1) unless, at any time after the commence- ment of the manufacture, construction, or production of the property, or at the time of the purchase of the property described In subsection (b)(3) or at any time thereafter, such shareholder (A) owned (or was consid- ered as owning) more than 5 percent in value of the outstanding stock of the corporation, or (B) owned stock which was considered as owned at such time by another shareholder who then owned (or was considered as owning) more than 5 percent in value of the outstanding stock of the corporation; (2) to the gain recognized during a taxable year, unless more than 70 percent of such gain is attributable to the property so manu- factured, constructed, produced, or pur- chased; and (3) to gain realized after the expiration of 3 years following the completion of such manu- facture, construction, production, or pur- chase. For purposes of paragraph (1), the ownership of stock shall be determined in accordance with the rules prescribed in paragraphs (1), (2), (3), (5), and (6) of section 544(a) (relating to person- al holding companies); except that, in addition to the persons prescribed by paragraph (2) of that section, the family of an individual shall include the spouses of that individual's broth- ers and sisters (whether by the whole or half blood) and the spouses of that individual's lineal descendants. (e) Exceptions to application of section (1) Sales or exchanges of stock For purposes of subsection (a)(1), a corpora- tion shall not be considered to be a collapsible corporation with respect to any sale or ex- change of stock of the corporation by a share. holder, if, at the time of such sale or ex- change, the sum of- (A) the net. unrealized appreciation in subsection e) assets of the corporation (as defined in paragraph (5)(A)), plus (B) if the shareholder owns more than 5 percent in value of £he outstanding stock of the corporation the net unrealized apprecia- tion in assets of the corporation (other than assets described in subparagraph (A) which would be subsection (e) assets under clauses (i) and (iii) of paragraph (5)(A) if the share- holder owned more than 20 percent in value of such stock, plus (C) if the shareholder owns more than 20 percent in value of the outstjdlng stock of the corporation and owns, or at uny time during the preceding 3-year period owned, more than 20 percent in value of the out- standing stock of any other corporation more than 70 percent in value of the assets of which are, or were at any time during which such shareholder owned during such 3-year period more than 20 percent in value of the outstanding stock, assets similar or related in service or use to assets comprising more than 70 percent in value of the assets of the corporation, the net unrealized ap- preciation in assets of the corporation (other than assets described in subpara- graph (A) which would be subsection (M) assets under clauses (I) and (iII) of para- graph (5)(A) if the determination whether the property, in the hands of such share- holder, would be property gain from the sale or exchange of which would under any provision of this chapter be considered in whole or in part as ordinary income, were made- (I) by treating any sale or exchange by such shareholder of stock in such other corporation within the preceding 3-year period (but only if at the time of such sale or exchange the shareholder owned more than 20 percent in value of the outstand- ing stock in such other corporation) as a sale or exchange by such shareholder of his proportionate share of the assets of such other corporation, and § 341 Page 254
TITLE 26-INTERNAL REVENUE CODE (ii) by treating any sale or exchange of property by such other corporation within such 3-year period (but only if at the time of such sale or exchange the shareholder owned more than 20 percent in value of the outstanding stock in such other corporation), gain or loss on which was not recognized to such other corpora- tion under section 337(a), as a sale or ex- change by such shareholder of his propor- tionate share of the property sold or ex- changed, does not exceed an amount equal to 15 per- cent of the net worth of the corporation. This paragraph shall not apply to any sale or ex- change of stock to the issuing corporation or, in the case of a shareholder who owns more than 20 percent in value of the outstanding stock of the corporation, to any sale or ex- change of stock by such shareholder to any person related to him (within the meaning of paragraph (8)). (2) Distributions in liquidation For purposes of subsection (a)(2), a corpora- tion shall not be considered to be a collapsible corporation with respect to any distribution to a shareholder pursuant to a plan of com- plete liquidation if, by reason of the applica- tion of paragraph (4) of this subsection, sec- tion 337(a) applies to sales or exchanges of property by the corporation within the 12- month period beginning on the date of the adoption of such plan, and if, at all times after the adoption of the plan -f liquidation, the sum of- (A) the net unrealized appreciation in subsection (e) assets of the corporation (as defined in paragraph (5)(A)), plus (B) if the shareholder owns more than 5 percent in value of the outstanding stock of the corporation, the net unrealized appre- ciation in assets of the corporation de- scribed in paragraph (1)(B) (other than assets described in subparagraph (A) of this paragraph), plus (C) if the shareholder owns more than 20 percent in value of the outstanding stock of the corporation and owns, or at any time during the preceding 3-year period owned, more than 20 percent in value of the out- standing stock of any other corporation more than 70 percent in value of the assets of which are, or were at any time during which such shareholder owned during such 3-year period more than 20 percent in value of the outstanding stock, assets similar or related in service or use to assets comprising more than 70 percent in value of the assets of the corporation, the net unrealized ap- preciation in assets of the corporation de- scribed in paragraph (1)(C) (other than assets described in subparagraph (A) of this paragraph), does not exceed an amount equal to 15 per- cent of the net worth of the corporation. (3) Recognition of gain in certain liquidations For purposes of section 333, a corporation shall not be considered to be a collapsible cor- poration if at all times after the adoption of the plan of liquidation, the net unrealized ap- preciation in subsection (e) assets of the cor- poration (as defined in paragraph (5)(B)) does not exceed an amount equal to 15 percent of the net worth of the corporation. (4) Gain or loss on sales or exchanges in connec- tion with certain liquidations For purposes of section 337, a corporation shall not be considered to be a collapsible cor- pora,ion with respect to any sale or exchange by it of property within the 12-month period beginning on the date of the adoption of a plan of complete liquidation, if- (A) at all times after the adoption of such plan, the net unrealized appreciation in sub- section (e) assets of the corporation (as de- fined in paragraph (5)(A)) does not exceed an amount equal to 15 percent of the net worth of the corporation, (B) within the 12-month period beginning on the date of the adoption of such plan, the corporation sells substantially all of the properties held by it on such date, and (C) following the adoption of such plan, no distribution is made of any property which in the hands of the corporation or in the hands of the distributee is property in respect of which a deduction for exhaus- tion, wear and tear, obsolescence, amortiza- tion, or depletion is allowable. This paragraph shall not apply with respect to any sale or exchange of property by the corporation to any shareholder who owns more than 20 percent in value of the out- standing stock of the corporation or to any person related to such shareholder (within the meaning of paragraph (8)), if such prop- erty in the hands of the corporation or in the hands of such shareholder or related person is property in respect of which a deduction for exhaustion, wear and tear, obsolescence, amortization, or depletion is allowable. (5) Subsection (e) asset defined (A) For purposes of paragraphs (1), (2), and (4), the term "subsection (e) asset" means, with respect to property held by any corporation- (1) property (except property used in the trade or business, as defined in para- graph (9)) which in the hands of the cor- poration is, or, in the hands of a share- holder who owns more than 20 percent in value of the outstanding stock of the cor- poration, would be property gain from the sale or exchange of which would under any provision of this chapter be consid- ered in whole or in part as ordinary income; (ii) property used in the trade or busi- ness (as defined in paragraph (9)), but only if the unrealized depreciation on all such property on which there Is unrea- lized depreciation exceeds the unrealized appreciation on all such property on which there is unrealized appreciation; (iti) if there is net unrealized apprecia- tion on all property used in the trade or business (as defined in paragraph (9)), property used in the trade or business (as defined in paragraph (9)) which, in the hands of a shareholder who owns more than 20 percent in value of the outstand- § 341 Page 255
TITLE 26-INTERNAL REVENUE CODE Ing stock of the corporation, would be property gain from the sale or exchange of which would under any provision of this chapter be considered in whole or in part as ordinary income; and (iv) property (unless included under clause (i), (1i), or (iii)) which consists of a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, or any interest in any such property, if the property was created in whole or in part by the personal efforts of, or (in the case of a letter, memoran- dum, or similar property) was prepared, or produced in whole or in part for, any individual who owns more than 5 percent in value of the stock of the corporation. The determination as to whether property of the corporation in the hands of the cor- poration is, or in the hands of a shareholder would be, property gain from the sale or ex- change of which would under any provision of this chapter be considered in whole or in part as ordinary income; shall be made as if all property of the corporation had been sold or exchanged to one person in one transaction. (B) For purposes of paragraph (3), the term "subsection (e) asset" means, with re- spect to property held by any corporation, property described in clauses (i), (ii), (iII), and (iv) of subparagraph (A), except that clauses (I) and (iII) shall apply in respect of any shareholder who owns more than 5 per- cent in value of the outstanding stock of the corporation (in lieu of any shareholder who owns more than 20 percent in value of such stock). (6) Net unrealized appreciation defined (A) For purposes of this subsection, the term "net unrealized appreciation" means, with respect to the assets of a corporation, the amount by which- (i) the unrealized appreciation in such assets on which there is unrealized appre- ciation, exceeds (ii) the unrealized depreciation in such assets on which there is unrealized depre- ciation. (B) For purposes of subparagraph (A) and paragraph (5)(A), the term "unrealized ap- preciation" means, with respect to any asset, the amount by which- (I) the fair market value of such asset, exceeds (ii) the adjusted basis for determining gain from the sale or other disposition of such asset. (C) For purposes of subparagraph (A) and paragraph (5)(A), the term "unrealized de- preciation" means, with respect to any asset, the amount by which- (I) the adjusted basis for determining gain from the sale or other disposition of such asset, exceeds (it) the fair market value of such asset. (D) For purposes of this paragraph (but not paragraph (5)(A)), in the case of any asset on the sale or exchange of which only a portion of the gain would under any pro- vision of this chapter be considered as ordi- nary income, there shall be. taken into ac- count only an amount of the unrealized ap- preciation in such asset which is equal to such portion of the gair. (7) Net worth defined For purposes of this subsection, the net worth of a corporation, as of any day, is the amount by which- (A)(i) the fair market value of all its assets at the close of such day, plus (ii) the amount of any distribution in complete liquidation made by it on or before such day, exceeds (B) all its liabilities at the close of such day. For purposes of this paragraph, the net worth of a corporation as of any day shall not take into account any increase in net worth during the one-year period ending on such day to the extent attributable to any amount received by it for stock, or as a contribution to capital or as paid-in surplus, if it appears that there was not a bona fide business pur- pose for the transaction in respect of which such amount was received. (8) Related person defined For purposes of paragraphs (1) and (4), the following persons shall be considered to be re- lated to a shareholder: (A) If the shareholder is an individual- (i) his spouse, ancestors, and lineal de- scendants, and (ii) a corporation which is controlled by such shareholder. (B) If the shareholder is a corporation- (1) a corporation which controls, or is controlled by, the shareholder, and (ii) if more than 50 percent in value of the outstanding stock of the shareholder is owned by any person, a corporation more than 50 percent in value of the out- standing stock of which is owned by the same person. For purposes of determining the ownership of stock in applying subparagraphs (A) and (B), the rules of section 267(c) shall apply, except that the family of an individual shall include only his spouse, ancestors, and lineal descen- dants. For purposes of this paragraph, control means the ownership of stock possessing at least 50 percent of the total combined voting power of all classes of stock entitled to vote or at least 50 percent of the total value of shares of all classes of stock of the corporation. (9) Property used in the trade or business For purposes of this subsection, the term "property used in the trade or business" means property described in section 1231(b), without regard to any holding period therein provided. (10) Ownership of stock For purposes of this subsection (other than paragraph (8)), the ownership of stock shall be determined in the manner prescribed in subsection (d). Page 256
TITLE 26-INTERNAL REVENUE CODE (11) Corporations and shareholders not meeting re- quirements In determining whether or not any corpora- tion is a collapsible corporation within the meaning of subsection (b), the fact that such corporation, or such corporation with respect to any of its shareholders, does not meet the requirements of paragraph (1), (2), (3), or (4) of this subsection shall not be taken into ac- count, and such determination, in the case of a corporation which does not meet such re- quirements, shall be made as if this subsec- tion had not been enacted. (12) Nonapplication of section 1245(a)' For purposes of this subsection, the deter- mination of whether gain from the sale or ex- change of property would under any provi- sion of this chapter be considered as ordinary income, shall be made without regard to the application of sections 617(d)(1), 1245(a), 1250(a), 1251(c), 1252(a) and 1254(a). (f) Certain sales of stock of consenting corporations (1) In general Subsection (a)(1) shall not apply to a sale of stock of a corporation (other than a sale to the issuing corporation) if such corporation (hereinafter in this subsection referred to as "consenting corporation") consents (at such time and in such manner as the Secretary may by regulations prescribe) to have the provisions of paragraph (2) apply. Such con- sent shall apply with respect to each sale of stock of such corporation made within the 6- month period beginning with the date on which such consent is filed. (2) Recognition of gain Except as provided in paragraph (3), if a subsection (f) asset (as defined in paragraph (4)) is disposed of at any time by a consenting corporation (or, if paragraph (3) applies, by a transferee corporation), then the amount by which- (A) in the case of a sale, exchange, or in- voluntary conversion, the amount realized, or (B) in the case of any other disposition, the fair market value of such asset, exceeds the adjusted basis of such asset shall be treated as gain from the sale or exchange of such asset. Such gain shall be recognized notwithstanding any other provision of this subtitle, but only to the extent such gain is not recognized under any other provision of this subtitle. (3) Exception for certain tax-free transactions If the basis of a subsection f) asset in the hands of a transferee is determined by refer- ence to its basis in the hands of the transfer- or by reason of the application of section 332, 351, 361, 371(a), or 374(a), then the amount of gain taken into account by the transferor under paraaph (2) shall not exceed the amount of gain recognized to the transferor on the transfer of such asset (determined without regard to this subsection). This para- graph shall apply only if the transferee- (A) is not an organization which is exempt from tax imposed by this chapter, and 'Paragraph amended without amendment to para- graph catchline to reflect change. (B) agrees (at such time and in such manner as the Secretary may by regula- tions prescribe) to have the provisions of paragraph (2) apply to any disposition by it of such subsection (f) asset. (4) Subsection (f) asset defined For purposes of this subsection- (A) In general The term "subsection (f) asset" means any property which, as of the date of any sale of stock referred to in paragraph (1), Is not a capital asset and is property owned by, or subject to an option to acquire held by, the consenting corporation. For pur- poses of this subparagraph, land or any in- terest in real property (other than a securi- ty interest), and unrealized receivables or fees (as defined in subsection (b)(4)), shall be treated as property which is not a capital asset. (B) Property under construction If manufacture, construction, or produc- tion with respect to any property described in subparagraph (A) has commenced before any date of sale described therein, the term "subsection (f) asset" includes the property resulting from such manufacture, construc- tion, or production. (C) Special rule for land In the case of land or any interest in real property (other than a security interest) de- scribed in subparagraph (A), the term "sub- section (f) asset" includes any improve- ments resulting from construction with re- spect to such property if such construction is commenced (by the consenting corpora- tion or by a transferee corporation which has agreed to the application of paragraph (2)) within 2 years after the date of any sale described in subparagraph (A). (5) 5-year limitation as to shareholder Paragraph (1) shall not apply to the sale of stock of a corporation by a shareholder if, during the 5-year period ending on the date of such sale, such shareholder (or any related person within the meaning of subsection (e)(8)(A)) sold any stock of another consent- ing corporation within any 6-month period beginning on a date on which a consent was filed under paragraph (1) by such other cor- poration. (6) Special rule for stock ownership in other corpo. rations If a corporation (hereinafter in this para- graph referred to as "owning corporation") owns 5 percent or more in value of the out- standing stock of another corporation on the date of any sale of stock of the owning corpo- ration during a 6-month period with respect to which a consent under paragraph (1) was filed by the owning corporation, such consent shall not be valid with respect to such sale unless such other corporation has (within the 6-month period ending on the date of such sale) filed a valid consent under paragraph (1) with respect to sales of its stock. For purposes of applying paragraph (4) to such other cor- poration, a sale of stock of the owning corpo- ration to which paragraph (1) applies shall be treated as a sale of stock of such other corpo- Page 257 § 341
TITLE 26-INTERNAL REVENUE CODE ration. In the case of a chain of corporations connected by the 5-percent ownership re- quirements of this paragraph, rules similar to the rules of the two preceding sentences shall be applied. (7) Adjustments to basis The Secretary shall prescribe such regula- tions as he may deem necessary to provide for adjustments to the basis of property to re- flect gain recognized under paragraph (2). (Aug. 16, 1954, ch. 736, 68A Stat. 107; Sept. 2, 1958, Pub. L. 85-866, title I, § 20(a), 72 Stat. 1615; Oct. 16, 1962, Pub. L. 87-834, § 13(f)(4), 76 Stat. 1035; Feb. 26, 1964, Pub. L. 88-272, title II, § 231(b)(4), 78 Stat. 105; Aug. 22, 1964, Pub. L. 88-484, § 1(a), 78 Stat. 596; Sept. 12, 1966, Pub. L. 89-570, § 1(b)(4), 80 Stat. 762; Dec. 30, 1969, Pub. L. 91-172, title II, § 211(b)(4), title V, § 514(b)(l), 83 Stat. 570, 643; Oct. 4, 1976, Pub. L. 94-465, title II, § 205(c)(2), title XIV, § 1402(b)(1)(B), title XIX, §§ 1901(b)(3)(A), (I), 1906(b)(13)(A), 90 Stat. 1535, 1731, 1732, 1792, 1793, 1834.) TAXABLE YEARs AFTER 1977 Subsec. (a) of this section amended by Pub. L. 94-455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, effective for taxable years beginning after Dec. 31, 1977, by sub- stituting "1 year"for "9 months'" AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, §§ 1402(b)(1)(B), 1901(b)(3)(I), in provisions following par. (3), provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977 and substituted "ordi- nary income" for "gain from the sale or exchange of property which is not a capital asset". Subsec. (e)(1)(C). Pub. L. 94-455, § 1901(b)(3)(A), substituted "ordinary income" for "gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231(b)". Subsec. (e)(5)(A). Pub. L. 94-455, § 1901(b)(3)(A), substituted "ordinary income" for "gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231(b)" wher- ever appearing. Subsec. (e)(6)(D). Pub. L. 94-455, § 1901(b)(3)(A), substituted "ordinary income" for "gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231(b)". Subsec. (e)(12). Pub. L. 94-455, §§ 205(c)(2), 1901(b)(3)(A), substituted "ordinary income" for "gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231(b)" and "1252(a), and 1254(a)" for "and 1252(a)". Subsecs. (f)(1), (3), (7). Pub. L. 94-455, § 1906(b)(13)CA), struck out "or his delegate" following "Secretary". 1969-ubsec. (e)(5)(A1iv). Pub. L. 91-172, § 514(b)(1), added reference to a letter or memoran- dum. Subsec. (e)(12). Pub. L. 91-172, § 211(b)(4), substitut- ed "1250(a), 1251(c), and 1252(a)" for "and 1250(a)". 1966-Subsec. (e)(12). Pub. L. 89-570 included refer- ence to section 617(d)(1). 1964-Subsec. (a). Pub. L. 88-484 substituted "except as otherwise provided in this section" for "except as provided in subsection (d)". Subsec. (e)(12). Pub. L. 88-272 inserted the reference to section 1250(a). Subsec. (f). Pub. L. 88-484 added subsection (f). 1962-Subsec. (e)(12). Pub. L. 87-834 added subsec. (e)(12). 1958-Subsec. (e). Pub. L. 85-866 added subsec. (e). EFFECTIVE DATE OF 1976 AMENDMENT Section 1402(b)(1) of Pub. L. 94-455 provided in part that the substitution of "9 months" for "6 months" in subsec. (a) of this section by section 1402(b)(1)(B) of Pub. L. 94-455 is effective with respect to taxable years beginning in 1977. Amendment of subsecs. (a) and (e) by section 1901(b)(3) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Amendment of subsec. (e)(12) by section 205(c)(2) of Pub. L. 94-455 effective for taxable years ending after Dec. 31, 1975, see section 205(e) of Pub. L. 94-455, set out as an Effective Date note under section 1254 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Amendment of subsec. (e)(5)(A)(iv) by section 514(b)(1) of Pub. L. 91-172 applicable to sales and other dispositions occurring after July 25, 1969, see section 514(c) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 1221 of this title. Amendment of subsec. (e)(12) by section 211(b)(4) of Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1969, see section 211(c) of Pub. L. 91-172, set out as an Effective Date note under section 1251 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendmei.t by Pub. L. 89- 570 applicable to taxable years ending after Sept. 12, 1966, but only in respect of expenditures paid or incurred after such date, see section 3 of Pub. L. 89-570, set out as an Effective Date note under section 617 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Section 2 of Pub. L. 88-484 provided that: "The amendments made by the first section of this Act [to sections 301, 312, 341, and 453 of this title] shall apply with respect to transactions after the date of the en- actment of this Act (Aug. 22, 1964] in taxable years ending after such date." Amendment of section by Pub. L. 88-272 applicable to dispositions after Dec. 31, 1963, in taxable years ending after such date, see section 231(c) of Pub. L. 88-272, set out as an Effective Date note under section 1250 of this title. EFFEcTIvE DATE OF 1962 AMENDMENT Subsec. (e)(12) of this section applicable to taxable years beginning after Dec. 31, 1962, see section 13(g) of Pub. L. 87-834, set out as an Effective Date note under section 1245 of this title EFFECTIVE DATE OF 1958 AMENDMENT Section 20(b) of Pub. L. 85-866 provided that: "The amendment made by subsection (a) (which added subsec. (e) of this section] shall apply with respect to taxable sears beginning after December 51, 1957, but onl' with respect to sales, exchanges, and distribu- tions after the date of the enactment of this Act [S,.pt. 2. 1958]." CRoss REFERENCES Election as to recognition of gain in liquidations other than distributions of property of a collapsible corporation to which subsection (a) of this section ap- plies, see section 333 of this title. Gain or loss on sales or exchanges In connettion with liquidations, section as not applicable to any sale or exchange made by a collapsible corporation, see sec- tion 337 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 301, 312, 333, 337, 453 of this title. Page 258 § 341
TITLE 26-INTERNAL REVENUE CODE [§ 342. Repealed. Pub. L. 94-455, title XIX, § 1901(a)(47), Oct. 4, 1976, 90 Stat. 1772] Section, act Aug. 16, 1954, ch. 736, 68A Stat. 110, re- lated to the liquidation of certain foreign personal holding companies. EFFECTIVE DATE OF REPEAL Repeal of section effective for taxable years begin- ning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amend- ment note under section 2 of this title. SUBPART D-DEFINITION Sec. 346. Partial liquidation defined. § 346. Partial liquidation defined (a) In general For purposes of this subchapter, a distribu- tion shall be treated as in partial liquidation of a corporation if- (1) the distribution is one of a series of dis- tributions in redemption of all of the stock of the corporation pursuant to a plan; or (2) the distribution is not essentially equiv- alent to a dividend, is in redemption of a part of the stock of the corporation pursuant to a plan, and occurs within the taxable year in which the plan is adopted or within the suc- ceeding taxable year, including (but not limit- ed to) a distribution which meets the require- ments of subsection (b). For purposes of section 562(b) (relating to the dividends paid deduction) and section 6043 (re- lating to information returns), a partial liquida- tion includes a redemption of stock to which section 302 applies. (b) Termination of a business A distribution shall be treated as a distribu- tion described in subsection (a)(2) if the re- quirements of paragraphs (1) and (2) of this subsection are met. (1) The distribution is attributable to the corporation's ceasing to conduct, or consists of the assets of, a trade or business which has been actively conducted throughout the 5- year period immediately before the distribu- tion, which trade or business was not acquired by the corporation within such period in a transaction in which gain or loss was recog- nized In whole or in part. (2) Immediately after the distribution the liquidating corporation is actively engaged in the conduct of a trade or business, which trade or business was actively conducted throughout the 5-year period ending on the date of the distribution and was not acquired by the corporation within such period in a transaction in which gain or loss was recog- nied in whole or in part. Whether or not a distribution meets the re- quirements of paragraphs (1) and (2) of this subsection shall be determined without regard to whether or not the distribution is pro rata with respect to all of the shareholders of the corporation. (c) Treatment of certain redemptions The fact that, with respect to a shareholder, a distribution qualifies under section 302(a) (re- lating to redemptions treated as distributions in part or full payment in exchange for stock) by reason of section 302(b) shall not be taken into account in determining whether the distribu- tion, with respect to such shareholder, is also a distribution in partial liquidation of the corpo- ration. (Aug. 16, 1954, ch. 736, 68A Stat. 110.) CROSS REFERENCES Corporations, gain or loss on sales or exchanges in connection with liquidations, see section 337 of this title. Dividend defined, see section 316 of this title. Effect on earnings and profits of certain distribu- tions in partial liquidation, see section 312 of this title. Gain or loss to shareholders in corporate liquida- tions, partial liquidations, see section 331 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 331 of this title. PART III--CORPORATE ORGANIZATIONS AND REORGANIZATIONS Subpart A. Corporate organizations. B. Effects on shareholders and security holders. C. Effects on corporations.' D. Special rule; definitions. SUBPART A-CORPORATE ORGANIZATIONS Sec. 351. Transfer to corporation controlled by transferor. § 351. Transfer to corporation controlled by transfer (a) General rule No gain or loss shall be recognized if property is transferred to a corporation by one or more persons solely in exchange for stock or securi- ties in such corporation and immediately after the exchange such person or persons are in con- trol (as defined in section 368(c)) of the corpo- ration. For purposes of this section, stock or se- curities issued for services shall not be consid- ered as issued in return for property. (b) Receipt of property If subsection (a) would apply to an exchange but for the fact that there is received, in addi- tion to the stock or securities permitted to be received under subsection (a), other property or money, then- (1) gain (if any) to such recipient shall be recognized, but not in excess of- (A) the amount of money received, plus (B) the fair market value of such other property received; and (2) no loss to such recipient shall be recog- nized. () Special rule In determining control, for purposes of this section, the fact that any corporate transferor distributes part or all of the stock which it re- ceives in the exchange to its shareholders shall not be taken into account. (d) Exception This section shall not apply to a transfer of property to an investment company. (e) Cross references (1) For special rule where another party to the ex- change assumes a liability, or acquires property subject to a liability, see section 357. 'So in original. Does not conform to subpart head- ing. Page 259
TITLE 26-INTERNAL REVENUE CODE (2) For the basis of stock, securities, or property re- ceived in an exchange to which this section applies, see sections 358 and 362. (3) For special rule in the case of an exchange de- scribed in this section but which results in a gift, see sec- tion 2501 and following. (4) For special rule in the case of an exchange de- scribed in this section but which has the effect of the payment of compensation by the corporation or by a transferor, see section 61(a)(1). (Aug. 16, 1954, ch. 736, 68A Stat. 111; Nov. 13, 1966, Pub. L. 89-809, title II, § 203(a), (b), 80 Stat. 1577; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(a)(48)(A), (B), 90 Stat. 1772.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, § 1901(a)(48)(A), struck out "(including, in the case of transfers made on or before June 30, 1967, an investment company)" following "property is transferred to a corporation". Subsec. (d). Pub. L. 94-455, § 1901(a)(48)(B), among other changes, substituted in subsec. catchhne "Ex- ception" for "Application of June 30, 1967, date" and in text provision that this section does not apply to a transfer of property to an investment company for provisions relating to treatment of a transfer of prop. erty to an investment company as made on or before June 30, 1967. 1966-Subsec. (a). Pub. L. 89-809, § 203(a), inserted "(including, in the case of transfers made on or before June 30, 1967, an investment company)" following "if property is transferred to a corporation". Subsec. (d). Pub. L. 89-809, § 203(b), added subsec. (d) and redesignated former subsec. (d as (e). Subsec. (e). Pub. L. 89-809, § 203(b), redesignated former subsec. (d) as (e). EFncTvE DATE OF 1976 AMENDMENT Section 1901(a)(48)(C) of Pub. L. 94-455 provided that: "The amendments made by this paragraph [amending subsecs. (a) and (d) of this section] shall take effect with respect to transfers of property occur- ring after the date of the enactment of this Act (Oct. 4, 1976]." EyncTIvE DATE OF 1966 AMENDMENT Section 203(c) of Pub. L. 89-809 provided that: "The amendments made by subsections (a) and (b) lamend- ing subsec. (a) of this section, redesignating subsec. (d) as (e), and adding subsec. (d)] shall apply with respect to transfers of property to investment companies whether made before, on, or after the date of the en- actment of this Act [Nov. 13, 1966]." CRoss REFERENCES Assumption of liability, see section 357 of this title. Basis of property received in liquidations purchase defined, see section 334 of this title. Basis to corporations, see section 362 of this title. Basis to distributees, see section 358 of this title. Foreign corporations, see section 367 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 48, 49, 311, 334, 341, 357, 358, 362, 367, 382, 613A, 683, 721, 995, 1245, 1250, 1251 of this title. SUBPART B-EFFECTS ON SHAREHOLDERS AND SECURITY HOLDERS Sec. 354. Exchanges of stock and securities in certain reor- ganizations. 355. Distribution of stock and securities of a con- trolled corporation. 356. Rdceipt of additional consideration. 357. Assumption of liability. 358. Basis to distributees. § 354. Exchanges of stock and securities in certain re- organizations (a) General rule (1) In general No gain or loss shall be recognized if stock or securities In a corporation a party to a re- organization are, in pursuance of the plan of reorganization, exchanged solely for stock or securities in such corporation or in another corporation a party to the reorganization. (2) Limitation Paragraph (1) shall not apply if- (A) the principal amount of any such se- curities received exceeds the principal amount of any such securities surrendered, or (B) any such securities are received and no such securities are surrendered. (3) Cross reference For treatment of the exchange if any property is re- ceived which is not permitted to be received under this subsection (including an excess principal amount of se. curitles received over securtles surrendered), see sec. tion 356. (b) Exception (1) In general Subsection (a) shall not apply to an ex- change in pursuance of a plan of reorganiza- tion within the meaning of section 368(a)(1)(D), unless- (A) the corporation to which the assets are transferred acquires substantially all of the assets of the transferor of such assets; and (B) the stock, securities, and other proper- ties received by such transferor, as well as the other properties of such transferor, are distributed in pursuance of the plan of reor- ganization. (2) Cross reference For special rules for certain exchanges in pursuance of plans of reorganization within the meaning of sec. tion 368(a)(1)(D), see section 355. (e) Certain railroad reorganizations Notwithstanding any other provision of this subehapter, subsection (a)(1) (and so much of section 356 as relates to this section) shall apply with respect to a plan of reorganization (whether or not a reorganization within the meaning of section 368(a)) for a railroad ap- proved by the Interstate Commerce Commis- sion under section 77 of the Bankruptcy Act, or under section 20b of the Interstate Commerce Act, as being in the public interest. (d) Exchanges under the final system plan for Con- Rail No gain or loss shall be recognized if stock or securities in a corporation are, in pursuance of an exchange to which paragraph (1) or (2) of section 374(c) applies, exchanged solely for stock of the Consolidated Rail Corporation, se- curities of such Corporation, certificates of value of the United States Railway Association, or any combination thereof. (Aug. 16, 1954, ch. 736, 68A Stat. 112; Mar. 31, 1976, Pub. L. 94-253, § 1(c), 90 Stat. 296.) AMENDMENTS 1976-Subsec. (d). Pub. L. 94-253 added subsec. (d). § 354 Page 260
TITLE 26-INTERNAL REVENUE CODE REFERENCES IN TEXT Section 77 of the Bankruptcy Act, referred to in subsec. (c), is classified to section 205 of Title 11, Bankruptcy. Section 20b of the Interstate Commerce Act, re- ferred to in subsec. (c), is classified to section 20b of Title 49, Transportation. EFFECTIVE DATE OF 1976 AMENDMENT Amendment by Pub. L. 94-253 applicable to taxable years ending after Mar. 31, 1976, see section 2 of Pub. L. 94-253, set out as an Effective Date of 1976 Amend- ment note under section 374 of this title. CROSS REFERENCES Basis to distributees, see section 358 of this title. Carryovers in corporate acquisitions, see section 381 of this title. Complete liquidations of subsidiaries, liquidations to which section applies, see section 332 of this title. Foreign corporations, see section 367 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 83, 332, 356, 358, 367, 368, 381, 382, 425, 1101 of this title. § 355. Distribution of stock and securities of a con- trolled corporation (a) Effect on distributees (1) General rule If- (A) a corporation (referred to in this sec- tion as the "distributing corporation")- (i) distributes to a shareholder, with re- spect to its stock, or (1i) distributes to a security holder, in exchange for its securities, solely stock or securities of a corporation (referred to in this section as "controlled corporation") which it controls immediately before the distribution, (B) the transaction was not used princi- pally as a device for the distribution of the earnings and profits of the distributing cor- poration or the controlled corporation or both (but the mere fact that subsequent to the distribution stock or securities in one or more of such corporations are sold or ex- changed by all or some of the distributees (other than pursuant to an arrangement ne- gotiated or agreed upon prior to such distri- bution) shall not be construed to mean that the transaction was used principally as such a device), (C) the requirements of subsection (b) (re- lating to active businesses) are satisfied, and (D) as part of the distribution, the distrib- uting corporation distributes- (I) all of the stock and securities in the controlled corporation held by it immedi- ately before the distribution, or (ii) an amount of stock in the controlled corporation constituting control within the meaning of section 368(c), and it is es- tablished to the satisfaction of the Secre- tary that the retention by the distributing corporation of stock (or stock and securi- ties) in the controlled corporation was not in pursuance of a plan having as one of its principal purposes the avoidance of Fed- eral income tax, then no gain or loss shall be recognized to (and no amount shall be includible in the income of) such shareholder or security holder on the receipt of such stock or securi- ties. (2) Non pro rata distributions, etc. Paragraph (1) shall be applied without regard to the following: (A) whether or not the distribution is pro rata with respect to all of the shareholders of the distributing corporation, (B) whether or not the shareholder sur- renders stock in the distributing corpora- tion, and (C) whether or not the distribution is in pursuance of a plan of reorganization (within the meaning of section 368(a)(1)(D)). (3) Limitation Paragraph (1) shall not apply if- (A) the principal amount of the securities in the controlled corporation which are re- ceived exceeds the principal amount of the securities which are surrendered in connec- tion with such distribution, or (B) securities in the controlled corpora- tion are received and no securities are sur- rendered in connection with such distribu- tion. For purposes of this section (other than para- graph (1)(D) of this subsection) and so much of section 356 as relates to this section, stock of a controlled corporation acquired by the distributing corporation by reason of any transaction which occurs within 5 years of the distribution of such stock and in which gain or loss was recognized in whole or in part, shall not be treated as stock of such con- trolled corporation, but as other property. (4) Cross reference For treatment of the distribution if any property is received which is not permitted to be received under this subsection (including an excess principal amount of securities received over securities surrendered), see section 356. (b) Requirements as to active business (1) In general Subsection (a) shall apply only if either- (A) the distributing corporation, and the controlled corporation (or, if stock of more than one controlled corporation is distribut- ed, each of such corporations), is engaged immediately after the distribution in the active conduct of a trade or business, or (B) immediately before the distribution, the distributing corporation had no assets other than stock or securities in the con- trolled corporations and each of the con- trolled corporations is engaged immediately after the distribution in the active conduct of a trade or business. (2) Definition For purposes of paragraph (1), a corpora- tion shall be treated as engaged in the active conduct of a trade or business if and only if- (A) it is engaged in the active conduct of a trade or business, or substantially all of its assets consist of stock and securities of a corporation controlled by it (immediately after the distribution) which is so engaged, (B) such trade or business has been ac- tively conducted throughout the 5-year 71-999 0 - 78 - 19 (Vol. 7) Page 261 § 355
TITLE 26-INTERNAL REVENUE CODE period ending on the date of the distribu- tion, (C) such trade or business was not ac- quired within the period described in sub. paragraph (B) in a transaction in which gain or loss was recognized in whole or in part, and (D) control of a corporation which (at the time of acquisition of control) was conduct- ing such trade or business- (I) was not acquired directly (or through one or more corporations) by another cor- poration within the period described in subparagraph (B), or (ii) was so acquired by another corpora- tion within such period, but such control was so acquired only by reason of transac. tions in which gain or loss was not recog- nized in whole or in part, or only by reason of such transactions combined with acquisitions before the beginning of such period. (Aug. 16, 1954, ch. 736, 68A Stat. 113; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (a)(1)(D)(ii). Pub. L. 94-455 struck out "or lis delegate" following "Secretary". CROSS REFERENCES Allocation of earnings and profits in distributions or exchanges to which this section applies, see section 312 of this title. Basis to distributees, see section 358 of this title. Capital gains and losses, distribution to which this section applies to be treated as an exchange, see sec- tion 1223 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 83, 306, 312, 355, 356, 358, 367, 368, 425, 815, 877, 995, 1223, 2107, 2501, 6166, 6166A of this title. § 356. Receipt of additional consideration (a) Gain on exchanges (I) Recognition of gain If- (A) section 354 or 355 would apply to an exchange but for the fact that (B) the property received in the exchange consists not only of property permitted by section 354 or 355 to be received without the recognition of gain but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property. " (2) Treatment as dividend If an exchange is described in paragraph (1) but has the effect of the distribution of a dividend, then there shall be treated as a divi- dend to each distributee such an amount of the gain recognized under paragraph (1) as is not in excess of his ratable share of the undis- tributed earnings and profits of the corpora- tion accumulated after February 28, 1913. The remainder, if any, of the gain recognized under paragraph (1) shall be treated as gain from the exchange of property. (b) Additional consideration received In certain dis. tributions If- (1) section 355 would apply to a distribution but for the fact that (2) the property received in the distribution consists not only of property permitted by section 355 to be received without the recog- nition of gain, but also of other property or money, then an amount equal to the sum of such money and the fair market value of such other property shall be treated as a distribution of property to which section 301 applies. (c) Loss If- (1) section 354 would apply to an exchange or section 355 woulu apply to an exchange or distribution, but for the fact that (2) the property received in the exchange or distribution consists not only of property per- mitted by section 354 or 355 to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange or distribution shall be recognized. (d) Securities as other property For purposes of this section- (1) In general Except as provided in paragraph (2), the term "other property" includes securities. (2) Exceptions (A) Securities with respect to which nonrecogni- tion of gain would be permitted The term "other property" does not in- clude securities to the extent that, under section 354 or 355, such securities would be permitted to be received without the recog- nition of gain. (B) Greater principal amount in section 354 ex- change If- (i) in an exchange described in section 354 (other than subsection (c) or (d) thereof), securities of a corporation a party to the reorganization are surren- dered and securities of any corporation a party to the reorganization are received, and (ii) the principal amount of such securi- ties received exceeds the principal amount of such securities surrendered, then, with respect to such securities re- ceived, the term "other property" means only the fair market value of such excess. For purposes of this subparagraph and sub- paragraph (C) if no securities are surren- dered, the excess shall be the entire princi- pal amount of the securities received. (C) Greater principal amount in section 355 transaction If, in an exchange or distribution de- scribed in section 355, the principal amount of the securities in the controlled corpora- tion which are received exceeds the princi- pal amount of the securities in the distrib- uting corporation which are surrendered, then, with respect to such securities re- § 356 Page 262
TITLE 26-INTERNAL REVENUE CODE ceived, the term "other property" means only the fair market value of such excess. (e) Exchanges for section 306 stock Notwithstanding any other provision of this section, to the extent that any of the other property (or money) is received in exchange for section 306 stock, an amcunt equal to the fair market value of such other property (or the amount of such money) shall be treated as a distribution of property to which section 301 applies. (f) Transactions involving gift or compensation For special rules for a transaction described in section 354, 355, or this section, but which- (1) results in a gift, see section 2501 and following, or (2) has the effect of the payment of compensation, see section 61(a)(1). (Aug. 16, 1954, ch. 736, 68A Stat. 115; Mar. 31, 1976, Pub. L. 94-253, § l(c), 90 Stat. 296.) AMENDMENTS 1976-Subsec. (d)(2)(E)(i). Pub. L. 94-253 substituted "subsection (c) or (d) thereof" for "subsection (c) thereof". EFFECTIVE DATE OF 1976 AMENDMENT Amendment by Pub. L. 94-253 applicable to taxable years ending after Mar. 31, 1976, see section 2 of Pub. L. 94-253, set out as an Effective Date of 1376 Amend- mcuit note under section 374 of this title. CRoss REFERENCES Basis to distributees, see section 358 of this title. Capital gains and losses, distributions under this sec- tion relating to section 355 to be treated as exchanges, see section 1223 of this title. Definitions relating to corporate reorganizations, see section 368 of this title. Effect on earnings and profits, allocation in corpo- rate separations, see section 312 of this title. Foreign corporations, see section 367 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 83, 306, 312, 354, 355. 358. 367, 368, 425, 1223, 6166, 6166A of this title. § 357. Assumption of liability (a) General rule Except as provided in subsections (b) and (c), if- (1) the taxpayer receives property which would be permitted to be received under sec- tion 351, 361, 371, or 374 without the recogni- tion of gain if it were the sole consideration, and (2) as part of the consideration, another party to the exchange assumes a liability of the taxpayer, or acquires from the taxpayer property subject to a liability, then such assumption or acquistion shall not be treated as money or other property, and shall not prevent the exchange from being within the provisions of section 351, 361, 371, or 374, as the case may be. (b) Tax avoidance purpose (1) In general If, taking into consideration the nature of the liability and the circumstances in the light of which the arrangement for the as- sumption or acquisition was made, it appears that the principal purpose of the taxpayer with respect to the assumption or acquisition described in subsection (a)- (A) was a purpose to avoid Federal income tax on the exchange, or (B) if not such purpose, was not a bona fide business purpose, then such assumption or acquisition (in the total amount of the liability assumed or ac- quired pursuant to such exchange) shall, for purposes of section 351, 361, 371, or 374 (as the case may be), be considered as money re- ceived by the taxpayer on the exchange. (2) Burden of proof In any suit or proceeding where the burden is on the taxpayer to prove such assumption or acquisition is not to be treated as money received by the taxpayer, such burden shall not be considered as sustained unless the tax- payer sustaims such burden by the clear pre- ponderance of the evidence. (c) Liabilities in excess of basis (1) In general In the case of an exchange- (A) to which section 351 applies, or (B) to which section 361 applies by reason of a plan of reorganization within the meaning of section 368(a)(1)(D), if the sum of the amount of the liabilities as- sumed, plus the amount of the liabilities to which the property is subject, exceeds the total of the adjusted basis of the property transferred pursuant to such exchange, then such excess shall be considered as a gain from the sale or exchange of a capital asset or of property which is not a capital asset, as the case may be. (2) Exceptions Paragraph (1) shall not apply to any ex- change to which- (A) subsection (b)(1) of this section ap- plies, or (B) section 371 or 374 applies. (Aug. 16, 1954, ch. 736, 68A Stat. 116; June 29, 1956, ch. 463, § 2, 70 Stat. 403.) AMENDMENTS 1956-Subsec. (a). Act June 29, 1956, § 2(1), substitut- ed "371, or 374" for "or 371", in two instances. Subsec. (b). Act June 29, 1956, § 2(1), substituted "371, or 374" for "or 371". Subsec. (c)(2)(B). Act June 29, 1956, § 2(2), substitut- ed "371 or 374" for "371". SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 371 of this title. § 358. Basis to distributees (a) General rule In the case of an exchange to which section 351, 354, 355, 356, 361, 371(b), or 374 applies- (1) Nonrecognition property The basis of the property permitted to be received under such section without the rec- ognition of gain or loss shall be the same as that of the property exchanged- (A) decreased by- (I) the fair market value of any other property (except money) received by the taxpayer, Page 263
TITLE 26-INTERNAL REVENUE CODE (it) the amount of any money received by the taxpayer, and (iii) the amount of loss to the taxpayer which was recognized on such exchange, and (B) increased by- (I) the amount which was treated as a dividend, and (ii) the amount of gain to the taxpayer which was recognized on such exchange (not including any portion of such gain which was treated as a dividend). (2) Other property The basis of any other property (except money) received by the taxpayer shall be its fair market value. (b) Allocation -of basis (1) In general Under regulations prescribed by the Secre- tary, the basis determined under subsection (a)(1) shall be allocated among the properties permitted to be received without the recogni- tion of gain or loss. (2) Special rule for section 355 In the case of an exchange to which section 355 (or so much of section 356 as relates to section 355) applies, then in making the allo- cation under paragraph (1) of this subsection, there shall be taken into account not only the property so permitted to be received without the recognition of gain or loss, but also the stock or secuirties (if any) of the distributing corporation which are retained, and the allo- cation of basis shall be made among all such properties. (3) Certain exchanges involving ConRail To the extent provided in regulations pre- scribed by the Secretary in the case of an ex- change to which section 354(d) (or so much of section 356 as relates to section 354(d)) or sec- tion 374(c) applies, for purposes of allocating basis under paragraph (1), stock of the Con- solidated Rail Corporation and the certificate of value of the United States Railway Associ- ation which relates to such stock shall, so long as they are held by the same person, be treated as one property. (c) Section 355 transactions which are not exchanges For purposes of this section, a distribution to which section 355 (or so much of section 356 as relates to section 355) applies shall be treated as an exchange, and for such purposes the stock and securities of the distributing corpora- tion which are retained shall be treated as sur- rendered, and received back, in the exchange. (d) Assumption of liability Where, as part of the consideration to the taxpayer, another party to the exchange as- sumed a liability of the taxpayer or acquired from the taxpayer property subject to a liabil- ity, such assumption or acquisition (in the amount of the liability) shall, for purposes of this section, be treated as money received by the taxpayer on the exchange. (e) Exception This section shall not apply to property ac- quired by a corporation by the exchange of its stock or securities (or the stock or securities of a corporation which is in control of the acquir- ing corporation) as consideration in whole or in part for the transfer of the property to it. (Aug. 16, 1954, ch. 736, 68A Stat. 117; Sept. 2, 1958, Pub. L. 85-866, title I, § 21(a), 72 Stat. 1620; Oct. 22, 1968, Pub. L. 90-621, § 2(a), 82 Stat. 1311; Mar. 31, 1976, Pub. L. 94-253, § 1(b), 90 Stat. 296; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMZNDMENTS 1976-Subsec. (a). Pub. L. 94-253, § l(b)(1), substitut- ed "371(b), or 374" for "or 371(b)". Subsecs. (b)(1), (3). Pub. L. 94-455 struck out "or his delegate" following "Secretary". Pub. L. 94-253, § l(b)(2), added subsec. (b)(3). 1968-Subsec. (e). Pub. L. 90-621 substituted ex- change of stock and securities for issuance of stock or securities as the transaction involved and added paren- thetical provisions making reference to stock or securi- ties of a corporation which is in control of the acquir- ing corporation. 1958-Subsec. (a)(1)(A)(iii). Pub. L. 85-866 added subsec. (a)(1)(A)(iii). EFFECTIVE DATE OF 1976 AMENDMENT Amendment by Pub. L. 94-253 applicable to taxable years ending after Mar, 31, 1976, see section 2 of Pub. L. 94-253, set out as an Effective Date of 1976 Amend- ment note under section 374 of this title. EFFECTIVE DATE OF 1968 AMENDMENI Section 2(c) of Pub. L. 90-621 provided that: "The amendments made by subsections (a) and (b) [amend- ing this section and section 362(b) of this title] shall apply only in respect of plans of reorganization adopt- ed after the date of the enactment of this Act [Oct 22, 1968]." EFFECTIVE DATE OF 1958 AMENDMENT Section 21(b) of Pub. L. 85-866 provided that: "The amendment made by subsection (a) [to subsec. (a)(1)(A) of this section] shall apply as provided in sec- tion 393 of the Internal Revenue Code of 1954 [section 393 of this title] as if the clause (iII) added by such amendment had been included in such Code at the time of its enactment [Aug. 16, 1954]." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 351, 372 of this title. SUBPART C-EFFECTS ON CORPORATION Sec. 361. Nonrecognition of gain or loss to corporations. 362. Basis to corporations. [363. Repealed.] AMENDMENTS 1976-Pub. L. 94-455, title XIX, § 1901(b)(13), Oct. 4, 1976, 90 Stat. 1795, struck out item 363 "Effect on earnings and profits". § 361. Nonrecognition of gain or loss to corporations (a) General rule No gain or loss shall be recognized if a corpo- ration a party to a reorganization exchanges property, in pursuance of the plan of reorgani- zation, solely for stock or securities in another corporation a party to the reorganization. (b) Exchanges not solely in kind (1) Gain If subsection (a) would apply to an ex- change but for the fact that the property re- ceived in exchange consists not only of stock Page 264
TITLE 26-INTERNAL REVENUE CODE or securities permitted by subsection (a) to be received without the recognition of gain, but also of other property or money, then- (A) if the corporation receiving such other property or money distributes it in pursuance of the plan of reorganization, no gain to the corporation shall be recognized from the exchange, but (B) if the corporation receiving such other property or money does riot distribute it in pursuance of the plan of reorganiza- tion, the gain, if any, to the corporation shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property so received, which is not so distributed. (2) Loss If subsection (a) would apply to an ex- change but for the fact that the property re- ceived in exchange consists not only of prop- erty permitted by subsection (a) to be re- ceived without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized. (Aug. 16, 1954, ch. 736, 68A Stat. 118.) CROSS REFERENCES Assumption of liability, see section 357 of this title. Basis to distributees, see section 358 of this title. Carryovers In corporate acquisitions, see section 381 of this title. Complete liquidations of subsidiaries, exchange de- scribed in this section, see section 332 of this title. Foreign corporations, see section 367 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 48, 49, 332, 341, 357, 358, 367, 381, 1245, 1250, 1251 of this title. § 362. Basis to corporations (a) Property acquired by issuance of stock or as paid- in surplus If property was acquired on or after June 22, 1954, by a corporation- (1) in connection with a transaction to which section 351 (relating to transfer of property to corporation controlled by trans- feror) applies, or (2) as paid-in surplus or as a contribution to capital, then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain recognized to the transferor on such transfer. (b) Transfers to corporations If property was acquired by a corporation in connection with a reorganization to which this part applies, then the basis shall be the same as it would be in the hands of the transferor, in- creased in the amount of gain recognized to the transferor on such transfer. This subsection shall not apply if the property acquired consists of stock or securities in a corporation a party to the eorganization, unless acquired by the ex- cha, ,e of stock or securities of the transferee (or ol a corporation which is in control of the transferee) as the consideration in whole or in part for the transfer. (c) Special rule for certain contributions to capital (1) Property other than money Notwithstanding subsection (a)(2), if prop- erty other than money- (A) is acquired by a corporation, on or after June 22, 1954, as a contribution to cap- ital, and (B) is not contributed by a shareholder as such, then the basis of such property shall be zero. (2) Money Notwithstanding subsection (a)(2), if money- (A) is received by a corporation, on or after June 22, 1954, as a contribution to cap- ital, and (B) is not contributed by a shareholder as such, then the basis of any property acquired with such money during the 12-month period be- ginning on the day the contribution is re- ceived shall be reduced by the amount of such contribution. The excess (if any) of the amount of such contribution over the amount of the reduction under the preceding sen- tence shall be applied to the reduction (as of the last day of the period specified in the pre- ceding sentence) of the basis of any other property held by the taxpayer. The particular properties to which the reductions required by this paragraph shall be allocated shall be determined under regulations prescribed by the Secretary. (3) Exception for contributions in aid of construc- tion The provisions of this subsection shall not apply to contributions in aid of construction to which section 118(b) applies. (Aug. 16, 1954, ch. 736, 68A Stat. 118; Oct. 22, 1968, Pub. L. 90-621, § 2(b), 82 Stat. 1311; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), title XXI, § 2120(b), 90 Stat. 1834, 1913.) AMENDMENTS 1976-Subsec. (c)(2)(B). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c)(3). Pub. L. 94-455, § 2120(b), added subsec. (c)(3). 1968-Subsec. (b). Pub. L. 90-621 substituted the ex- change of stock or securities of the transferee (or of a corporation which is in control of the transferee) for the issuance of stock or securities of the transferee as the transaction rendering the subsection applicabie. EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (c)(3) by section 2120(b) of Pub. L. 94-455 applicable to contributions made after Jan. 31, 1976, see section 2120(c) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 118 of this title. EFFECTIVE DATE OF 1968 AMENDMENT Amendment by Pub. L. 90-621 applicable only in re- spect of plans of reorganization adopted after Oct. 22, 1968, see section 2(c) of Pub. L. 90-621, set out as an Effective Date of 1968 Amendment note under section 358 of this title. CROSS REFERENCES Basis to distributees, see section 358 of this title. Page 265 § 362
TITLE 26-INTERNAL REVENUE CODE Contributions to capital of corporation, see section 118 of this title. Exchange of stock for property, nonrecognition of gain or loss, see section 1032 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 118, 351, 617 of this title. [§ 363. Repealed Pub. L. 94-455, title XIX, § 1901(a)(49), Oct. 4, 1976, 90 Stat. 17731 Section, act Aug. 16, 1954, ch. 736, 68A Stat. 119, re- lated to a cross reference for rules relating to the effect on earnings and profits of transactions to which this part applies. EFFECTIVE DATE OF R1PEAL Repeal of section effective for taxable years begin- ning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amend- ment note under section 2 of this title. SUBPART D-SPECIAL RULE; DEFINITIONS Sec. 367. Foreign corporations. 368. Definitions relating to corporate reorganizations. § 367. Foreign corporations (a) Transfers of property from the United States (1) General rule If, in connection with any exchange de- scribed in section 332, 351, 354, 355, 356, or 361, there is a transfer of property (other than stock or securities of a foreign corpora- tion which is a party to the exchange or a party to the reorganization) by a United States person to a foreign corporation, for purposes of determining the extent to which gain shall be recognized on such transfer, a foreign corporation shall not be considered to be a corporation unless, pursuant to a request filed not later than the close of the 183d day after the beginning of such transfer (and filed in such form and manner as may be pre- scribed by regulations by the Secretary), it is established to the satisfaction of the Secre- tary that such exchange is not in pursuance of a plan having as one of its principal pur- poses the avoidance of Federal income taxes. (2) Exception for transactions designated by the Secretary Paragraph (1) shall not apply to any ex- change (otherwise within paragraph (1)), or to any type of property, which the Secretary by regulations designates as not requiring the filing of a request. (b) Other transfers (I) Effect of section to be determined under regula. tions In the case of any exchange described in section 332, 351, 354, 355, 356, or 361 in con- nection with which there is no transfer of property described in subsection (a)(1), a for- eign corporation shall be considered to be a corporation except to the extent provided in regulations prescribed by the Secretary which are necessary or appropriate to prevent the avoidance of Federal income taxes. (2) Regulations relating to sale or exchange of stock in foreign corporations The regulations prescribed pursuant to paragraph (1) shall include (but shall not be limited to) regulations dealing with the sale or exchange of stock or securities in a foreign corporation by a United States person, includ- ing regulations providing- (A) the circumstances under which- (i) gain shall be recognized currently, or amounts included in gross income current- ly as a dividend, or both, or (it) gain or other amounts may be de- ferred for inclusion in the gross income of a shareholder (or his successor in inter- est) at a later date, and (B) the extent to which adjustments shall be made to earnings and profits, basis of stock or securities, and basis of assets. (c) Transactions to be treated as exchanges (1) Section 355 distribution For purposes of this section, any distribu- tion described in section 355 (or so much of section 35G as relates to section 355) shall be treated as an exchange whether or not it is an exchange. (2) Contribution of capital to controlled corpora- tions For purposes of this chapter, any transfer of property to a foreign corporation as a con- tribution to the capital of such corporation by one or more persons who, immediately after the transfer, own (within the meaning of section 318) stock possessing at least 80 percent of the total combined votlng power of all classes of stock of such corporation enti- tled to vote shall be treated as an exchange of such property for stock of the foreign corpo- ration equal in value to the fair market value of the property transferred. (d) Transitional rule In the case of any exchange beginning before January 1, 1978- (1) subsection (a) shall be applied without regard to whether or not there is a transfer of property described in subsection (a)(1), and (2) subsection (b) shall not apply. (Aug. 16, 1954, ch. 736, 68A Stat. 119; Jan. 12, 1971, Pub. L. 91-681, § l(a), 84 Stat. 2065; Oct. 4, 1976, Pub. L. 94-455, title X, § 1042(a), 90 Stat. 1634.) AMErDMENTS 1976-Pub. L. 94-455, among other changes, added provisions permitting nonrecognition of gain if a re- quest for a ruling that tax avoidance is not present is filed within 183 days after beginning of an exchange, relating to an organization, reorganization, and liqui- dation of a foreign corporation, in the case of out- bound transfers, however, for all other transfers, regu- lations are to provide the extent that earnings are to be taken into account as dividends and provisions re- lating to Tax Court review of the tax avoidance rul- ings. 1971-Subsec. (a). Pub. L. 91-681 designated existing provisions as subsec. (a), and, as so designated, added provisions relating to instances of an exchange, de- scribed in subsection (b). Provisions relating to distri- butions described in section 355 (or so much of section 356 as relates to section 355) were stricken and were transferred to subsec. (c). Subsec. (W). Pub. L. 91-681 added subsec. (b). Subsec. (c). Pub. L. 91-681 designated as subsec. (c) provisions relating to distribution described in section 355 (or so much of section 356 as relates to section 355). Page 266
TITLE 26-INTERNAL REVENUE CODE Subsec. (d). Pub. L. 91-681 added subsec. (d). EFFECTIVE DATE OF 1976 AMENDMENT Section 1042(e) of Pub. L. 94-455 provided that: "(1) The amendments made by this section (other than by subsection (d)) [amending sections 367, 751(c) and 1248(2)(A), (C), (f) to (h) of this title] shall apply to transfers beginning after October 9, 1975, and to sales, exchanges, and distributions taking place after such date. The amendments made by subsection (d) [enacting section 7477 of this title and amending sec- tions 7476 and 7482(b)(1) of this title] shall apply with respect to pleadings filed with the Tax Court after the date of the enactment of this Act [Oct. 4, 1976] but only with respect to transfers beginning after October 9, 1975. "(2) In the case of any exchange described in section 367 of the Internal Revenue Code of 1954 [section 367 of this title] (as in effect on December 31, 1974) in any taxable year beginning after December 31, 1962, and before the date of the enactment of this Act [Oct. 4, 1976], which does not involve the transfer of property to or from a United States person, a taxpayer shall have for purposes of such section until 183 days after the date of the enactment of this Act [Oct. 4, 1976] to file a request with the Secretary of the Treasury or his delegate seeking to establish to the satisfaction of the Secretary of the Treasury or his delegate that such exchange was not in pursuance of a plan having as one of its principal purposes the avoidance of Fed- eral income taxes and that for purposes of such sec- tion a foreign corporation is to be treated as a foreign corporation." EFFECTIVE DATE OF 1971 AMENDMENT Section 1(c) of Pub. L. 91-681 provided that: "The amendments made by this section [amending this sec- tion and section 1492 of this title] shall apply to trans- fers made after December 31, 1967; except that sec- tions 367(d) and 1492 of the Internal Revenue Code of 1954 [this section and section 1492 of this title] (as amended by this section) shall apply only with respect to transfers made after December 31, 1970. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 819A, 1492, 7477 of this title. § 368. Definitions relating to corporate reorganiza- tions (a) Reorganization (1) In general For purposes of parts I and II and this part, the term "reorganization" means-- (A) a statutory merger or consolidation; (B) the acquisition by one corporation, in exchange solely for all or a part of its voting stock (or in exchange solely for all or a part of the voting stock of a corporation which is in control of the acquiring corpora- tion), of stock of another corporation if, im- mediately after the acquisition, the acquir- ing corporation has control of such other corporation (whether or not such acquiring corporation had control Immediately before the acquisition); (C) the acquisition by one corporation, in exchange solely for all or a part of its voting stock (or in exchange solely for all or a part of the voting stock of a corporation which is in control of the acquiring corpora- tion), of substantially all of the properties of another corporation, but in determining whether the exchange is solely for stock the assumption by the acquiring corporation of a liability of the other, or the fact that property acquired is subject to a liability, shall be disregarded; (D) a transfer by a corporation of all or a part of its assets to another corporation if immediately after the transfer the transfer- or, or one or more of its shareholders (in- cluding persons who were shareholders im- mediately before the transfer), or any com- bination thereof, is in control of the corpo- ration to which the assets are transferred; but only if, in pursuance of the plan, stock or securities of the corporation to which the assets are transferred are distributed in a transaction which qualifies under section 354, 355, or 356; (E) a recapitalization; or (F) a mere change in identity, form, or place of organization, however effected. (2) Special rules relating to paragraph (1) (A) Reorganizations described in both paragraph (1)(C) and paragraph (1)(D) If a transaction is described in both para- graph (1)(C) and paragraph (1)(D), then, for purposes of this subchapter, such trans- action shall be treated as described only in paragraph (1)(D). (B) Additional consideration in certain para- graph (l)(C) cases If- (I) one corporation acquires substantial- ly all of the properties of another corpo- ration, (ii) the acquisition would qualify under paragraph (1)(C) but for the fact that the acquiring corporation exchanges money or other property in addition to voting stock, and (iII) the acquiring corporation acquires, solely for voting stock described in para- graph (1)(C), property of the other corpo- ration having a fair market value which is at least 80 percent of the fair market value of all of the property of the other corporation, then such acquisition shall (subject to sub- paragraph (A) of this paragraph) be treated as qualifying under paragraph (1)(C). Solely for the purpose of determining whether clause (iii) of the preceding sentence ap- plies, the amount of any liability assumed by the acquiring corporation, and the amount of any liability to which any prop- erty acquired by the acquiring corporation is subject, shall be treated as money paid for the property. (C) Transfers of assets or stock to subsidiaries in certain paragraph (1)(A), (1)(B), and (I)(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 corpora- tion acquiring such assets or stock. (D) Statutory merger using stock of controlling corporation The acquisition by one corporation, in ex- change for stock of a corporation (referred to in this subparagraph as "controlling cor- Page 267 § 368
TITLE 26-INTERNAL REVENUE CODE poration") which is in control of the acquir- ing corporation, of substantially all of the properties of another corporation which in the transaction is merged into the acquiring corporation shall not disqualify a transac- tion under paragraph (1)(A) if (i) such transaction would have qualified under paragraph (1)(A) if the merger had been into the controlling corporation, and (ii) no stock of the acquiring corporation is used in the transaction. (E) Statutory merger using voting stock of corpo- ration controlling merged corporation A transaction otherwise qualifying under paragraph (1)(A) shall not be disqualified by reason of the fact that stock of a corpo- ration (referred to in this subparagraph as the "controlling corporation") which before the merger was In control of the merged corporation is used in the transaction, If- (1) after the transaction, the corporation surviving the merger holds substantially all of its properties and of the properties of the merged corporation (other than stock of the controlling corporation dis- tributed in the transaction); and (ii) in the transaction, former share- holders of the surviving corporation ex- changed, for an amount of voting stock of the controlling corporation, an amount of stock in the surviving corporation which constitutes control of such corporation. (F) Certain transactions involving 2 or more in- vestment companies (I) If immediately before a transaction described in paragraph (1) (other than subparagraph (E) thereof), 2 or more par- ties to the transaction were investment companies, then the transaction shall not be considered to be a reorganization with respect to any such investment company (and its shareholders and security hold- ers) unless it was a regulated investment company, a real estate investment trust, or a corporation which meets the require- ments of clause (it). (ii) A corporation meets the require- ments of this clause if not more than 25 percent of the value of its total assets is invested in the stock and securities of any one issuer, and not more than 50 percent of the value of its total assets is invested in the stock and securities of 5 or fewer is- suers. For purposes of this clause, all members of a controlled group of corpora- tions (within the meaning of section 1563(a)) shall be treated as one issuer. (iII) For purposes of this subparagraph the term "investment company" means a regulated investment company, a real estate investment trust, or a corporation more than 50 percent of the value of whose total assets are stock and securities and more than 80 percent of the value of whose total assets are assets held for In- vestment. In making the 50-percent and 80-percent determinations under the pre- ceding sentence, stock and securities in any subsidiary corporation shall be disre- garded and the parent corporation shall be deemed to own its ratable share of the subsidiary's assets, and a corporation shall be considered a subsidiary if the parent owns 50 percent or more of the combined voting power of all classes of stock enti- tled to vote, or 50 percent or more of the total value of shares of all classes of stock outstanding. (iv) For purposes of this subparagraph, in determining total assets -there shall be excluded cash and cash items (including receivables). Government securities, and, under regulations prescribed by the Secre- tary, assets acquired (through incurring indebtedness or otherwise) for purposes of meeting the requirements of clause (ii) or ceasing to be an investment company. (v) This subparagraph shall not apply if the stock of each investment company is owned substantially by the same persons in the same proportions. (vi) If an investment company which is not diversified within the meaning of clause (ii) acquires assets of another cor- poration, clause (I) shall be applied to such investment company and its share- holders and security holders as though its assets had been acquired by such other corporation. If such investment company acquires stock of another corporation in a reorganization described in section 368(a)(1)(B) (hereafter referred to as the "actual acquisition"), clause (I) shall be applied to the shareholders and security holders of such investment company as though they had exchanged with such other corporation all of their stock in such investment company for a percent- age of the value of the total outstanding stock of the other corporation equal to the percentage of the value of the total outstanding stock of such investment company which such shareholders own immediatley after the actual acquisition. For purposes of section 1001, the deemed acquisition or exchange referred to in the two preceding sentences shall be treated as a sale or exchange of property by the corporation and by the shareholders and security holders to which clause (1) is ap- plied. (b) Party to a reorganization For purposes of this part, the term "a party to a reorganization" includes- (1) a corporation resulting from a reorgani- zation, and (2) both corporations, in the case of a reor- ganization resulting from the acquisition by one corporation of stock or properties of an- other In 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 term "a party to a reorganization" includes the corporation so controlling the acquiring corporation. In the case of a reorganization qualifying under para- graph (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 Page 268 368
TITLE 26-INTERNAL REVENUE CODE which the acquired assets or stock are trans- ferred. In the case of a reorganization qualify- ing under paragraph (1)(A) of subsection (a) by reason of paragraph (2)(D) of that subsection, the term "a party to a reorganization" includes the controlling corporation referred to in such paragraph (2)(D). In the case of a reorganiza- tion qualifying under subsection (a)(1)(A) by reason of subsection (a)(2)(E), the term "party to a reorganization" includes the controlling corporation referred to in subsection (a)(2)(E). (c) Control For purposes of part I (other than section 304), part II, this part, and Part V, the term "control" means the ownership of stock pos- sessing at least 80 percent of the total com- bined voting power of all classes of stock enti- tled to vote and at least 80 percent of the total number of shares of all other classes of stock of the corporation. (Aug. 16, 1954, ch. 736, 68A Stat. 120; Feb. 26, 1964, Pub. L. 88-272, title II, § 218(a), (b), 78 Stat. 57; Oct. 22, 1968, Pub. L. 90-621, § l(a), (b), 82 Stat. 1310, 1311; Jan. 12, 1971, Pub, L. 91- 693, § 1(a). (b), 84 Stat. 2077; Oct. 4, 1976, Pub. L. 94-455, title VIII, § 806(f)(1), title XXI, § 2131(a), 90 Stat. 1605, 1922.) AMENDMENTS 1976-Subsec. (a)(2)(F). Pub. L. 94-455, §2131(a), added subsec. (a)(2)(F). Subsec. (c). Pub. L. 94-445, §806(f)(1), substituted "this part, and Part V," for "and this part,". 1971-Subsec. (a)(2). Pub. L. 91-693, § l(a), added subpar. (E). Subsec. (b). Pub. L. 91-693, § l(b), defined the term "party to a reorganization" in the case of a reorganiza- tion qualifying under subsection (a)(1)(A) by reason of subsection (a)(2)(E). 1968-Subsec. (a)(2). Pub. L. 90-621, § 1(a), added subpar. (D). Subsec. (b). Pub. L. 90-621, § l(b), added reference to the inclusion of the controlling corporation in the term "a party to a reorganization" in reorganizations qualifying under paragraph (1)(A) of subsection (a) by reason of paragraph (2)(D) of subsection (a). 1964-Subsec. (a). Pub. L. 88-272, § 218(a), (b)(1), in- serted "(or in exchange solely for all or a part of the voting stock of a corporation which is in control of the acquiring corporation)" in par. (1)(B), and in par. (2)(C), inserted references to par. (1)(B), and substitut- ed "assets or stock" for "assets" wherever appearing. Subsec. (b). Pub, L. 88-272, § 218(b)(2), inserted ref- erences to par. (1)(B) wherever appearing. EFFECTIVE DATE OF 1976 AMENDMENT Section 2131(f)(1), (2) of Pub. L. 94-455 provided that: "(1) Except as provided in paragraph (2), the amend- ment made by subsection (a) [enacting subsec. (a)(2)(F) of this section] shall apply to transfers made after February 17, 1976, in taxable years ending after such date. "(2) The amendment made by subsection (a) shall not apply to transfers made in accordance with a ruling issued by the Internal Revenue Service before February 18, 1976, holding that a proposed transaction would be a reorganization described in paragraph (1) of section 368(a) of the Internal Revenue Code of 1954 [subsec. (a) of this section]." For effective date of amendment of subsec. c) by section 806(f)(1) of Pub. L. 94-455, see section 806(g)(2), (3) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 382 of this title. EFFECTIVE DATE OF 1971 AMENDMENT Section 1(c) of Pub, L. 91-693 provided that: "The amendments made by this section [to subsecs. (a)(2) and (b) of this section] shall apply to statutory merg- ers occurring after December 31, 1970." EFFECTIVE DATF OF 1968 AMENDMENT Section l(c) of Pub. L. 90-621 provided that: "The amendments made by subsections (a) and (b) (amend- ing this section] shall apply to statutory mergers oc- curring after the date of the enactment of this Act [Oct. 22, 1968]." EFFECTIVE DATE OF 1964 AMENDMENT Section 218(c) of Pub. L. 88-272 provided that: "The amendments made by this section [to this section] shall apply with respect to transactions after Decem- ber 31, 1963, in taxable years ending after such date." CROSS REFERNCES Assumption of liability, liabilities in excess of basis, see section 357 of this title. Carryovers in certain corporate acquisitions, operat- Ing rules, see section 381 of this title. Dividends paid on certain preferred stock of public utilities, stock issued in reorganization as defined in this section, see section 247 of this title. Section 306 stock defined, stock received in reorgani- zation within meaning of this section, see section 306 of this title. Taxability of beneficiary of employees' trust, certain plan terminations, see section 402 of this title. Transfer to corporation controlled by transferor, definition of control, see section 351 of this title. Transferred assets, other taxes, see section 6901 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 247, 249, 279, 306, 351, 354, 355, 357, 381, 382, 402, 512, 815, 995, 1101, 1232, 1244, 4912. 4920, 6166, 6166A, 6901 of this title; title 12 section 1717. PART IV-INSOLVENCY REORGANIZATIONS Sec. 371. 372. [373. 374. Reorganization in certain receivership and bank- ruptcy proceedings. Basis in connection with certain receivership and bankruptcy proceedings. Repealed.] Gain or loss not recognized in certain railroad reorganizations. AMENDMENTS 1976-Pub. L. 94-455, title XIX, § 1901(b)(14)(E), Oct. 4, 1976, 90 Stat. 1796, struck out item 373 "Loss not recognized in certain railroad reorganizations". 1956-Act June 29, 1956, ch. 463, § 4, 70 Stat. 403, added Item 374. § 371. Reorganization in certain receivership and bankruptcy proceedings (a) Exchanges by corporations (1) In general No gain or loss shall be recognized if prop- erty of a corporation (other than a railroad corporation, as defined in section 77(m) of the Bankruptcy Act (11 U.S.C. 205)) is trans- ferred in pursuance of an order of the court having jurisdiction of such corporation- (A) in a receivership, foreclosure, or simi- lar proceeding, or (B) in a proceeding under chapter X of the Bankruptcy Act (11 U.S.C. 501 and fol- lowing), Page 269
TITLE 26-INTERNAL REVENUE CODE to another corporation organized or made use of to effectuate a plan of reorganization ap- proved by the court in such proceeding, in ex- change solely for stock or securities in such other corporation. (2) Gain from exchanges not solely in kind If an exchange would be within the provi- sions of paragraph (1) if it were not for the fact that the property received in exchange consists not only of stock or securities permit- ted by paragraph (1) to be received without the recognition of gain, but also of other property or money, then- (A) if the corporation receiving such other property or money distributes it in pursuance of the plan of reorganization, no gain to the corporation shall be recognized from the exchange, but (B) if the corporation receiving such other property or money does not distribute it in pursuance of the plan of reorganiza- tion, the gain, if any, to the corporation shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property so received, which is not so distributed. (b) Exchanges by security holders (1) In general No gain or loss shall be recognized on an ex- change consisting of the relinquishment or extinguishment of stock or securities in a cor- poration the plan of reorganization of which Is approved by the court in a proceeding de- scribed in subsection (a), in consideration of the acquisition solely of stock or securities in a corporation organized or made use of to ef- fectuate such plan of reorganization. (2) Gain from exchanges not solely in kind If an exchange would be within the provi- sions of paragraph (1) if it were not for the fact that the property received in exchange consists not only of property permitted by paragraph (1) to be received without the rec- ognition of gain, but also of other property or money, then the gain, if any, to the recipient shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property. (c) Loss from exchanges not solely In kind If an exchange would be within the provi- sions of subsection (a)(1) or (b)(1) if it were not for the fact that the property received in ex- change consists not only of property permitted by subsection (a)(1) or (b)(1) to be received without the recognition of gain or loss, but also of other property or money, then no loss from the exchange shall be recognized. (d) Assumption of liabilities In the case of a transaction involving an as- sumption of a liability or the acquisition of property subject to a liability, the rules pro- vided in section 357 shall apply. (Aug. 16, 1954, ch. 736, 68A Stat. 121; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(a)(50), 90 Stat. 1773.) REFERENCES IN TEXT The Bankruptcy Act, referred to in subsecs. (a)(1), (B), is act July 1, 1898, ch. 541, 30 Stat. 544, as amend- ed, which is classified generally to Title 11, Bankrupt- cy. Chapter X of the Bankruptcy Act, referred to in subsec. (a)(1)(B), is classified to chapter 10 (§ 501 et seq.) of Title 11. For complete classification of this Act to the Code, see Tables volume. AMENDMENTS 197-Subiec. (a)(1). Pub. L. 94-455, § 1901(a)(50)(A), struck out "49 Stat. 922;" before "11 U.S.C. 205)) is transferred". Subsec. (a)(1)(B). Pub. L. 94-455, § 1901(a)(50)(B), substituted "(11 U.S.C. 501 and following)" for "(52 Stat. 883-905: 11 U.S.C., chapter 10) or the correspond- ing provisions of prior law" ]?,FFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (a)(1) by section 1901(a)(50) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. CROSS REFERENCES Assumption of liability, see section 357 of this title. Basis in connection with receivership and bankrupt- cy proceedings to which this section applies, see sec- tion 372 of this title. Basis to distributees, see section 358 of this title. Dividends paid on certain preferred stock of public utilities, transactions to which this section applies, see section 247 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 48, 49, 247. 341, 357, 358, 372, 1232, 1245, 1250, 1251 of this title. § 372. Basis in connection with certain receivership and bankruptcy proceedings (a) Corporation If property was acquired by a corporation in a transfer to which- (1) section 371(a) applies, (2) so much of section 371(c) as relates to section 371(a)(1) applies, or (3) the corresponding provisions of prior law apply, then notwithstanding the provisions of section 270 of the Bankruptcy Act (1" U:S,C. 670), the basis in the hands of the acquiring corporation shall be the same as it would be In the hands of the corporation whose property was so ac- quired, increased in the amount of gain recog- nized to the corporation whose property was so acquired under the law applicable to the year in which the acquisition occurred, and such basis shall not be adjusted under section 1017 by reason of a discharge of indebtedness in pursu- ance of the plan of reorganization under which such transfer was made. (b) Adjustment for depreciation sustained before March 1, 1913, in certain cases of property ac- quired from retirement method corporations (1) In general If the taxpayer has acquired property in a transaction described In section 374(b), and if any such property constitutes retirement- straight line property, then, in determining the adjusted basis of all retirement-straight line property held by the taxpayer on his ad- Justment date, adjustment shall be made (in lieu of the adjustment provided in section 1016(a)(3)(A)) for depreciation sustained before March 1, 1913, on retirement-straight line property whigh was held on such date for § 372 Page 270
TITLE 26-INTERNAL REVENUE CODE which cost was or is claimed as basis, and wiIch either- (A) Retired before acquisition by taxpayer Was retired before the acquisition of the retirement-straight line property by the taxpayer, but only if a deduction was al- lowed in computing net income by reason of such retirement, and such deduction was computed on the basis of cost without ad- justment for depreciation sustained before March 1, 1913. In the case of any such prop- erty retired during any taxable year begin- ning after December 31, 1929, the adjust- ment under this subparagraph shall not exceed that portion of the amount attribut- able to depreciation sustained before March 1, 1913, which resulted (by reason of the de- duction so allowed) in a reduction in taxes under this subtitle or prior income, war- profits, or excess-profits tax laws. (B) Acquired by taxpayer Was acquired by the taxpayer. The adjustment determined under this para- graph shall be allocated (in the manner pre- scribed by the Secretary) among all retire- ment-straight line property held by the tax- payer on his adjustment date. Such adjust- ment shall apply to all periods on and after the adjustment date. (2) Retirement-straight line property defined For purposes of this subsection, the term "retirement-straight line property" means any property of a kind or class with respect to which (A) the corporation transferring such property to the taxpayer was using (at the time of transfer) the retirement method of computing the allowance of deductions for depreciation, and (B) the acquiring corpora- tion has adopted any other method of com- puting such allowance. (3) Other definitions For purposes of this subsection: (A) Depreciation The term "depreciation" means exhaus- tion, wear and tear, and obsolescence. (B) Adjustment date In the case of any kind or class of proper- ty, the term "adjustment date" means whichever of the following is the later: (I) the first day of the taxpayer's first taxable year beginning after December 31, 1955, or (ii) the first day of the first taxable year in which the taxpayer uses a method of computing the allowance of deductions for depreciation other than the retire- ment method. (c) Stock or security holder For basis of stock or securities acquired under section 371(b), see section 358. (Aug. 16, 1954, ch. 736, 68A Stat. 122; Sept. 2, 1958, Pub. L. 85-866, title I, §95(a), 72 Stat. 1671; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(a)(51), (b)(14)(A), 1906(b)(13)(A), 90 Stat. 1773, 1795, 1834.) AMENDMENTS 1976-Subsec. (a)(3). Pub. L. 94-455. § 1901(a)(51), strucK out "54 Stat. 709;" before "11 U.S.C. 670), the basis". Subsec. (b)(1). Pub. L. 94-455, §§ 1901(b)(14)(A), 1906(b)(13)A), struck out in provisions preceding subpar. (A) "373(b) or" before "314ib), and if any" and in provisiors following subpar. (B) "or his delegate" following , cretary". 1958-Subsec. (b). Pub. L. 85-866 added subsec. (b) and redesignated former subsec. (b) as (c). Subsec. (c). Pub. L. 85-866 redesignated former subsec. (b) as (C). EFFECTIVE DATE OF 1976 AMLi, LENT Amendment of subsecs. (a)(3) and (b)(l) by section 1901(a)(51) and (b)14)(A) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see sec- tion 1901(d) of Pub. L. 94-455, set out as ar. Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1958 AMENDMENT Section 95(b) of Pub. L. 85-866 provided that: "(1) In general.-The amendments made by subsec- tion (a) [to subsecs. (b) and (c) of this section] shall apply only to taxable years beginning after December 31, 1955. "(2) Exception.-The amendments made by subsec- tion (a) shall not apply with respect to any taxpayer if, before the date of the enactment of this Act [Sept. 2, 19581, there has been a determination, for any tax- able year, of the adjusted basis of retirement-straight line property of the taxpayer of the type described in section 372(b) of the Internal Revenue Code of 1954 (as added by subsection (a)) [section 372(b) of this title] by the Tax Court of the United States, or by any other court of competent jurisdiction, in any proceed- ing in which the decision of the court became final after December 31, 1955, and which established the right of the taxpayer to use the straight line depreci- ation method of computing the annual depreciation allowance with respect to such property for Federal tax purposes for any year." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 617 of this title. [§ 373. Repealed. Pub. L. 94-455, title XIX, § 1901(a)(52), Oct. 4, 1976, 90 Stat. 1773] Section, acts Aug. 16, 1954, ch. 736, 68A Stat. 123; June 29, 1956, c. 463, § 3, 70 Stat. 403, related td loss not recognized in certain railroad reorganizations. EFFECTIVE DATE OF REPEAL Repeal of section effective for taxable years begin- ning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amend- ment note under section 2 of this title. § 374. Gain or loss not recognized in certain railroad reorganizations (a) Exchanges by corporations (I) Nonrecognition of gain or loss No gain or loss shall be recognized if prop- erty of a railroad corporation, as defined in section 77(m) of the Bankruptcy Act (11 U.S.C. 205), is transferred after July 31, 1955, in pursuance of an order of the court having jurisdiction of such corporation- (A) in a receivership proceeding, or (B) in a proceeding under section 77 of the Bankruptcy Act, to another railroad corporation (as defined in section 77(m) of the Bankruptcy Act) orga- nized or made use of to effectuate a plan of § 374 Page 271
TITLE 26-INTERNAL REVENUE CODE reorganization approved by the court in such proceeding, in exchange solely for stock or se- curities in such other railroad corporation. (2) Gain from exchanges not solely in kind If an exchange would be within the provi- sions of paragraph (1) if it were not for the fact that the property received in exchange consists not only of stock or securities permit- ted by paragraph (1) to be received without the recognition of gain, but also of other property or money, then- (A) if the corporatlon receiving such other property or money distributes it in pursuance of the plan of reorganization, no gain to the corporation shall be recognized from the exchange, but (B) if the corporation receiving such other property or money does not distribute it in pursuance of the plan of reorganiza- tion, the gain, if any, to the corporation shall be recognized, but in an amount not in excess of the sum of such money and the fair market value of such other property so received, which is not so distributed. (3) Loss from exchanges not solely in kind If an exchange would be within the provi- sions of paragraph (1) if it were not for the fact that the property received in exchange consists not only of property permitted by such paragraph to be received without the recognition of gain or loss, but also of other property or money, then no loss from the ex- change shall be recognized. (b) Basis (1) Railroad corporations If the property of a railroad corporation, as defined in section 77(m) of the Bankruptcy Act (11 U.S.C. 205(m)), was acquired after De- cember 31, 1938, in pursuance of an order of the court having jurisdiction of such corpora- tion- (A) in a receivership proceeding, or (B) in a proceeding under section 77 of the Bankruptcy Act, and the acquiring corporation is a railroad corporation (as defined in section 77(m) of the Bankruptcy Act) organized or made use of to effectuate a plan of reorganization ap- proved by the court in such proceeding, the basis shall be the same as it would be in the. hands of the railroad corporation whose prop- erty was so acquired, increased in the amount of gain recognized under subsection (a)(2) to the transferor on such transfer. (2) Property acquired by stre', suburban, or inter- urban electric railway corporation If the property of any street, suburban, or interurban electric railway corporation en- gaged as a common carrier in the transporta- tion of persons or property in interstate com- merce was acquired after December 31, 1934, in pursuance of an order of the court having jurisdiction of such corporation in a proceed- ing under section 77 of the Bankruptcy Act (11 U.S.C. 501 and following), and the acquir- ing corporation is a street, suburban, or inter- urban electric railway engaged as a common carrier in the transportation of persons or property in interstate commerce, organized or made use of to effectuate a plan of reorgani- zation approved by the court in such proceed- ing, then, notwithstanding the provisions of section 270 of the Bankruptcy Act (11 U.S.C. 670) the basis shall be the same as it would be in the hands of the corporation whose proper- ty was so acquired. (c) Exchanges under the final system plan for Con- Rail (1) In general No gain or loss shall be recognized if, in order to carry out the final system plan, rail properties of a transferor railroad corpora- tion are transferred to the Consolidated Rail Corporation (or any subsidiary thereof) pur- suant to an order of the special court under section 303 or 305(d) of the Regional Rail Re- organization Act of 1973 in exchange solely for stock of the Consolidated Rail Corpora- tion, securities of such Corporation, certifi- cates of value of the United States Railway Association, or any combination thereof. (2) Exchanges not solely in kind If paragraph (1) would apply to an ex- change if it were not for the fact that the property received in exchange consists not only of property permitted by paragraph (1) to be received without the recognition of gain or loss, but also of other property or money, then rules similar to the rules set forth in paragraph (2) or (3) of subsection (a) (which- ever is appropriate) shall be applied. (3) Basis The basis of the property transferred to the Consolidated Rail Corporation (or any subsid- iary thereof) in an exchange to which para- graph (1) or (2) applies shall be determined under rules similar to the rules set forth in subsection (b)(1). (4) Denial of net operating loss carryovers to Con- Rail Neither the Consolidated Rail Corporation nor any subsidiary thereof shall succeed to any net operating loss carryover of any trans- feror railroad corporation. (5) Definitions For purposes of this subsection- (A) Rail properties The term "rail properties" means rail properties within the meaning of paragraph (12) of section 102 of the Regional Rail Re- organization Act of 1973. (B) Transferor railroad corporation The term "transferor railroad corpora- tion" means a corporation which, on March 11, 1976, was- (I) a railroad in reorganization (within the meaning of paragraph (14) of section 102 of the Regional Rail Reorganization Act of 1973) in the region (within the meaning of paragraph (15) of such section 102), or (ii) a corporation leased, operated, or controlled by such a railroad in reorgani- zation. (C) Final system plan The term "final system plan" means the final system plan (within the meaning of paragraph (6) of section 102 of such Act). Page 272
TITLE 26-INTERNAL REVENUE CODE Such term includes supplemental transac- tions under section 305 of such Act. (D) Subsidiary The term "subsidiary" means any corpo- ration 100 percent of whose total combined voting shares are, directly or indirectly, owned or controlled by the Consolidated Rail Corporation. (d) Assumption of liabilities In the case of a transaction involving an as- sumption of a liability or the acquisition of property subject to a liability, the rules pro- vided in section 357 shall apply. (e) Use of expired net operating loss carryovers to offset income arising from certain railroad reor- ganization proceedings (1) In general If- (A) any corporation receives or accrues any amount pursuant to- (I) an award in (or settlement of) a pro- ceeding under section 77 of the Bankrupt- cy Act, (ii) an award in (or settlement of) a pro- ceeding before the special court to carry out section 303(c), 305, or 306 of the Re- gional Rail Reorganization Act of 1973, (Iii) an award in (or settlement of) a pro- ceeding in the Court of Claims under sec- tion 1491 of title 28 of the United States Code, to the extent such proceeding in- volves a claim arising under the Regional Rail Reorganization Act of 1973, or (iv) a redemption of a certificate of value of the United States Railway Asso- ciation issued to such corporation under section 306 of such Act, (B) any portion of such amount is includi- ble In the gross income of such corporation for the taxable year in which such portion is received or accrued, and such taxable year begins not more than 5 years after the date of such award, settlement, or redemp- tion, and (C) the net operating loss of such corpora- tion for any taxable year- (i) was a net operating loss carryover to, or arose In, the first taxable year of such corporation ending after March 31, 1976 (or, in the case of a proceeding referred to in subparagraph (A)(i) which began after March 31, 1976, ending after the begin- ning of such proceeding), but (it) solely by reason of the lapse of time, is not a net operating loss carryover to the taxable year referred to in subparagraph (B), then such net operating loss shall be a net operating loss carryover to the taxable year described in subparagraph (B) but only for use (to the extent not theretofore used under this subsection to offset other amounts) to offset the portion referred to in subparagraph (B). (2) Special rule For purposes of paragraph (1)(C)(i), a cor- poration which was a regulated transporta- tion corporation (within the meaning of sec- tion 172(g)) for its last taxable year ending on or before March 31, 1976, shall be treated as such a regulated transportation corporation for its first taxable year ending after such date. (Added June 29, 1956, ch. 463, § 1, 70 Stat. 402, and amended Mar. 31, 1976, Pub. L. 94-253, § l(a), (d), 90 Stat. 295, 296; Oct. 4, 1976, Pub. L, 94-455, title XIX, § 1001(a)(53), (b)(10)(A), (14)(B), (C), 90 Stat. 1773, 1795, 1796.) REFERENCES IN TEXT Section 77 of the Bankruptcy Act, referred to in subsec. (b)(2), is classified to section 205 (rather than section 501 et seq.) of Title 11, Bankruptcy. The refer- ence possibly should have been to section "77B" of the Bankruptcy Act, because that citation appeared in the predecessor provisions (2e U.S.C. 373(b)(2)) prior to the amendment made by Pub. L. 94-'55, § 1901(b)(14)(B), 90 Stat. 1796. Section 77B of the Bankruptcy Act was amended generally as chapters X to XIV of the Bankruptcy Act by act June 22, 1938, popularly known as the Chandler Act. Chapter X of the Bankruptcy Act is classified to section 501 et seq. of Title 11. The Regional Rail Reorganization Act of 1973, re- ferred to in subsecs. (c)(1), (5)(A) to (C), (e)(1)(A)(ii) to (iv), is Pub. L. 93-236, Jan. 2, 1974, 87 Stat. 985, as amended, which is classified principally to chapter 16 (§701 et seq.) of Title 45, Railroads. Sections 102, 303, 305, and 306 of the Regional Rail Reorganization Act of 1973 are classified to sections 702, 743, 745, and 746, respectively, of title 45. For complete classification of this Act to the Code, see Short Title note set out under section 701 of Title 45 and Tables volume. Sections 102, 305, and 306 of such Act, referred to in subsecs. (c)(5)(C) and (e)(1)(A)(iv), probably mean sec- tions 102, 305, and 306 of the Regional Rail Reorgani- zation Act of 1973. See note hereinabove. AMENDMENT 1976-Subsec. (a)(1). Pub. L. 94-455, § 1901(a)(53), struck out "49 Stat. 922;" before "11 U.S.C. 205)". Subsec. (b). Pub. L. 94-455, § 1901(b)(14)(B), desig- nated existing provisions as par. (1), and in par. (1) as so designated, substituted "December 31, 1938" for "July 31, 1955" and added par. (2). Subsec. (c). Pub. L. 94-253, § l(a), added subsec. (c). Former subsec. (c) was redesignated as (d). Subsec. (c)(3). Pub. L. 94-455, § 1901(b)(14)(C), sub- stituted "subsection (b)(1)" for "subsection (b)". Subsec. (d). Pub. L. 94-253, § l(a), redesignated former subsec. (c) as subsec. (d). Subsec. (e). Pub. L. 94-253, § l(d), added subsec. (e). Subsec. (e)(2). Pub. L. 94-455, § 1901(b)(10)(A), sub- stituted "172(g)" for "172(j)". EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (a)(1), (b), and (c)(3) by sec- tion 1901(a)(53), (b)(14)(B), (b)(14)(C) of Pub. L. 94- 455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under sec- tion 2 of this title. Amendment of subsec. (e)(2) by section 1901(b)(10)(A) of Pub. L. 94-455 effective for taxable years ending after Oct. 4, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Section 2 of Pub. L. 94-253 provided that: "The amendments made by section 1 [amending sections 354, 356, 358, and 374(c) to (e) of this title] shall apply to taxable years ending after March 31, 1976." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 48, 49, 250, 341, 354, 357, 358, 372, 617, 1232, 1245, 1250, 1251 of this title. Page 273 § 374
TITLE 26-INTERNAL REVENUE CODE PART V-CARRYOVERS Sec. 381. Carryovers in certain corporate acquisitions. 382. Special limitations on net operating loss car- ryovers. ' 383. Special limitations on carryovers of unused in- vestment credits, work incentive program cred- its, foreign taxes, and Capital losses. I AMENDMENTS 1971-Pub. L. 92-178, title III, § 302(b), Dec. 10, 1971, 85 Stat. 521, added item 383. § 381. Carryovers in certain corporate acquisitions (a) General rule In the case of the acquisition of assets of a corporation by another corporation- (1) in a distribution to such other corpora- tion to which section 332 (relating to liquida- tions of subsidiaries) applies, except in a cqse In which the basis of the assets distributed is deLermined under section 334(b)(2); or (2) in a transfer to which section 361 (relat- ing to nonrecognition of gain or loss to corpo- rations) applies, but only if the transfer Is in connection with a reorganization described in subparagraphs (A), (C), (D) (but only if the requirements of subparagraphs (A) and (B) of section 354(b)(1) are met), or (F) of section 368(a)(1), the acquiring corporation shall succeed to and take into account, as of the close of the day of distribution or transfer, the items described in subsection (W) of the distributor or transferor corporation, subject to the conditions and limi- tations specified in subsections (b) and (c). (b) Operating rules Except in the case of an acquisition in con- nection with a reorganization described in sub- paragraph (F) of section 368(a)(1)- (1) The taxable year of the distributor or transferor corporation shall end on the date of distribution or transfer. (2) For purposes of this section, th(e date of distribution or transfer shall be the day on which the distribution or transfer is complet- ed; except that, under regulations prescribed by the Secretary, the date when substantially all of the property has been distributed or transferred may be used if the distributor or transferor corporation ceases all operations, other than liquidating activities, after such date. (3) The corporation acquiring property in a distribution or transfer described in subsec- tion (a) shall not be entitled to carry back a net operating loss or a net capital loss for a taxable year ending after the date of distribu- tion or transfer to a taxable year of the dis- tributor or transferor corporation. (c) Items of the distributor or transferor corporation The Items referred to in subsection (a) are: (1) Net operating loss carryovers The net operating loss carryovers deter- mined under section 172, subject to the fol- lowing conditions and limitations: (A) the taxable year of the acquiring cor- poration to which the net operating loss 'So in original. Does not conform to section catch- line. carryovers of the distributor or transferor corporation are first carried shall be the first taxable year ending after the date of distribution or transfer. (B) In determining the net operating loss deduction, the portion of such deduction at- tributable to the net operating loss car- ryovers of the distributor or transferor cor- poration to the first taxable year of the ac- quiring corporation ending after the date of distribution or transfer shall be limited to an amount which bears the same ratio to the taxable income (determined without regard to a net operating loss deduction) of the acquiring corporation in such taxable year as the number of days in the taxable year after the date of distribution or trans- fer bears to the total number of days in the taxable year. (C) For the purpose of determining the amount of the net operating loss carryovers under section 172(b)(2), a net operating loss for a taxable year (hereinafter in this sub- paragraph referred to as the "loss year") of a distributor or transferor corporation which ends on or before the end of a loss year of the acquiring corporation shall be considered to be a net operating loss for a year prior to such loss year of the acquiring corporation. For the same purpose, the tax- able income for a "prior taxable year" (as the term is used in section 172(b)(2)) shall be computed as provided in such section; except that, if the date of distribution or transfer is on a day other than the last day of a taxable year of the acquiring corpora- tion- (I) such taxable year shall (for the pur- pose of this subparagraph only) be consid- ered to be 2 taxable years (hereinafter in this subparagraph referred to as the "pre- acquisition part year" and the "post-ac- quisition part year"); (ii) the pre-acquisition part year shall begin on the same day as such taxable year begins and shall end on the date of distribution or transfer; (iiI) the post-acquisition part year shall begin on the day following the date of dis- tribution or transfer and shall end on the same day as the end of such taxable year; (iv) the taxable income for such taxable year (computed with the modifications specified in section 172(b)(2)(A) but with- out a net operating loss deduction) shall be divided between the pre-acquisition part year and the post-acquisition part year in proportion to the number of days in each; (v) the net operating loss deduction for the pre-acquisition part year shall be de- termined as provided in section 172(b)(2)(B), but without regard to a net operating loss year of the distributor or transferor corporation; and (vi) the net operating loss deduction for the post-acquisition part year shall be de- termined as provided in section 172(b)(2)(B). (2) Earnings and profits In the case of a distribution or transfer de- scribed in subsection (a)- § 381 Page 274
TITLE 26-INTERNAL REVENUE CODE (A) the earnings and profits or deficit in earnings and profits, as the case may be, of the distributor or transferor corporation shall, tubJect to subparagraph (B), be deemed to have been received or incurred by the acquiring corporation as of the close of the date of the distribution or transfer; and (B) a deficit in earnings and profits of the distributor, transferor, or acquiring corpo- ration shall be used only to offset earnings and profits accumulated after the date of transfer. For this purpose, the earnings and profits for the taxable year of the acquiring corporation in which the distribution or transfer occurs shall be deemed to have been accumulated after such distribution or transfer in an amount which bears the same ratio to the undistributed earnings and profits of the acquiring corporation for such taxable year (computed without regard to any earnings and profits received from the distributor or transferor corpora- tion, as described in subparagraph (A) of this paragraph) as the number of days in the taxable year after the date of distribu- tion or transfer bears to the total number of days in the taxable year. (3) Capital loss carryover The capital loss carryover determined under section 1212, subject to the following conditions and limitations: (A) The taxable year of the acquiring cor- poration to which the capital loss carryover of the distributor or transferor corporation is first carried shall be the first taxable year ending after the date of distribution or transfer. (B) The capital loss carryover shall be a short-term capital loss in the taxable year determined under subparagraph (A) but shall be limited to an amount which bears the same ratio to the capital gain net income (determined without regard to a short-term capital loss attributable to cap- ital loss carryover), if any, of the acquiring corporation in such taxable year as the number of days in the taxable year after the date of distribution or transfer bears to the total number of days in the taxable year. (C) For purposes of determining the amount of such capital loss carryover to taxable years following the taxable year de- termined under subparagraph (A), the cap- ital gain net income in the taxable year de- termined under subparagraph (A) shall be considered to be an amount equal to the amount determined under subparagraph (B). (4) Method of accounting The acquiring corporation shall use the method of accounting used by the distributor or transferor corporation on the date of dis- tribution or transfer unless different methods were used by several distributor or transferor corporations or by a distributor or transferor corporation and the acquiring corporation. If different methods were used, the acquiring corporation shall use the method or combina- tion of methods of computing taxable income adopted pursuant to regulations prescribed by the Secretary. (5) Inventories In any case In which Inventories are re- ceived by the acquiring corporation, such in- ventories shall be taken by such corporation (in determining its income) on the same basis on which such inventories were taken by the distributor or transferor corporation, unless different methods were used by several dis- tributor or transferor corporations or by a distributor or transferor corporation and the acquiring corporation. If different methods were used, the acquiring corporation shall use the method or combination of methods of taking inventory adopted pursuant to regula- tions prescribed by the Secretary. (6) Method of computing depreciation allowance The acquiring corporation shall be treated as the distributor or transferor corporation for purposes of computing the depreciation allowance under subsections (b), (J), and k) of section 167 on property acquired in a distri- bution or transfer with respect to so much of the basis in the hands of the acquiring corpo- ration as does not exceed the adjusted basis in the hands of the distributor or transferor corporation. (7) Repealed. June 15, 1955, ch. 143, § 2(1), 69 Stat. 134] (8) Installment method If the acquiring corporation acquires in- stallment obligations (the income from which the distributor or transferor corporation has elected, under section 453, to report on the in- stallment basis) the acquiring corporation shall, for purposes of section 453, be treated as if it were the distributor or transferor cor- poration. (9) Amortization of bond discount or premium If the acquiring corporation assumes liabil- ity for bonds of the distributor or transferor corporation issued at a discount or premium, the acquiring corporation shall be treated as the distributor or transferor corporation after the date of distribution or transfer for pur- poses of determining the amount of amortiza- tion allowable or includible with respect to such discount or premium. (10) Treatment of certain mining development and exploration expenses of distributor of transfer- or corporation The acquiring corporation shall be entitled to deduct, if it were the distributor or trans- feror corporation, expenses deferred under section 616 (relating to certain development expenditures) if the distributor or transferor corporation has so elected. For the purpose of applying the limitation provided in section 617(h), if, for any taxable year, the distribu- tor or transferor corporation was allowed a deduction under section 617(a), the acquiring corporation shall be deemed to have been al- lowed such deduction. (11) Contributions to pension plans, employees' an- nuity plans, and stock bonus and profit-sharing plans The acquiring corporation shall be consid- ered to be the distributor or transferor corpo- ration after the date of distribution or trans- Page 2715
TITLE 26-INTERNAL REVENUE CODE fer for the purpose of determining the amounts deductible under section 404 with re- spect to pension plans, employees' annuity plans, and stock bonus and profit-sharing plans. (12) Recovery of bad debts, prior taxes, or delin- quency amounts If the acquiring corporation is entitled to the recovery of bad debts, prior taxes, or de- linquency amounts previously deducted or credited by the distributor or transferor cor- poration, the acquiring corporation shall in- clude in its income such amounts as would have been includible by the distributor or transferor corporation in accordance with sec- tion 111 (relating to the recovery of bad debts, prior taxes, and delinquency amounts). (13) Involuntary conversions under section 1033 The acquiring corporation shall be treated as the distributor or transferor corporation after the date of distribution or transfer for purposes of applying section 1033. (14) Dividend carryover to personal holding compa- ny The dividend carryover (described in section 564) to taxable years ending after the date of distribution or transfer. (15) Indebtedness of certain personal holding com- panies The acquiring corporation shall be consid- ered to be the distributor or transferor corpo- ration for the purpose of determining the ap- plicability of subsection (c) of section 545, re- lating to deduction with respect to payment of certain indebtedness. (16) Certain obligations of distributor or transferor corporatioh, If the acquiring corporation- (A) assumes an obligation of the distribu- tor or transferor corporation which, after the date of the distribution or transfer, gives rise to a liability, and (B) such liability, if paid or accrued by the distributor or transferor corporation, would have been deductible in computing its taxable income, the acquiring corporation shall be entitled to deduct such items when paid or accrued, as the case may be, as if such corporation were the distributor or transferor corportion. A corporation which would have been an acquir- ing corporation under this section if the date of distribution or transfer had occurred on or after the effective date of the provisions of this subchapter applicable to a liquidation or reorganization, as the case may be, shall be entitled, even though the date of distribution or transfer occurred before such effective date, to apply this paragraph with respect to amounts paid or accrued in taxable years be- ginning after December 31, 1953, on account of such obligations of the distributor or trans- feror corporation. This paragraph shall not apply if such obligations are reflected in the amount of stock, securities, or property trans- ferred by the acquiring corporation to the transferor corporation for the property of the transferor corporation. (17) Deficiency dividend of personal holding com- pany If the acquiring corportion pays a deficien- cy dividend (as defined in section 547(d)) with respect to the distributor or transferor corpo- ration, such distributor or transferor corpora- tion shall, with respect to such payments, be entitled to the deficiency dividend deduction provided in section 547. (18) Percentage depletion on extraction of ores or minerals from the waste or residue of prior mining The acquiring corporation shall be consid- ered to be the distributor or transferor corpo- ration for the purpose of determining the ap- plicability of section 613(c)(3) (relating to ex- traction of ores or minerals from the ground). (19) Charitable contributions in excess of prior years' limitation Contributions made in the taxable year ending on the date of distribution or transfer and the 4 prior taxable years by the distribu- tor or transferor corporation in excess of the amount deductible under section 170(b)(2) for such taxable years shall be deductible by the acquiring corporation for its taxable years which begin after the date of distribution or transfer, subject to the limitations imposed in section 170(b)(2). In applying the preceding sentence, each taxable year of the distributor or transferor corporation beginning on or before the date of distribution or transfer shall be treated as a prior taxable year with reference to the acquiring corporation's tax- able years beginning after such date. [(20) Repealed. Pub. L. 94-455, title XIX, § 1901(a)(54), Oct. 4, 1976, 90 Stat. 1773] [(21) Repealed. Pub. L. 94-455, title XIX, § 1901(b)(16), Oct. 4, 1976, 90 Stat. 1796] (22) Successor insurance company If the acquiring corporation is an insurance company taxable under subchapter L, there shall be taken into account (to the extent proper to carry out the purposes of this sec- tion and of subchapter L, and under such reg- ulations as may be prescribed by the Secre- tary) the items required to be taken into ac- count for purposes of subchapter L in respect of the distributor or transferor corporation. (23) Credit under section 38 for investment in cer- tain depreciable property The acquiring corporation shall take into account (to the extent proper to carry out the purposes of this section and section 38, and under such regulations as may be prescribed by the Secretary) the items required to be taken into account for purposes of section 38 in respect of the distributor or transferor cor- poration (24) Crc*.c under section 40 for work incentive pro- gram expenses The acquiring corporation shall take into account (to the extent proper to carry out the purposes of this section and section 40, and under such regulations as may be prescribed by the Secretary) the items required to be taken into account for purposes of section 40 in respect of the distributor or transferor cor- poration. §381 Page 276
TITLE 26-INTERNAL REVENUE CODE (25) Deficiency dividend of real estate investment trust If the acquiring corporation pays a deficien- cy dividend (as defined in section 859(d)) with respect to the distributor or transferor corpo- ration, such distributor or transferor corpora- tion shall, with respect to such payments, be entitled to the deficiency dividend deduction provided in section 859. (d) Operations loss carrybacks and carryovers of life insurance companies For application of this part to operations loss carry. backs and carryovers of life Insurance companies, see section 812(f). (Aug. 16, 1954, ch. 736, 68A Stat. 124; June 15, 1955, ch. 143, § 2(1), 69 Stat. 134; Jan. 28, 1956, ch. 15, § 1, 70 Stat. 7; Sept. 2, 1958, Pub. L. 85- 866, title I, § 29(c), 72 Stat. 1628; June 25, 1959, Pub. L. 86-69, § 3(c), 73 Stat. 139; Oct. 16, 1962, Pub. L. 87-834, § 2(d), 76 Stat. 971; Feb. 26, 1964, Pub. L. 88-272, title II, §§ 209(d)(2), 225(i)(3), 78 Stat. 46, 92; Jan. 2, 1968, Pub. L. 90-240, § 5(d), 81 Stat. 778; Dec. 30, 1969, Pub. L. 91-172, title V, §§ 504(c)(2), 512(c), 521(f), 83 Stat. 633, 639, 654; Dec. 10, 1971, Pub. L. 92-178, title VI, § 601(c)(3), 85 Stat. 557; Oct. 4, 1976, Pub. L. 94-455, title XVI, § 1601(e), title XIX, §§ 1901(a)(54), (b)(16), (17), (21)(B), (33)(N), 1906(b)(13)(A), 90 Stat. 1746, 1773, 1796, 1797, 1802, 1834.) AMENDMENTS 1976-Subsec. (b)(2). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c)(3). Pub. L. 94-455, § 1901(b)(33)(N), sub- stituted in subpars. (B) and (C) "capital gain net income" for "net capital gain". Subsecs. (c)(4), (5). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c)(10). Pub. L. 94-455, § 1901(b)(21(B), among other changes, substituted reference to section 616 (relating to certain development expenditures) if the distributor or transferor corporation has so elect- ed for reference to sections 615 and 616 (relating to pre-1970 exploration expenditures and development expenditures, respectively) if the distributor or tran- feror corporation has so elected and struck out provi- sions that if, for any taxable year, the distributor of transferor corporation was allowed or made the elec- tion of the deduction under section 615 of this title, the acquiring corporation shall be deemed to have been allowed or to have made such election of the de- duction under section 615 of this title. Subsec. (c)(15). Pub. L. 94-455, § 1901(b)(17), substi- tuted "subsection (c)" for "subsections (b)(7) and (c)". Subsec. (c)(20). Pub. L. 94-455, § 1901(a)(54), struck out subsec. (c)(20), which related to carry-over of unused pension trust deductions in certain cases. Subsec. (c)(21). Pub. L. 94-455, § 1901(b)(16). struck out subsec. (c)(21), which related to pre-1954 adjust- ments resulting from change in method of accounting. Subsecs. (c)(22), 23. Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c)(24). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c)(25). Pub. L. 94-455, § 1601(e), added subsec. (c)(25). 1971-Subsec. (c)(24). Pub. L. 92-178 added par. (24). 1969-Subsec. (b)(3). Pub. L. 91-172, § 512(c), substi- tuted "a net operating loss or a net capital loss" for "a net operating loss". Subsec. (c)(6). Pub. L. 91-172, § 521(f), substituted "subsections (b), (j) and (k) of section 167" for "para- graphs (2), (3) and (4) of section 167(b)" and added reference to adjusted basis in the hand of the distribu- tor or tranferor corporation. Subsec. (c)(10). Pub. L. 91-172, § 504(c)(2), substitut- ed "Treatment of certain mining exploration and de- velopment expenses of distributor or transferor corpo- ration" for "Treatment of certain expenses deferred by the election of distributor or transferor corpora- tion" in the par. catchline, limited deduction of ex- penses deferred under sections 615 and 616 of this title by the acquiring corporation as if it were the distribu- tor or transferor corporation to pre-1970 exploration and development expenditures, and added provision that if distributor or transferor corporation, for any taxable year, was allowed the deduction in sections 615(a) or 617(a) of this title or made the election pro- vided in section 615(b) of this title, acquiring corpora- tion shall be deemed to have been allowed such deduc- tion or deductions or to have made such election, as the case may be, for the purpose of applying the limi- tation provided in section 617 of this title. 1968-Subsec. (c)(22). Pub, L. 90-240 substituted suc- cessor insurance companies for successor life insur- ance companies as the business enterprise covered, substituted reference to insurance companies taxable under subchapter L for reference to life insurance companies as defined in section 801(a), and substituted reference to the purposes of this section and of sub- chapter L for reference to the purposes of this section and part I of subchapter L. 1964-Subsec. (c)(15). Pub. L. 88-272, § 225(I)(3), sub. stituted "subsections (b)(7) and (c) of section 545, re- lating to deductions with respect to payment of cer- tain indebtedness" for "section 545(b)(7). relating to a deduction for payment of certain indebtedness in- curred before Jan. 1, 1934". Subsec. (c)(19). Pub. L. 88-272, § 209(d)(2), permitted deductions for contributions made in the taxable year and in 4 prior taxable years, instead of one prior tax- able year, and provided that each taxable year begin- ning on or before the distribution or transfer date shall be treated as a prior taxable year with reference to the acquiring corporation's taxable years beginning after such date. 1962-Subsec. (c)(23). Pub. L. 87-834 added subsec. (c)(23). 1959-Subsec. (c)(22). Pub. L. 86-69, §3(c)(1), added subsec. (c)(22). Subsec. (d). Pub. L. 86-69, § 3(c)(2), added subsec. (d). 1958-Subsec. (c)(21). Pub. L. 85-866 added subsec. (c)(21). 1956-Subsec. (c), (20). Act Jan. 28, 1956 added subsec. (c)(20). 1955-Subsec. (c), (7). Act June 15, 1955, repealed subsec. (c)(7), which related to carryover of prepaid income. EFFECTIVE DATE OF 1976 AMENDMENT Amendment of Subsecs. (c)(3), (10), (15), (20), (21) by section 1901(a)(54), (b)(16), (17), (21)(B), (33)(N) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. For effective date of amendment of subsec. (c)(25) by section 1601(e) of Pub. L. 94-455, see section 1608(a) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 859 of this title. EFFECTIVE DATE OF 1971 AMENDMENT Enactment of subsec. (c)(24) of this section by Pub. L. 92-178 applicable to taxable years beginning after Dec. 31, 1971, see section 601(f) of Pub. L. 92-178, set out as an Effective Date note under section 50A of this title. EFFECTIVE DATE OF 1969 AMENDMENT Amendment of subsec. (b)(3) by section 512(c) of Pub. L. 91-172 applicable with respect to net capital losses sustained in taxable years beginning after Dec. 31, 1969, see section 512(g) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under sec- tion 1212 of this title. 71-999 0 - 78 - 20 (Vol. 7) Page 277
TITLE 26-INTERNAL REVENUE CODE Amendment of subsec. (c)(6) by section 521(f) of Pub. L. 91-172 applicable with respect to taxable years ending after July 24, 1969, see section 521(g) of Pub. L. 91-172, set out as an Effective Date of 1969 Amend- ment note under section 167 of thisititle. Amendment of subsec. (c)(10) by section 504(c)(2) of Pub. L. 91-172 applicable with respect to exploration expenditures paid or incurred after Dec. 31, 1969, see section 504(d)(1) of Pub. L. 91-172, set out as an Effec- tive Date of 1969 Amendment note under section 243 of this title. EFFECTIVE DATE OF 1968 .AMENDMENT Amendment of subsec. (c)(22) of this section by Pub. L. 90-240 applicable to taxable years beginning after Dec. 31, 1966, see section 5(e) of Pub. L. 90-240, set out as an Effective Date of 1968 Amendment note under section 832 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment of subsec. (c)(15) by Pub. L. 88-272 ap- plicable to taxable years beginning after Dec. 31, 1963, see section 225(t) of Pub. L. 88-272 set out as an Effec- tive Date of 1964 Amendment note under section 316 of this title. Amendment of subsec. (c)(19) by Pub. L. 88-272 ap- plicable to taxable years beginning after Dec. 31, 1963, with respect to contributions paid or treated as paid under section 170(a)(2) of this title, in taxable years beginning after Dec. 31, 1961, see section 209(f)(2) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 170 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Subsec. (c)(23) of this section applicable with respect to taxable years ending after Dec. 31, 1961, see section 2(h) of Pub. L. 87-834, set out as an Effective Date note under section 38 of this title. EFFECTIVE DATE OF 1959 AMENDMENT Amendment by Pub. L. 86-69 applicable only with respect to taxable years beginning after December 31, 1957. see section 4 of Pub. L. 86-69, set out as an Effec- tive Date note under section 801 of this title. EFFECTIVE DATE OF 1958 AMENDMENT For effective date of amendment by Pub. L. 85-866, which added subsec. (c)(21), see section 29(d) of Pub. L. 85-866, set out as an Effective Date of 1958 Amend- ment note under section 481 of this title. EFFECTIVE DATE OF 1956 AMENDMENT Section 2 of act Jan. 28, 1956, provided that: "The amendments made by the first section of this Act [adding subsec. (c), par (20) of this section] shall reply with respect to taxable years beginning after Decem- ber 31, 1953, and ending after August 16, 1954." EFFECTIVE DATE OF 1955 AMENDMENT Section 3 of act June 15, 1955, provided that the repeal of sections 452 and 462 of this title and par. (7), subsec. (c) of this section, should apply with respect to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954. SAVINGS PROVISIONS Section 4 of act June 12, 1955, provided: "(a) FILING OF STATEMENT.-If- "(1) the amount of any tax required to be paid for any taxable year ending on or before the date of the enactment of this Act [June 15, 19551 is increased by reason of the enactment of this Act [repealing sec- tions 452 and 462, and par. (7) of subsec. (c) of this sec- tion], and "(2) the last date prescribed for payment of such tax (or any installment thereof) is before December 15, 1955, then the taxpayer shall, on or before December 15, 1955, file a statement which shows the increse in the amount of such tax required to be paid by reason of the enactment of this Act. "(b) FORM AND EFFECT OF STATEMENT.- "(1) FORM OF STATEMENT, ETc.-The statement re- quired by subsection (a) shall be filed at the place fixed for filing the return. Such statement shall be in such form, and shall include such information neces- sary or approprate to show the increase In the amount of the tax required to be paid for the taxable year by reason of the enactment of this Act, as the Secretary of the Treasury or his delegate shall by regulations prescribe. "(2) TREATMENT AS AMOUNT SHOWN ON RETURN.-The amount shown on a statement filed under subsection (a) as the increase in the amount of the tax required to be paid for the taxable year by reason of the enact- ment of this Act shall, for all purposes of the internal revenue laws, be treated as tax shown on the return. Notwithstanding the preceding sentence, that portion of the ainount of increase in tax for any taxable year which is attributable to a decrease (by reason of the enactment of this Act) in the net operating loss for a succeeding taxable year shall not be treated as tax shown on the return. "(3) WAIVER OF INTEREST IN CASE OF PAYMENT ON OR BEFORE DECEMBER 15, 1955.-If the taxpayer, on or before December 15, 1955, files the statement referred to in subsection (a) and pays in full that portion of the amount shown thereon for which the last date pre- scribed for payment is before December 15, 1955, then for purposes of computing interest (other than inter- est on overpayments) such portion shall be treated as having been paid on the last date prescribed for pay- ment. This paragraph shall not apply if the amount shown on the statement as the Increase in the amount of the tax required to be paid for the taxable year by reason of the enactment of this Act is greater than the actual increase unless the taxpayer establishes, to the satisfaction of the Secretary of the Treasury or his delegate, that his computation of the greater amount was based upon a reasonable interpretation and appli- cation of sections 452 and 462 of the Internal Revenue Code of 1954 (sections 452 and 462 of this title], as those sections existed before the enactment of this Act. "(C) SPECIAL RULES.- "(1) INTEREST FOR PERIOD BEFORE ENACTMENT-Inter- est shall not be imposed on the amount of any in- crease in tax resulting from the enactment of this Act for any period before the day after the date of the en- actment of this Act [June 15, 1955]. "(2) ESIMATED TA.-Any addition to the tax under section 294(d) of the Internal Revenue Code of 1939 [section 294(d) of former Title 26, Internal Revenue Code], shall be computed as if this Act had not been enacted. In the case of any Installment for which the last date prescribed for payment is before December 15, 1955, any addition to the tax under section 6654 of the Internal Revenue Code of 1954 [section 6654 of this title], shall be computed as If this Act had not been enacted. "(3) TREATMENT OF CERTAIN PAYMENTS WHILH TAXPAY- ER IS REQUIRED TO MAKE.-If- "(A) the taxpayer is required to make a payment (or an additional payment) to another person by reason of the enactment of this Act, and "(B) the Internal Revenue Code of 1954 [this title] prescribes a period, which expires after the close of the taxable year, within which the taxpayer must make such payment (or additional payment) If the amount thereof is to be taken into account (as a de- duction or otherwise) in computing taxable income for such taxable year, then, subject to such regulations as the Secretary of the Treasury or his delegate may prescribe, if stch payment (or additional payment) is made on or before December 15, 1955, it shall be treated as having been made within the period prescribed by such Code. "(4) TREATMENT OF CERTAIN DIVIDENDS.-Subject to such regulations as the Secretary of the Treasury or his delegate may prescribe, for purposes of section 561(a)(1) of the Internal Revenue Code of 1954 [sec- tion 561(a)(1) of this title], dividends paid after the § 381 Page 278
TITLE 26-INTERNAL REVENUE CODE 15th day of the third month following the close of the taxable year and on or before December 15, 1955, may be treated as having been paid on the last day of the taxable year, but only to the extent (A) that such divi- dends are attributable to an increase in taxable income for the taxable year resulting from the enact- ment of this Act, and (B) elected by the taxpayer. "(5) DETERMINATION OF DATE PREscRIBED.-For pur- poses of this section, the determination of the last date prescribed for payment or for filing a return shall be made without regard to any extension of time therefor and without regard to any provision of this section. "(6) REGULATIONS.-For requirement that the Secre- tary of the Treasury or his delegate shall prescribe all rules and regulations as may be necessary by reason of the enactment of this Act, see section 7805(a) of the Internal Revenue Code of 1954 [section 7805(a) of this titlel." CROSS REFERENCES Effect on earnings and profits, see section 312 of this title. Effective date of part V of subchapter C, this section as applicable to liquidations and reorganizations, see section 394 of this title. Liquidations before Jan. 1, 1966, see section 225(h) of Pub. L. 88-272, set out as a note under section 333 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 47, 50A, SOB, 166, 172, 250, 382, 394, 463, 545, 810, 812, 815, 832, 904, 1251 of this title; title 46 section 1177. § 382. Special limitations on net operating loss car. ryovers (a) Purchase of a corporation and change in its trade or business (1) In general If, at the end of a taxable year of a corpora- tion- (A) any one or more of those persons de- scribed in paragraph (2) own a percentage of the total fair market value of the out- standing stock of such corporation which is at least 50 percentage points more than such person or persons owned at- (i) the beginning of such taxable year, or (ii) the beginning of the prior taxable year, (B) the increase in percentage points at the end of such taxable year is attributable to- (i) a purchase by such person or persons of such stock, the stock of another corpo- ration owning stock in such corporation, or an interest in a partnership or trust owning stock in such corporation, or (ii) a decrease in the amount of such stock outstanding or the amount of stock outstanding of another corporation owning stock in such corporation, except a decrease resulting from a redemption to pay death taxes to which section 303 ap- plies, and (C) such corporation has not continued to carry on a trade or business substantially the same as that conducted before any change in the percentage ownership of the fair market value of such stock, the net operating loss carryovers, if any, from prior taxable years of such corporation to such taxable year and subsequent taxable years shall not be included in the net operat- ing loss deduction for such taxable year and subsequent taxable years. (2) Description of person or persons The person or persons referred to in para- graph (1) shall be the 10 persons (or such lesser number as there are persons owning the outstanding stock at the end of such tax- able year) who own the greatest percentage of the fair market value of such stock at the end of such taxable year; except that, if any uther person owns the same percentage of such stock at such time as is owned by one of the 10 persons, such person shall also be in- cluded. If any of the persons are so related that such stock owned by one is attributed to the other under the rules specified in para- graph (3), such persons shall be considered as only one person solely for the purpose of se- lecting the 10 persons (more or less) who own the greatest percentage of the fair market value of such outstanding stock. (3) Attribution of ownership Section 318 (relating to constructive owner- ship of stock) shall apply in determining the ownership of stock, except that sections 318(a)(2)(C) and 318(a)(3)(C) shall be applied without regard to the 50 percent limitation contained therein. (4) Definition of purchase For purposes of this subsection, the term "purchase" means the acquisition of stock, the basis of which is determined solely by ref- erence to its cost to the holder thereof, in a transaction from a person or persons other than the person or persons the ownership of whose stock would be attributed to the holder by application of paragraph (3). (b) Change of ownership as the result of a reorgani- zation (1) In general If, in the case of a reorganization specified in paragraph (2) of section 381(a), the trans- feror corporation or the acquiring corpora- tion- (A) has a net operating loss which is a net operating loss carryover to the first taxable year of the acquiring corporation ending after the date of transfer, and (B) the stockholders (immediately before the reorganization) of such corporation (hereinafter in this subsection referred to as the "loss corporation"), as the result of owning stock of the loss corporation, own (immediately after the reorganization) less than 20 percent of the fair market value of the outstanding stock of the acquiring cor- poration, the total net operating loss carryover from prior taxable years of the loss corporation to the first taxable year of the acquiring corpo- ration ending after the date of transfer shall be reduced by the percentage determined under paragraph (2). (2) Reduction of net operating loss carryover The reduction applicable under paragraph (1) shall be the percentage determined by substracting from 100 percent- § 382 Page 279
TITLE 26-INTERNAL REVENUE CODE (A) the percent of the fair market value of the outstanding stock of the acquiring corporation owned (immediately after the reorganization) by the stockholders (imme- diately before the reorganization) of the loss corporation, as the result of owning stock of the loss corporation, multiplied by (B) five. (3) Exception to limitation In this subsection The limitation in this subsection shall not apply if the transferor corporation and the acquiring corporation are owned substantially by the same persons in the same proportion. (4) Net operating loss carryovers to subsequent years In computing the net operating loss car- ryovers to taxable years subsequent to a taxble year in which there was a limitation applicable to a net operating loss carryover by operation of this subsection, the income in such taxable year, as computed under section 172(b)(2), shall be increased by the amount of the reduction of the total net operating loss carryover determined under paragraph (2). (5) Attribution of ownership If the transferor corporation or the acquir- ing corporation owns (immediatley before the reorganization) any of the outstanding stock of the loss corporation, such transferor corpo- ration or acquiring corporation shall, for pur- poses of this subsection, be treated as owning (immediately after the reorganization) a per- centage of the fair market value of the ac- quiring corporation's outstanding stock which bears the same ratio to the percentage of the fair market value of the outstanding stock of the loss corporation (immediately before the reorganization) owned by such transferor cor- poration or acquiring corporation as the fair market value of the total outstanding stock of the loss corporation (immediately before the reorganization) bears to the fair market value of the total outstanding stock of the acquir- ing corporation (immediately after the reor- ganization). (6) Stock of corporation controlling acquiring cor- poration If the stockholders of the loss corporation (immediately before the reorganization) own, as a result of the reorganization, stock in a corporation controlling the acquiring corpora- tion, such stock of the controlling corporation shall, for purposes of this subsection, be treated as stock of the acquiring corporation in an amount valued at an equivalent fair market value. (c) Definition of stock For purposes of this section, "stock" means all shares except nonvoting stock which is limited and preferred as to dividends. (Aug. 16, 1954, ch. 736, 68A Stat. 129; Aug. 31, 1964, Pub. L. 88-554, § 4(b)(3), 78 Stat. 763.) TAXABLE YEARS BEGINNING AFTER JUNE 30, 1978, AND REORGANIZATIONS PURSUANT TO PLANS OF REORGANIZATION ADOPTED ON OR AFTER JANU- ARY 1, 1978 Pub. L. 94-455, title VIII, § 806(e), (g)(2), (3), Oct. 4, 1976, 90 Slat. 1599, 1605, 1606, provided that, for purposes of applying subsec. (a) of this section to taxable years beginning after June 30, 1978, with specified exceptions, and that for purposes of apply- ing subsec. (b) of this section to reorganiza- tions pursuant to plans of reorganization adopted on or after Jan. 1, 1978, this section will read as follows: § 382. Special limitations on net operating loss car- ryover (a) Certain acquisitions of stock of a corporation (1) In general If- (A) on the last day of a taxable year of a corporation, (B) any one or more of the persons de- scribed in paragraph (4)(B) own, directly or indirectly, a percentage of the total fair market value of the participating stock or of all the stock of the corporation which ex- ceeds by more than 60 percentage points the percentage of such stock owned by such person or persons at- (i) the beginning of such taxable year, or (ii) the beginning of the first or second preceding taxable year, and (C) such increase in percentage points is attributable to- (i) a purchase by such person or persons of such stock, or of the stock of another corporation owning stock in such corpo- ration, or of an interest in a partnership or trust owning stock in such corporation, (ii) an acquistion (by contribution, merger, or consolidation) of an interest in a partnership owning stock in such corpo- ration, or an acquisition (by contribution, merger, or consolidation) by a partnership of such stock, (iii) an exchange to which section 351 (relating to transfer to corporation con- trolled by transferor) applies, or an acqui- sition by a corporation of such stock in an exchange in which section 351 applies to the tranferor, (iv) a contribution to the capital of such corporation, (v) a decrease in the amount of such stock outstanding or in the amount of stock outstanding of another corporation owning stock in such corporation (except a decrease resulting from a redemption to pay death taxes to which section 303 ap- plies), (vi) a liquidation of the interest of a partner in a partnership owning stock in such corporation, or (vii) any combination of the transac- tions described in clauses (i) through (vi), then the net operating loss carryover, if any, from such taxable year and the net operating loss carryovers, if any, from prior taxable years to such taxable year and subsequent tax- able years of such corporation shall be re- duced by the percentage determined under paragraph (2), (2) Reduction of net operating loss carryover The reduction applicable under paragraph (1) shall be the sum of the percentages deter- mined by multiplying- § 382 Page 280
TITLE 26-INTERNAL REVENUE CODE (A) by three and one-half the increase in percentage points (including fractions thereof) in excess of 60 and up to and in- cluding 80, and (B) by one and one-half the increase in percentage points (including fractions thereof) in excess of 80. The reduction under this paragraph shall be determined by reference to the increase in per- centage points of the total fair market value of the participating stock or of all the stock, whichever increase is greater. (3) Minimum ownership rule Notwithstanding the provisions of para- graph (1), a net operating loss carryover from a taxable year shall not be reduced under this subsection if, at all times during the last half of such taxable year, any of the persons de- scribed in paragraph (4)(B) (determined on the last day of the taxable year referred to in paragraph (1)(A)) owned at least 40 percent of the total fair market value of the participat- ing stock and of all the stock of the corpora- tion. For purposes of the preceding sentence, persons owning stock of a corporation on the last day of its first taxable year shall be con- sidered to have owned such stock at all times during the last half of such first taxable year. (4) Operating rules For purposes of this subsection- (A) Definition of purchase The term "purchase" means an acquisi- tion of stock the basis of which is deter- mined by reference to its cost to the holder thereof. (B) Description of person or persons The person or persons referred to in para- graph (1)(B) shall be the 15 persons (or such lesser number as there are persons owning the stock on the last day of the taxable year) who own the greatest percentage of the total fair market value of all the stock on the last day of that year, except that if any other person owns the same percentage of such stock at such time as is owned by one of the 15 persons, that other person shall also be included. If any of the persons are so related that the stock owned by one is attributed to the other under the rules specified in sub- paragraph (C), such persons shall be consid- ered as only one person solely for the pur- pose of selecting the 15 persons (more or less) who own the greatest percentage of the total fair market value of all the stock. (C) Constructive ownership Section 318 (relating to constructive own- ership of stock) shall apply in determining the ownership of stock, except that section 318(a)(2)(C) and 318(a)(3)(C) shall be ap- plied without regard to the 50 percent limi- tation contained therein. (D) Short taxable years If one of the taxable years of the corpora- tion referred to in paragraph (1)(B) is a short taxable year, then such paragraph and paragraph (6) shall be applied by substitut- ing "first, second, or third" for "first or second" each time such phrase occurs. (5) Exceptions This subsection shall not apply to a pur- chase or other acquisition of stock (or of an interest in a partnership or trust owning stock in the corporation)- (A) from a person whose ownership of stock would be attributed to the holder by application of paragraph (4)(C) to the extent that such stock would be so attribut- ed; (B) if (and to the extent) the basis thereof is determined under section 1014 or 1023 (relating to property acquired from a dece- dent), or section 1015(a) or (b) (relating to property acquired by gift or transfers in trust); (C) by a security holder or creditor in ex- change for the relinquishment or extinguish- ment in whole or part of a claim against the corporation, unless the claim was acquired for the purpose of acquiring such stock; (D) by one or more persons who were full- time employees of the corporation at all times during the period of 36 months ending on the last day of the taxable year of the cor- poration (or at all times during the period of the corporation's existence, if shorter); (E) by a trust described in section 401(a) which is exempt from tax under section 501(a) and which benefits exclusively the employees (or their beneficiaries) of the cor- poration, including a member of a con- trolled group of corporations (within the meaning of section 1563(a) determined without regard to section 1563(a)(4) and (e)(3)(C)) which includes such corporation; (F) by an employee stock ownership plan meeting the requirements of section 301(d) of the Tax Reduction Act of 1975; or (G) in a recapitalization described in sec- tion 368(a)(1)(E). (6) Successive applications of subsection If- (A) a net operating loss carryover is re- duced under this subsection at the end of a taxable year of a corporation, and (B) any person described in paragraph (4)(B) who owns stock of the corporation on the last day of such taxable year does not own, on the last day of the first or second succeeding taxable year of the corporation, a greater percentage of the total fair market value of the participating stock or of all the stock of the corporation than such person owned on the last day of such taxable year, then, for purposes of applying this subsection as of the end of the first or second succeeding taxable year (as the case may be), stock owned by such person at the end of such succeeding taxable year shall be considered owned by such person at the beginning of the first or second preceding taxable year. Other rules re- lating to the manner and extent of successive applications of this section in the case of in- creases in ownership and transfers of stock by the persons described in paragraph (4)(B) shall be prescribed by regulations issued by the Secretary. Page 281 § 382
TITLE 26-INTERNAL REVENUE CODE (b) Reorganizations (1) In general If one corporation acquires the stock or assets of another corporation in a reorganiza- tion described in section 368(a)(1)(A), (B), (C), (D) (but only if the requirements of sec- tion 354(b)(1) are met), or (F), and if- (A) the acquiring or acquired corporation has a net operating loss for the taxable year which includes the date of the acquisition, or a net operating loss carryover from a prior taxable year to such taxable year, and (B) the shareholders (immediately before the reorganization) of such corporation (the 'loss corporation". as the result of owning stock of the loss corporation, own (immedi- ately after the reorganization) less than 40 percent of the total fair market value of the participating stock or of all the stock of the acquiring corporation, then the net operating loss carryover (if any) of the losS corporation from the taxable year which includes the date of the acquisition, and the net operating loss carryovers (if any) of the loss corporation from prior taxable years to such taxable year and subsequent tax- able years, shall be reduced by the percentage determined under paragraph (2). (2) Reduction of net operating loss carryover (A) Ownership of 20 percent or more If such shareholders own less than 40 per- cent, but not less than 20 percent, of the total fair market value of the participating stock or of all the stock of the acquiring cor- poration, the reduction applicable under paragraph (1) shall be the percentage equal to the number of percentage points (includ- ing fractions thereof) less than 40 percent, multiplied by three and one-half. (B) Ownership of less than 20 percent If such shareholders own less than 20 per- cent of the total fair market value of the participating stock or of all the stock of the acquiring corporation, the reduction appli- cable under paragraph (1) shall be the sum of- (i) the percentage that would be deter- mined under subparagraph (A) if the shareholders owned 20 percent of such stock, plus. (ii) the percentage equal to the number of percentage points (including fractions thereof) of such stock less than 20 percent, multiplied by one and one-half. The reduction under this paragraph shall be determined by reference to the lesser of the percentage of the total fair market value of the participating stock or of all the stock of the acquiring corporation owned by such shareholders. (3) Losses of controlled corporations For purposes of this subsection- (A) Holding companies If, immediately before the reorganization, the acquiring or acquired corporation con- trols a corporation which has a net operat- ing loss for the taxable year which includes the date of the acquisition, or a net operat- ing loss carryover from a prior taxable year to such taxable year, the acquiring or ac- quired corporation, as the case may be, shall be treated as the loss corporation (whether or not such corporation is a loss corpora- tion). The reduction, if any, so determined under paragraph (2) shall be applied to the losses of such controlled corporation. (B) Triangular reorganizations Except as otherwise provided in para- graph (5), if the shareholders of the loss cor- poration (immediately before the reorgani- zation) own, as a result of the reorganiza- tion, stock in a corporation controlling the acquiring corporation, such shareholders shall be treated as owning (immediately after the reorganization) a percentage of the total fair market value of the participating stock and of all the stock of the acquiring corporation owned by the controlling corpo- ration equal to the percentage of the total fair market value of the participating stock and of all the stock, respectively, of the con- trolling corporation owned by such share- holders. (4) Special rules For purposes of applying paragraph (1)(B)- (A) Certain related transactions If, immediately before the reorganiza- tion- (i) one or more shareholders of the loss corporation own stock of such corpora- tion which such shareholder acquired during the 36-month period ending on the date of the acquisition in a transaction described in paragraph (1) or in subsec- tion (a)(1)(C) (unless excepted by subsec- tion (a)(5)), and (ii) such shareholders own more than 50 percent of the total fair market value of the stock of another corporation a party to the reorganization, or any such share- holder is a corporation controlled by an- other corporation a party to the reorgani- zation, then such shareholders shall not be treated as shareholders of the loss corporation with respect to such stock. (B) Certain prior ownership of loss corporation If, immediately before the reorganization, the acquiring or acquired corporation owns stock of the loss corporation, then para- graph (1)(B) shall be applied by treating the shareholders of the loss corporation as owning an additional amount of the total fair market value of the participating stock and of all the stock of the acquiring corpo- ration, as a result of owning stock in the loss corporation, equal to the total fair market value of the participating stock and of all the stock, respectively, of the loss cor- poration owned (immediately before the re- organization) by the acquiring or acquired corporation. This subparagraph shall not apply to stock of the loss corporation owned by the acquiring or acquired corporation if such stock was acquired by such corpora- tion within the 36-month period ending on the date of the reorganization in a transac- tion described in subsection (a)(1)(C) (unless excepted by subsection (a)(5)); or to § 382 Page 282
TITLE 26-INTERNAL REVENUE CODE a reorganization described in section 368(a)(1)(B) or (C) to the extent the ac- quired corporation does not distribute the stock received by it to its own shareholders. (C) Certain asset acquisitions If a loss corporation receives stock of the acquiring corporation in a reorganization described in section 368(a)(1)(C) and does not distribute such stock to its shareholders, paragraph (1)(B) shall be applied by treat- ing the shareholders of the loss corporation as owning (immediately after the reorgani- zation) such undistributed stock in propor- tion to the fair market value of the stock which such shareholders own in the loss cor- poration. (5) Certain stock-for-stock reorganizations In the case of a reorganization described in section 368(a)(1)(B) in which the acquired corporation is a loss corporation- (A) Stock which is exchanged Paragraphs (1)(B) and (2) shall be applied by reference to the ownership of stock of the loss corporation (rather than the acquiring corporation) immediately after the reorga- nization. Shareholders of the loss corpora- tion who exchange stock of the loss corpora- tion shall be treated as owning (immediate- ly after the reorganization) a percentage of the total fair market value of the participat- ing stock and of all the stock of the loss cor- poration acquired in the exchange by the ac- quiring corporation which is equal to the percentage of the total fair market value of the participating stock and of all the stock, respectively, of the acquiring corporation owned (immediately after the reorganiza- tion) by such shareholders. (B) Stock which is not exchanged Stock of the loss corporation owned by shareholders immediately before the reorga- nization which was not exchanged in the re- organization shall be taken into account in applying paragraph (1)(B). For purposes of the preceding sentence, the acquiring corpo- ration (or a corporation controlled by the acquiring corporation) shall not be treated as a shareholder of the loss corporation with respect to stock of the loss corporation ac- quired in a transaction described in para- graph (1), or in subsection (a)(1)(C) (unless excepted by subsection (a)(5)), during the 36-month period ending on the date of the exchange. (C) Triangular exchanges For purposes of applying the rules in this paragraph, if the shareholders of the loss corporation receive stock of a corporation controlling the acquiring corporation, such shareholders shall be treated as owning a percentage of the participating stock and of all the stock of the acquiring corporation owned by the controlling corporation equal to the percentage of the total fair market value of the participating stock and of all the stoclc, respectively, which such share- holders own of the controlling corporation immediately after the reorganization. (6) Exceptions The limitations in this subsection shall not apply- (A) if the same persons own substantially all the stock of the acquiring corporation and of the other corporation in substantial- ly the same proportions; or (B) to a net operating loss carryover from a taxable year if the acquiring or acquired corporation owned at least 40 percent of the total fair market value of the participating stock and of all the stock of the loss corpora- tion at all times during the last half of such taxable year, For purposes of subparagraph (A), if the ac- quiring or acquired corporation is controlled by another corporation, the shareholders of the controlling corporation shall be consid- ered as also owning the stock owned by the controlling corporation in that proportion which the total fair market value of the stock which each shareholder owns in the control- ling corporation bears to the total fair market value of all the stock in the controlling corpo- ration. (c) Rules relating to stock For purposes of this section- (1) The term "stock" means all shares of stock, except stock which- (A) is not entitled to vote, (B) is fixed and preferred as to dividends and does not participate in corporate growth to any significant extent, (C) has redemption and liquidation rights which do not exceed the paid-in capital or par value represented by such stock (except for a reasonable redemption premium in excess of such paid-in capital or par value), and (D) is not convertible into another class of stock. (2) The term "participating stock" means stock (including common stock) which repre- sents an interest in the earnings and assets of the issuing corporation which is not limited to a stated amount of money or property or percentage of paid-in capital or par value, or by any similar formula. (3) The Secretary shall prescribe regulations under which- (A) stock or convertible securities shall be treated as stock or participating stock, or (B) stock (however denoted) shall not be treated as stock or participating stock, by reason of conversion and call rights, rights in earnings and assets, priorities and prefer- ences as to distributions of earnings or assets, and similar factors. REERmUCES IN TEXT Section 301(d) of the Tax Reduction Act of 1975, re- ferred to in subsec. (a)(5)(F), is set out as a note under section 46 of this title. AMENDMENTS 1964-Subsec. (a)(3). Pub. L. 88-554 inserted the ref- erence to section 318(a)(3)(C) of this title. EFFECTIVE DATE OF 1976 AMENDMENT Section 806(g)(2), (3) of Pub. L. 94-455 provided that: Page 283
TITLE 26-INTERNAL REVENUE CODE "(2) For purposes of applying sections 382(a) and 383 (as it relates to section 382(a)) of the Internal Rev- enue Code of 1954 [subsec. (a) of this section and sec- tion 383 of this title], as amended by subsections (e) and (f), the amendments made by subsections (e) and (f) [amending this section and sections 368(c) and 383 of this title] shall take effect for taxable years begin- ning after June 30, 1978, except that the beginning of the taxable years specified in clause (ii) of section 382(a)(1)(B) of such Code Esubsec. (a)(1)(B) of this sec- tion], as so amended, shall be considered to be the later of: "(A) the beginning of such taxable years, or "(B) January 1, 1978. "(3) Sections 382(b) and 383 (as it relates to section 382(b)) of the Internal Revenue Code of 1954 (subsec. (b) of this section and section 383 of this title], as amended by subsections (e) and (f), shall apply (and such sections as in effect prior to such amendment shall not apply) to reorganizations pursuant to a plan of reorganization adopted by one or more of the par- ties thereto on or after January 1, 1978. For purposes of the preceding sentence, a corporation shall be con- sidered to have adopted a plan of reorganization on the date on which a resolution of the board of direc- tors is passed adopting the plan or recommending its adoption to the shareholders, or on the date on which the shareholders approve the plan of reorganization, whichever is earlier." EFFECTIVE DATE OF 1964 AMENDMENT Amendment by section 4 of Pub. L. 88-554 effective Aug. 31, 1964, except that for purposes of sections 302 and 304 of this title, such amendment shall not apply to distributions in payment for stock acquisitions or redemptions, if such acquisitions or redemptions oc- curred before Aug. 31, 1964, see section 4(c) of Pub. L. 88-554, set out as an Effective Date of 1964 Amend- ment note under section 318 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 172, 318, 383 of this title. § 383. Special limitations on carryovers of unused in- vestment credits, work incentive program credits, foreign taxes, and capital losses If- (1) the ownership and business of a corpora- tion are changed in the manner described in section 382(a)(1), or (2) in the case of a reorganization specified in paragraph (2) of section 381(a), there is a change in ownership described in section 382(b)(1)(B), then the limitations provided in section 382 in such cases with respect to the carryover of net operating losses shall apply in the same manner, as provided under regulations pre- scribed by the Secretary, with respect to any unused investment credit of the corporation which can otherwise be carried forward under section 46(b), to any unused work incentive pro- gram credit of the corporation which can other- wise be carried forward under section 50A(b), to any excess foreign taxes of the corporation which can otherwise be carried forward under section 904(c), and to any net capital loss of the corporation which can otherwise be carried for- ward under section 1212. (Added Pub. L. 92-178, title III, § 302(a), Dec. 10, 1971, 85 Stat. 5421, and amended Pub. L. 94- 455, title X, § 1031(b)(5), title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1623, 1834.) TAXABLE YEARS BEGINNING AFTER JUNE 30, 1978, AND REORGANIZATIONS PURSUANT TO PLANS ADOPTED ON OR AFTER JANUARY 1, 1978 Pub. L. 94-455, title VII!, § 806(f)(2), (g) (2), (3), Oct. 4, 1976, 90 Stat. 1605, 1606, pro- vided that for purposes of applying this sec. tion as it relates to section 382(a) of this title as amended by section 806(e) of Pub. L. 94-455 to taxable years beginning after June 30, 1978, and for purposes of applying this section as it relates to section 382(b) of this title as amended by section 806(e) of Pub. L. 94-455, to reorganizations pursuant to plans of reorganization adopted by one or more of the parties on or after Jan. 1, 1978, this section will read as follows: § 383. Special limitations on unused investment cred. its, work incentive program credits, foreign taxes, and capital losses In the case of a change of ownership of a cor- poration in the manner described in section 382 (a) or (b), the limitations provided in section 382 in such cases with respect to net operating losses shall apply in the same manner, as pro- vided under regulations prescribed by the Secre- tary, with respect to any unused investment credit of the corporation under section 46(b), to any unused work incentive program credit of the corporation under section 50A(b), to any excess foreign taxes of the corporation under section 904(d), and to any net capital loss of the corporation under section 1212. AMENDMENTS 1976-Pub. L. 94-455 struck out "or his delegate" fol- lowing "Secretary", and substituted "section 904(c)" for "section 904(d)". EFFECTIVE DATE OF 1976 AMENDMENT For effective date of amendment by section 1031(b)(5) of Pub. L. 94-455, see section 1031(c) of Pub. L. 94-455, set out as an Effective Date of 1976 Amend- ment note under section 904 of this title. For purposes of applying this section (as it relates to section 382(a) of this title) as amended by section 806(e) and (f) of Pub. L. 94-455, the amendments made by section 806(e) and (f) of Pub. L. 94-455 effective for taxable years beginning after June 30, 1978, with specified provisions for determining the beginning of the taxable years specified in section 382(a)(1)(B)(i) of this title, and this section (as it relates to section 382(b) of this title) as amended by section 806(e) and (f) of Pub. L. 94-455 to apply (and such sections as In effect prior to such amendment not to apply) to reor- ganizations pursuant to a plan of reorganization adopted by one or more of the parties thereto on or after Jan. 1, 1978, see section 806(g)(2) and (3) of Pub. L. 94-455, set out as an Effective Date of 1976 Amend- ment note under section 382 of this title. EFFECTIVE DATE Section 302(c) of Pub. L. 92-178 provided that: "The amendments made by this section (enacting this sec- tion] shall be applicable only with respect to reorgani- zations and other changes in ownership occurring after the date of enactment of this Act [Dec. 10, 1971) pursuant to a plan of reorganization or contract en- tered into on or after September 29, 1971." § 383 Page 284
TITLE 26-INTERNAL REVENUE CODE PART VI-TREATMENT OF CERTAIN COR- PORATE INTERESTS AS STOCK OR IN- DEBTEDNESS Sec. 385. Treatment of certain interests in corporations as stock or indebtedness. AMENDMENTS 1969-Pub. L. 91-172, title IV, §415(a), Dec. 30, 1969, 83 Stat. 613, added Part heading and analysis of sec- tions. § 385. Treatment of certain interests in corporations as stock or indebtedness (a) Authority to prescribe regulations The Secretary is authorized to prescribe sucl regulations as may be necessary or appropriate to determine whether an interest in a corpora- tion is to be treated for purposes of this title as stock or indebtedness. (b) Factors The regulations prescribed under this section shall set forth factors which are to be taken into account in determining with respect to a particular factual situation whether a debtor- creditor relationship exists or a corporation- shareholder relationship exists. The factors so set forth in the regulations may include among other factors: (1) whether there is a written unconditional promise to pay on demand or on a specified date a sum certain In money in return for an adequate consideration in money or money's worth, and to pay a fixed rate of interest, (2) whether there is subordination to or preference over any indebtedness of the cor- poration, (3) the ratio of debt to equity of the corpo- ration, (4) whether there is convertibility into the stock of the corporation, and (5) the relationship between holdings of stock in the corporation and holdings of the interest in question. (Added Pub. L. 91-172, title IV, § 415(a), Dec. 30, 1969, 83 Stat. 613, and amended; Pub. L. 94- 455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455 struck out "or his delegate" following "Secretary". [§§ 391-395. Repealed. Pub. L. 94-455, title XIX, § 1901(a)(55), Oct. 4, 1976, 90 Stat. 17731 Section 391, acts Aug. 16, 1954, ch. 736, 68A Stat. 131; Sept. 2, 19518, Pub, L. 88-866, title I, § 22(a), 72 Stat. 1620, related to the effective date of section 301 et seq. of this title. Section 392, act Aug. 16, 1954, ch. 736, 68A Stat. 131, related to the effective date of section 331 et seq. of this title. Section 393, act Aug. 16, 1954, ch. 736, 68A Stat. 132, related to the effective date of section 351 et seq. of this title. Section 394, act Aug. 16, 1954, ch. 736, 68A Stat. 133, related to the effective date of section 381 et seq. of this title. Section 395, act Aug. 16, 1954, ch. 736, 68A Stat. 133, related to special rules for application of this sub- chapter. EFFECTIVE DATE OF REPEAL Repeal of sections effective for taxable years begin- ning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amend- ment note under section 2 of this title. Subchapter D-Deferred Compensation, Etc. Part 1. Pension, profit-sharing, stock bonus plans, etc. II. Certain stock options. AMENDMENTS 1964-Pub. L. 88-272, title II, §221(d)(1), Feb. 26, 1964, 78 Stat. 75, substituted "Certain stock options" for "Miscellaneous provisions" in the heading to Part II. SUBCHAPTER REFERRED TO IN OTHER SECTIONS This subchapter is referred to in sections 6103, 7476, 7802 of this title. PART I-PENSION, PROFIT-SHARING, STOCK BONUS PLANS, ETC. Subpart A. General rule. B. Special rules. SUBPART A-GENERAL RULE Sec. 401. Qualified pension, profit-sharing, and stock bonus plans. 402. Taxability of beneficiary of employees' trust. 403. Taxation of employee annuities. 404. Deduction for contributions of an employer to an employees' trust or annuity plan and compensa- tion under a deferred-payment plan. 405. Qualified bond purchase plans. 406. Certain employees of foreign subsidiaries. 407. Certain employees of domestic subsidiaries en- gaged in business outside the United States. 408. Individual retirement accounts. 409. Retirement bonds. A.mENDMENTS 1974-Pub. L. 93-406, title II, § 1016(b)(1), Sept. 2, 1974, 88 Stat. 932, inserted heading "Subpart A-Gen- eral Rule" and added analysis of subparts. Pub. L. 93-406, title II, § 2002(h)(2), Sept. 2, 1974, 88 Stat. 970, added items 408 and 409. 1964-Pub. L. 88-272, title II, § 220(c)(1), Feb. 26, 1964, 78 Stat. 62, added items 406 and 407. 1962-Pub. L. 87-792, § 5(b), Oct. 10, 1962, 76 Stat. 827, added item 405. PART REFERRED TO IN OTHER SECTIONS This part is referred to in sections 1023, 6058, 7802 of this title; title 19 section 2373; title 29 sections 1084, 1201, 1202, 1321. § 401. Qualified pension, profit-sharing, and stock bonus plans (a) Requirements for qualification A trust created or organized in the United States and forming part of a stock bonus, pen- sion, or profit-sharing plan of an employer for the exclusive benefit of his employees or their beneficiaires shall constitute a qualified trust under this section- (1) If contributions are made to the trust by such employer, or employees, or both, or by another employer who is entitled to deduct his contributions under section 404(a)(3)(B) (relating to deduction for contributions to profit-sharing and stock bonus plans), for the purpose of distributing to such employees or Page 285 § 401
TITLE 26-INTERNAL REVENUE CODE their beneficiaries the corpus and income of the fund accumulated by the trust in accor- dance with such plan; (2) if under the trust instrument it is impos- sible, at any time prior to the satisfaction of all liabilities with respect to employees and their beneficiaries under the trust, for any part of the corpus or income to be (within the taxable year or thereafter) used for, or divert- ed to, purposes other than for the exclusive benefit of his employees or their beneficia- ries; (3) if the plan of which such trust is a part satisfies the requirements of section 410 (re- lating to minimum participation standards); and (4) if the contributions or the benefits pro- vided under the plan do not discriminate in favor of employees who are- (A) officers, (B) shareholders, or (C) highly compensated. For purposes of this paragraph, there shall be excluded from consideration employees de- scribed in section 410(b)(2)(A) and (C). (5) A classification shall not be considered discriminatory within the meaning of para- graph (4) or section 410(b) (without regard to paragraph (1)(A) thereof) merely because it excludes employees the whole of whose remu- neration constitutes "wages" under section 3121(a)(1) (relating to the Federal Insurance Contributions Act) or merely because it Is limited to salaried or clerical employees. Nei- ther shall a plan be considered discriminatory within the meaning of such provisions merely because the contributions or benefits of or on behalf of the employees under the plan bear a uniform relationship to the total compensa- tion, or the basic or regular rate of compensa- tion, of such employees, or merely because the contributions or benefits based on that part of an employee's remuneration which is excluded from "wages" by section 3121(a)(1) differ from the contributions or benefits based on employee's remuneration not so ex- cluded, or differ because of any retirement benefits created under State or Federal law. For purposes of this paragraph and para- graph (10), the total compensation of an indi- vidual who is an employee within the mean- ing of subsection (c)(1) means such individ- ual's earned income (as defined in subsection (c)(2)), and the basic or regular rate of com- pensation of such an individual shall be deter- mined, under regulations prescribed by the Secretary, with respect to that portion of his earned income which bears the same ratio to his earned income as the basic or regular compensation of the employees under the plan bears to the total compensation of such employees. For purposes of determining whether two or more plans of an employer satisfy the requirements of paragraph (4) when considered as a single plan, if the amount of contributions on behalf of the em- ployees allowed as a deduction under section 404 for the taxable year with respect to such plans, taken together, bears a uniform rela- tionship to the total compensation, or the basic or regular rate of compensation, of such employees, the plans shall not be considered discriminatory merely because the rights of employees to, or derived from, the employer contributions under the separate plans do not become nonforfeitable at the same rate. For the purposes of determining whether two or more plans of an employer satisfy the re- quirements of paragraph (4) when considered as a single plan, if the employees' rights to benefits under the separate plans do not become nonforfeitable at the same rate, but the levels of benefits provided by the separate plans satisfy the requirements of regulations prescribed by the Secretary. to take account of the differences in such rates, the plans shall not be considered discriminatory merely because of the difference in such rates. (6) A plan shall be considered as meeting the requirements of paragraph (3) during the whole of any taxable year of the plan if on one day in each quarter it satisfied such re- quirements. (7) A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part satisfies the re- quirements of section 411 (relating to mini- mum vesting standards). (8) A trust forming part of a pension plan shall not constitute a qualified trust under this section unless the plan provides that for- feitures must not be applied to increase the benefits any employee would otherwise re- ceive under the plan. (9) In the case of a plan which provides con- tributions or benefits for employees some or all of whom are employees within the mean- ing of subsection (c)(1), a trust forming part of such plan shall not constitute a qualified trust under this section unless, under the plan, the entire interest of each employee- (A) either will be distributed to him not later than his taxable year in which he at- tains the age of 70 V years, or, in the case of an employee other than an owner-employee (as defined in subsection (c)(3)), in which he retires, whichever is the later, or (B) will be distributed, commencing not later than such taxable year, (I) in accor- dance with regulations prescribed by the Secretary, over the life of such employee or over the lives of such employee and his spouse, or (it) in accordance with such regu- lations, over a period not extending beyond the life expectancy of such employee or the life expectancy of such employee and his spouse. A trust shall not be disqualified under this paragraph by reason of distributions under a designation, prior to the date of the enact- ment of this paragraph, by any employee under the plan of which such trust is a part, of a method of distribution which does not meet the terms of the preceding sentence. (10) In the case of a plan which provides contributions or benefits for employees some or all of whom are owner-employees (as de- fined in subsection (c)(3))- (A) paragraph (3), the first and second sentences of paragraph (5), and section 410 shall not apply, but- (i) such plan shall not be considered dis- criminatory within the meaning of para- graph (4) merely because the contribu- Page 286
TITLE 26-INTERNAL REVENUE CODE tions or benefits of or on behalf of em- ployees under the plan bear a uniform re- lationship to the total compensation, or the basic or regular rate of compensation, of such employees, and (ii) such plan shall not be considered discriminatory within the meaning of paragraph (4) solely because under the plan contributions described in subsection (e) which are in excess of the amounts which may be deducted under section 404 for the taxable year may be made on behalf of any owner-employee; and (B) a trust forming a part of such plan shall constitute a qualified trust under this section only if the requirements in subsec- tion (d) are also met. (11)(A) A trust shall not constitute a quali- fied trust under this section if the plan of which such trust is a part provides for the payment of benefits in the form of an annu- ity unless such plan provides for the payment of annuity benefits in a form having the effect of a qualified joint and survivor annu- ity. (B) Notwithstanding the provisions of sub- paragraph (A), in the case of a plan which provides for the payment of benefits before the normal retirement age (as defined in sec- tion 411(a)(8)), the plan is not required to provide for the payment of annuity benefits in a form having the effect of a qualified Joint and survivor annuity during the period beginning on the date on which the employee enters into the plan as a participant and ending on the later of- (i) the date the employee reaches the ear- liest retirement age under the plan, or (ii) the first day of the 120th month be- ginning before the date on which the em- ployee reaches normal retirement age. (C) A plan described in subparagraph (B) does not meet the requirements of subpara- graph (A) unless, under the plan, a partici- pant has a reasonable period during which he may elect the qualified joint and survivor an- nuity form with respect to the period begin- ning on the date on which the period de- scribed in subparagraph (B) ends and ending on the date on which he reaches normal re- tirement age (as defined in section 411(a)(8)) if he continues his employment during that period. A plan does not meet the require- ments of this subparagraph unless, in the case of such an election, the payments under the survivor annuity are not less than the payments which would have been made under the joint annuity to which the participant would have been entitled if he made an elec- tion described in this subparagraph immedi- ately prior to his retirement and if his retire- ment had occurred on the day before his death and within the period within which an election can be made. (D) A plan shall not be treated as not satis- fying the requirements of this paragraph solely because the spouse of the participant is not entitled to receive a survivor annuity (whether or not an election described in sub- paragraph (C) has been made under subpara- graph (C)) unless the participant and his spouse have been married throughout the 1- year period ending on the date of such par- ticipant's death. (E) A plan shall not be treated as satisfying the requirements of this paragraph unless, under the plan, each participant has a reason- able period (as described by the Secretary by regulations) before the annuity starting date during which he may elect in writing (after having received a written explanation of the terms and conditions of the joint and survivor annuity and effect of an election under this subparagraph) not to take such Joint and sur- vivor annuity. (F) A plan shall not be treated as not satis- fying the requirements of this paragraph solely because under the plan there is a provi- sion that any election described in subpara- graph (C) or (E), and any revocation of any such election, does not become effective (or ceases to be effective) if the participant dies within a period (not in excess of 2 years) be- ginning on the date of such election or revo- cation, as the case may be. The preceding sen- tence does not apply unless the plan provision described in the preceding sentence also pro- vides that such an election or revocation will be given effect in any case in which- (I) the participant dies from accidental causes, (ii) a failure to give effect to the election or revocation would deprive the partici- pant's survivor of a survivor annuity, and (iii) such election or revocation is made before such accident occurred. (G) For purposes of this paragraph- (I) the term "annuity starting date" means the first day of the first period for which an amount is received as an annuity (whether by reason of retirement or by reason of disability), (ii) the term "earliest retirement age" means the earliest date on which, under the plan, the participant could elect to receive retirement benefits, and (ill) the term "qualified joint and survivor annuity" means an annuity for the life of the participant with a survivor annuity for the life of his spouse which is not less than one-half of, or greater than, the amount of the annuity payable during the joint lives of the participant and his spouse and which is the actuarial equivalent of a single life annuity for the life of the participant. For purposes of this paragraph, a plan may take into account in any equitable manner (as determined by the Secretary) any increased costs resulting from providing joint and survi- vor annuity benefits. (H) This paragraph shall apply only if- (I) the annuity starting date did not occur before the effective date of this paragraph, and (ii) the participant was an active partici- pant in the plan on or after such effective date. (12) A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that in the case of any merger or consolidation with, or transfer of assets or liabilities to, any other Page 287/
TITLE 26-INTERNAL REVENUE CODE plan after September 2, 1974, each partici- pant in the plan would (if the plan then ter- minated) receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit he would have been entitled to receive immedi- ately before the merger, consolidation, or transfer (if the plan had then terminated). This paragraph shall apply in the case of a multiemployer plan only to the extent deter- mined by the Pension Benefit Guaranty Cor- poration. (13) A trust shall not constitute a qualified trust under 'this section unless the plan of which such trust is a part provides that bene- fits provided under the plan may not be as- signed or alienated. For purposes of the pre- ceding sentence, there shall not be taken into account any voluntary and revocable assign- ment of not to exceed 10 percent of any bene- fit payment made by any participant who is receiving benefits under the plan unless the assignment or alienation is made for purposes of defraying plan administration costs. For purposes of this paragraph a loan made to a participant or beneficiary shall not be treated as an assignment or alienation if such loan is secured by the participant's accrued nonfor- feitable benefit and is exempt from the tax imposed by section 4975 (relating to tax on prohibited transactions) by reason of section 4975(d)(1). This paragraph shall take effect on January 1, 1976 and shall not apply to as- signments which were irrevocable on Septem- ber 2, 1974. (14) A trust shall not constitute a qualified trust under this section unless the plan of which such trust is a part provides that, unless the participant otherwise elects, the payment of benefits under the plan to the participant will begin not later than the 60th day after the latest of the close of the plan year in which- (A) the date on which the participant at- tains the earlier of age 65 or the normal re- tirement age specified under the plan, (B) occurs the 10th anniversary of the year in which the participant commenced participation in the plan, or (C) the participant terminates his service with the employer. In the case of a plan which provides for the payment of an early retirement benefit, a trust forming a part of such plan shall not constitute a qualified trust under this section unless a participant who satisfied the service requirements for such early retirement bene- fit, but separated from the service (with any nonforfeitable right to an accrued benefit) before satisfying the age requirement for such early retirement benefit, is entitled upon satisfaction of such age requirement to re- ceive a benefit not less than the benefit to which he would be entitled at the normal re- tirement age, actuarially, reduced under regu- lations prescribed by the Secretary. (15) a trust shall not constitute a qualified trust under this section unless under the plan of which such trust is a part- (A) in the case of a participant or benefi- ciary who is receiving benefits under such plan, or (B) in the case of a participant who is sep- arated from the service and who has non- forfeitable rights to benefits, such benefits are not decreased by reason of any increase in the benefit levels payable under title II of the Social Security Act or any increase in the wage base under such title II, if such increase takes place after Septem- ber 2, 1974, or (if later) the earlier of the date of first receipt of such benefits or the date of such separation, as the case may be. (16) A trust shall not constitute a qualified trust under this section if the plan of which such trust Is a part provides for benefits or contributions which exceed the limitations of section 415. (17) In the case of a plan which provides contributions or benefits for employees some or all of whom are employees within the meaning of subsection (c)(1), or are share- holder-employees within the meaning of sec- tion 1379(d), only if the annual compensation of each employee taken into account under the plan does not exceed the first $100,000 of such compensation. (18) In the case of a trust which is part of a plan providing a defined benefit for employ- ees some or all of whom are employees within the meaning of subsection (c)(1), or are share- holder-employees within the meaning of sec- tion 1379(d), only if such plan satisfies the re- quirements of subsection (j). (19) A trust shall not constitute a qualified trust under this section if under the plan of which such trust is a part any part of a par- ticipant's accrued benefit derived from em- ployer contributions (whether or not other- wise nonforfeitable), is forfeitable solely be- cause of withdrawal by such participant of any amount attributable to the benefit de- rived from contributions made by such par- ticipant. The preceding sentence shall not apply to the accrued benefit of any partici- pant unless, at the time of such withdrawal, such participant has a nonforfeitable right to at least 50 percent of such accrued benefit (as determined under section 411). The first sen- tence of this paragraph shall not apply to the extent that an accrued benefit is permitted to be forfeited in accordance with section 411(a)(3)(D)(iii) (relating to proportional for- feitures of benefits accrued before September 2, 1974, in the event of withdrawal of certain mandatory contributions). (20) A trust forming part of a pension plan shall not be treated as failing to constitute a qualified trust under this section merely be- cause the pension plan of which such trust is a part makes a payment or distribution de- scribed in section 402(a)(5)(A)(i) or 403(a)(4)(A)(l). This paragraph shall not apply to a defined benefit plan unless the em- ployer maintaining such plan files a notice with the Pension Benefit Guaranty Corpora- tion (at the time and in the manner pre- scribed by the Pension Benefit Guaranty Cor- poration) notifying the Corporation of such payment or distribution and the Corporation has approved such payment or distribution or, within 90 days after the date on which such notice was filed, has failed to disapprove such payment or distribution. Page 288
TITLE 26-INTERNAL REVENUE CODE (21) A trust forming part of an employee stock ownership plan which satisfies the re- quirements of section 301(d) of the Tax Re- duction Act of 1975 shall not fail to be consid- ered a permanent program merely because employer contributions under the plan are determined solely by reference to the amount of credit which would be allowable under sec- tion 46(a) if the employer made the transfer described in subsection (d)(6) or (e)(3) of sec- tion 301 of the Tax Reduction Act of 1975. Paragraphs (11), (12), (13), (14), (15), (19), and (20) shall apply only in the case of a plan to which section 411 (relating to minimum vesting standards) applies without regard to subsection (e)(2) of such section. (b) Certain retroactive changes in plan A stock bonus, pension, profit-sharing, or an- nuity plan shall be considered as satisfying the requirements of subsection (a) for the period beginning with the date on which it was put into effect, or for the period beginning with the earlier of the date on which there was adopted or put into effect any amendment which caused the plan to fail to satisfy such requirements, and ending with the time prescribed by law for filing the return of the employer for his tax- able year in which such plan or amendment was adopted (including extensions thereof) or such later time as the Secretary may designate, if all provisions of the plan which are necessary to satisfy such requirements are in effect by the end of such period and have been made ef- fective for all purposes for the whole of such period. (c) Definitions and rules relating to self-r.mpioyed in- dividuals and owner-employees For purposes of this section- (1) Employee The term "employee" includes, for any tax- able year, an individual who has earned income (as defined in paragrah (2)) for the taxable year. To the extent provided in regu- lations prescribed by the Secretary, such term also includes, for any taxable year- (A) an individual who would be an em- ployee within the meaning of the preceding sentence but for the fact that the trade or business carried on by such Individual did not have net profits for the taxable year, and (B) an individual who has been an em- ployee within the meaning of the preceding sentence for any prior taxable year. (2) Earned income (A) In general The term "earned income" means the net earnings from self-employment (as defined in section 1402(a)), but such net earnings shall be determined- (i) only with respect to a trade or busi- ness in which personal services of the tax- payer are a material income-producing factor, (i) without regard to paragraphs (4) and (5) of section 1402(c), (iii) in the case of any individual who is treated as an employee under sections 3121(d)(3)(A), (C), or (D), without regard to paragraph (2) of section 1402(c), and (iv) without regard to items which are not included In gross income for purposes of this chapter, and the deductions prop- erly allocable to or chargeable against such items. For purposes of this subparagraph, section 1402, as in effect for a taxable year ending on December 31, 1962, shall be treated as having been in effect for all taxable years ending before such date. [(B) Repealed] (C) Income from disposition of certain property For purposes of this section, the term "earned income" includes gains (other than any gain which is treated under any provi- sion of this chapter as gain from the sale or exchange of a capital asset) and net earn- ings derived from the sale or other disposi- tion of, the transfer of any interest In, or the licensing of the use of property (other than good will) by an individual whose per- sonal efforts created such property. (3) Owner-employee The term "owner-employee" means an em- ployee who- (A) owns the entire interest in an unincor- porated trade or business, or (B) in the case of a partnership, is a part- ner who owns more than 10 percent of either the capital interest or the profits in- terest in such partnership. To the extent provided in regulations pre- scribed by the Secretary, such term also means an individual who has been an owner- employee within the meaning of the preced- ing sentence. (4) Employer An individual who owns the entire interest in an unincorporated trade or buisness shall be treated as his own employer. A partner- ship shall be treated as the employer of each partner who is an employee within the mean- ing of paragraph (1). (5) Contributions on behalf of owner-employees The term "contribution on behalf of an owner-employee" includes, except as the con- text otherwise requires, a contribution under a plan- (A) by the employer for an owner-employ- ee, and (B) by an owner-employee as an employ- ee. (d) Additional requirements for qualification of trusts and plans benefiting owner-employees A trust forming part of a pension or profit- sharing plan which provides contributions or benefits for employees some or all of whom are owner-employees shall constitute a qualified trust under this section only if, in addition to meeting the requirements of subsection (a), the following requirements of this subsection are met by the trust and by the plan of which such trust is a part' (1) In the case of a trust which is created on or after October 10, 1962, or which was cre- ated before such date but is not exempt from tax under section 501(a) as an organization described in subsection (a) on the day before such date, the assets thereof are held by a Page 289 § 401
TITLE 26-INTERNAL REVENUE CODE bank or other person who demonstrates to the satisfaction of the Secretary that the manner in which he will administer the trust will be consistent with the requirements of this section. A trust shall not be disqualified under this paragraph merely because a person (including the employer) other than the trustee or custodian so administering the trust may be granted, under the trust instru- ment, the power to control the investment of the trust funds either by directing invest- ments (including reinvestments, disposals, and exchanges) or by disapproving proposed investments (including reinvestments. dispos- als, or exchanges). This paragraph shall not apply to a trust created or organized outside the United States before October 10, 1962, if, under section 402(c), it is treated as exempt from tax under section 501(a) on the day before such date; or, to the extent provided under regulations prescribed by the Secre- tary, to it trust which uses annuity, endow- ment, or life insurance contracts of a life in- surance company exclusively to fund the benefits prescribed by the trust, if the life in- surance company supplies annually such in- formation about trust transactions affecting owner-employees as the Secretary shall by forms or regulations prescribe. For purposes of this paragraph, the term "bank" means a bank as defined in section 581, an insured credit union (within the meaning of section 101(6) of the Federal Credit Union Act), a corporation which under the laws of the State of its incorporation is subject to su- pervison and examination by the commission- er of banking or other officer of such State in charge of the administration of the banking laws of such State, and, in the case of a trust created or organized outside the United States, a bank or trust company, wherever in- corporated, exercising fiduciary powers and subject to supervision and examination by governmental authority. (2) Under the plan- (A) the employees' rights to or derived from the contributions under the plan are nonforfeitable at the time the contributions are paid to or under the plan; and (B) in the case of a profit-sharing plan, there is a definite formula for determining the contributions to be made by the em- ployer on behalf of employees (other than owner-employees). Subparagraph (A) shall not apply to contribu- tions which, under provisions of the plan adopted pursuant to regulations prescribed by the Secretary to preclude the discrimination prohibited by subsection (a)(4), may not be used to provide benefits for designated em- ployees in the event of early termination of the plan. (3)(A) The plan benefits each employee having 3 or more years of service (within the meaning of section 410(a)(3)). (B) For purposes of subparagraph (A), the term "employee" does not include- (I) any employee included in a unit of em- ployees covered by a collective bargaining agreement described in section 410(b)(2)(A), and (ii) any employee who is a nonresident alien individual described in section 410(b)(2)(C). (4) Under the plan- (A) contributions or benefits are not pro- vided for any owner-employee unless such owner-employee has consented to being in- cluded under the plan; and (B) no benefits in excess of contributions made by an owner-employee as an employee may be paid to any owner-employee, except in the case of his becoming disabled (within the meaning of section 72(m)(7)), prior to his attaining the age of 59V2 years. (5) The plan does not permit- (A) contributions to be made by the em- ployer on behalf of any owner-employee in excess of the amounts which may be de- ducted under section 404 for the taxable year; (B) in the case of a plan which provides contributions or benefits only for owner-em- ployees, contributions to be made on behalf of any owner-employee in excess of the amounts which may be deducted under sec- tion 404 for the taxable year; and (C) if a distribution under the plan is made to any employee and if any portion of such distribution is an amount described in section 72(m)(5)(A)(i), contributions to be made on behalf of such employee for the 5 taxable years succeeding the taxable year in which such distribution is made. Subparagraphs (A) and (B) do not apply to contributions described in subsection (e). (6) Except as provided in this paragraph, the plan meets the requirements of subsec- tion (a)(4) without taking into account for any purpose contributions or benefits under chapter 2 (relating to tax on self-employment income), chapter 21 (relating to Federal In- surance Contributions Act), title II of the Social Security Act, as amended, or any other Federal or State law. If- (A) of the contributions deductible under section 404, not more than one-third is de- ductible by reason of contributions by the employer on behalf of owner-employees, and (B) taxes paid by the owner-employees under chapter 2 (relating to tax on self-em- ployment income), and the taxes which would be payable under such chapter 2 by the owner-employees but for paragraphs (4) and (5) of section 1402(c), are taken into ac- count as contributions by the employer on behalf of such owner-employees, then taxes paid under section 3111 (relating to tax on employers) with respect to an em- ployee may, for purposes of subsection (a)(4), be taken into account as contributions by the employer for such employee under the plan. (7) Under the plan, if an owner-employee dies before his entire interest has been dis- tributed to him, or if distribution has been commenced in accordance with subsection (a)(9)(B) to his surviving spouse and such sur- viving spouse dies before his entire interest has been distributed to such surviving spouse, his entire interest (or the remaining part of such interest if distribution thereof has com- Page 290
TITLE 26-INTERNAL REVENUE CODE menced) will, within 5 years after his death (or the death of his surviving spouse), be dis- tributed, or applied to the purchase of an im- mediate annuity for his beneficiary or benefi- ciaries (or the beneficiary or beneficiaries of his surviving spouse) which will be payable for the life of such beneficiary or beneficia- ries (or for a term certain not extending beyond the life expectancy of such beneficia- ry or beneficiaries) and which will be immeJi- ately distributed to such beneficiary or bene- ficiaries. The preceding sentence shall not apply if distribution of the interest of an owner-employee has commenced and such dis- tribution is for a term certain over a period permitted under subsection (a)(9)(B )(ii). [(8) Repealed. Pub. L. 93-406, title II, § 2001(e)(2), Sept. 2, 1974, 88 Stat. 954.) (9)(A) If the plan provides contributions or benefits for an owner-employee who controls, or for two or more owner-employees who to- gether control, the trade or business with re- spect to which the plan is established, and who also control as an owner-employee or as owner-employees one or more other trades or businesses, such plan and the plans estab- lished with respect to such other trades or businesses, when coalesced, constitute a single plan which meets the requirements of subsec- tion (a) (including paragraph (10) thereof) and of this subsection with respect to the em- ployees of all such trades or businesses (in- cluding the trade or business with respect to which the plan intended to qualify under this section is established). (B) For purposes of subparagraph (A), an owner-employee, or two or more owner-em- ployees, shall be considered to control a trade or business if such owner-employee, or such two or more owner-employees together- (I) own the entire interest in an unincor- porated trade or business, or (ii) in the case of a partnership, own more than 50 percent of either the capital inter- est or the profits interest in such partner- ship. For purposes of the preceding sentence, an owner-employee, or two or more owner-em- ployees, shall be treated as owning any inter- est in a partnership which is owned, directly or indirectly, by a partnership which such owner-employee, or such two or more owner- employees, are considered to control within the meaning of the preceding sentence. (10) The plan does not provide contribu- tions or benefits for any owner-employee who controls (within the meaning of paragraph (9)(B)), or for two or more owner-employees who together control, as an owner.employee or as owner-employees, any other trade or business, unless the employees of each trade or business which such owner-employee or such owner-employees control are included under a plan which meets the requirements of subsection (a) (including paragraph (10) thereof) and of this subsection, and provides contributions and benefits for employees which are not less favorable than contribu- tions and benefits provided for owner-employ- ees under the plan. (11) Under the plan, contributions on behalf of any owner-employee may be made only with respect to the earned income of such owner-employee which is derived from the trade or business with respect to which such plan is established. (e) Contributions for premiums on annuity, etc., con- tracts A contribution by the employer on behalf of an owner-employee is described in this subsec- tion if- (1) under the plan such contribution is re- quired to be applied (directly or through a trustee) to pay premiums or other consider- ation for one or more annuity, endowment, or life insurance contracts on the life of such owner-employee issued under the plan, (2) the amount of such contribution exceeds the amount deductible under section 404 with respect to contributions made by the employ- er on behalf of such owner-employee under the plan, and (3) the amount of such contribution does not exceed the average of the amounts which were deductible under section 404 with re- spect to contributions made by the employer on behalf of such owner-employee under the plan (or which would have been deductible if such section had been in effect) for the first three taxable years (A) preceding the year in which the last such annuity, endowment, or life insurance contract was issued under the plan, and (B) in which such owner-employee derived earned income from the trade or busi- ness with respect to which the plan is estab- lished, or for so many of such taxable years as such owner-employee was engaged in such trade or business and derived earned income therefrom. In the case of any individual on whose behalf contributions described in paragraph (1) are made under more than one plan as an owner- employee during any taxable year, the preced- ing sentence does not apply if the amount of such contributions under all such plans for all such years exceeds $7,500. Any contribution which is described in this subsection shall, for purposes of section 4972(b), be taken into ac- count as a contribution made by such owner- employee as an employee to the extent that the amount of such contribution is not deductible under section 404 for the taxable year, but only for the purpose of applying section 4972(b) to other contributions made by such owner-em- ployee as an employee. (f) Certain custodial accounts and contracts For purposes of this title, a custodial account, an annuity contract, or a contract (other than a life, health or accident, property, casualty, or li- ability insurance contract) issued by an insur- ance company qualified to do business in a State shall be treated as a qualified trust under this section if- (1) the custodial account or contract would, except for the fact that it is not a trust, con- stitute a qualified trust under this section, and (2) in the case of a custodial account the assets thereof are held by a bank (as defined in subsection (d)(1)) or another person who demonstrates, to the satisfaction of the Secre- tary, that the manner in which he will hold Page 291
TITLE 26-INTERNAL REVENUE CODE the assets will be consistent with the require- ments of this section. For purposes of this title, in the case of a custo- dial account or contract treated as a qualified trust under this section by reason of this sub- section, the person holding the assets of such account or holding such contract shall be treat- ed as the trustee thereof. (g) Annuity defined For purposes of this section and sections 402, 403, and 404, the term "annuity" includes a face-amount certificate, as defined in section 2(a)(15) of the Investment Company Act of 1940 (15 U.S.C., sec. 80a-2); but does not include any contract or certificate issued after Decem- ber 31, 1962, which is transferable, if any person other than the trustee of a trust de- scribed in section 401(a) which is exempt from tax under section 501(a) is the owner of such contract or certificate. (h) Medical, etc., benefits for retired employees and their spouses and dependents Under regulations prescribed by the Secre- tary, a pension or annuity plan may provide for the payment of benefits for sickness, accident, hospitalization, and medical expenses of retired employees, their spouses and their dependents, but only if- (1) such benefits are subordinate to the re- tirement benefits provided by the plan, (2) a separate account is established and maintained for such benefits, (3) the employer's contributions to such separate account are reasonable and ascer- tainable, (4) it is impossible, at any time prior to the satisfaction of all liabilities under the plan to provide such benefits, for any part of the corpus or income of such separate account to be (within the taxable year or thereafter) used for, or diverted to, any purpose other than the providing of such benefits, and (5) notwithstanding the provisions of sub- section (a)(2), upon the satisfaction of all li- abilities under the plan to provide such bene- fits, any amount remaining in such separate account must, under the terms of the plan, be returned to the employer. (I) Certain union-negotiated pension plans In the case of a trust forming part of a pen- sion plan which has been determined by the Secretary to constitute a qualified 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 that- (1) such trust was created pursuant to a col- lective bargaining agreement between em- ployee representatives and one or more em- ployers, (2) any disbursements of contributions, made to or for such trust before the time as of which the Secretary or his delegate deter- mined that the trust constituted 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 Secre- tary determined that the trust constitutes a qualified trust, the contributions to or for such trust were not used in a manner which would Jeopardize the interests of its beneficia- ries, 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 qualified trust under subsection (a). (j) Defined benefit plans providing benefits for self- employed individuals and shareholder-employees (I) In general A defined benefit plan satisfies the require- ments of this subsection only if the basic benefit accruing under the plan for each plan year of participation by an employee within the meaning of subsection (c)(1) (or a share- holder-employee) is permissible under regula- tions prescribed by the Secretary under this subsection to insure that there will be reason- able comparability (assuming level funding) between the maximum retirement benefits which may be provided with favorable tax treatment under this title for such employees under- (A) defined contribution plans, (B) defined benefit plans, and (C) a combination of defined contribution plans and defined benefit plans. (2) Guidelines for regulations The regulations prescribed under this sub- section shall provide that a plan does not sat- isfy the requirements of this subsection if, under the plan, the basic benefit of any em- ployee within the meaning of subsection (c)(1) (or a shareholder-employee) may exceed the sum of the products for each plan year of participation of- (A) his annual compensation (not in excess of $50,000) for such year, and (B) the applicable percentage determined under paragraph (3). (3) Applicable percentage (A) Table For purposes of paragraph (2), the appli- cable percentage for any individual for any plan year shall be based on the percentage shown on the following table opposite his age when his current period of participation in the plan began. Applicable Age when participation began: percentage 30 or less .............................................. 6.5 35 ............................................................. 5.4 40 ............................................................. 4.4 45 ............................................................. 3.6 50 ......................... 3.0 55 ............................................................ 2.5 60 or over ............................................... 2.0 (B) Additional requirements The regulations prescribed under this subsection shall include provisions- (I) for applicable percentages for ages between any two ages shown on the table, Page 292 § 401
TITLE 26-INTERNAL REVENUE CODE (it) for adjusting the applicable percent- ages in the case of plans providing bene- fits other than a basic benefit, (iii) that any increase In the rate of ac- crual, and any increase in the compensa- tion base which may be taken into ac- count, shall, with respect only to such in- crease, begin a new period of participation in the plan, and (iv) when appropriate, in the case of pe- riods beginning after December 31, 1977, for adjustments in the applicable percent- ages based on changes in prevailing inter- est and mortality rates occurring after 1973. (4) Certain contributions and benefits may not be taken into account A defined benefit plan which provides con- tributions or benefits for owner-employees does not satisfy the requirements of this sub- section unless such plan meets the require- ments of subsection (a)(4) without taking into account contributions or benefits under chap- ter 2 (relating to tax on self-employment income), chapter 21 (relating to Federal In- surance Contributions Act), title II of the Social Security Act, or any other Federal or State law. (5) Definitions For purposes of this subsection- (A) Basic benefit The term "basic benefit" means a benefit in the form of a straight life annuity com- mencing at the later of- (1) age 65, or (ii) the day 5 years after the day the participant's current period of participa- tion began under a plan which provides no ancillary benefits and to which employees do not contribute. (B) Shareholder-employee The term "shareholder-employee" has the same meaning as when used in section 1379(d). (C) Compensation The term "compensation" means- (I) in the case of an employee within the meaning of subsection (c)(1), the earned income of such individual, or (ii) in the case of a shareholder-employ- ee, the compensation received or accrued by the individual from the electing small business corporation. (6) Special rules Section 404(e) (relating to special limita- tions for self-employed individuals) and sec- tion 1379(b) (relating to taxability of share- holder-employee beneficiaries) do not apply to a trust to which this subsection applies. (k) Cross reference For exemption from tax of a trust qualified under this section, see section 501(a). (Aug. 16, 1954, ch. 736, 68A Stat. 134; Oct. 10, 1962, Pub. L. 87-792, § 2, 76 Stat. 809; Oct. 23, 1962, Pub. L. 87-863, § 2(a), 76 Stat. 1141; Feb. 26, 1964, Pub. L. 88-272, title II, § 219(a), 78 Stat. 57; July 30, 1965, Pub. L. 89-97, title I, § 106(d)(4), 79 Stat. 337; Nov. 13, 1966, Pub. L. 89-809,. title II, §§ 204(b)(1), (c), 205(a), 80 Stat. 1577, 1578; Jan. 12, 1971, Pub. L. 91-691, § 1(a), 84 Stat. 2074; Sept. 2, 1974, Pub. L. 93-406, title II, §§ 1012(b), 1016(a)(2), 1021, 1022(a)-(d), f), 1023, 2001(c)-(e)(4), (h)(1), 2004(a)(1), 88 Stat. 913, 929, 935, 937-940, 943, 952-955, 957, 979; Apr. 15, 1976, Pub. L. 94-267, § l(c)(1), (2), 90 Stat. 367; Oct. 4, 1976, Pub. L. 94-455, title VIII, § 803(b)(2), title XV, § 1505(b), title XIX, §§ 1901(a)(56), 1906(b)(13)(A), 90 Stat. 1584, 1738, 1773, 1834.) REFERENCES IN TEXT The Federal Insurance Contributions Act, referred to in subsecs. (a)(5), (d)(6), and (J)(4), is act Aug. 16, 1954, ch. 736, 68A Stat. 415, as amended, which is clas- sified generally to chapter 21 (§ 3101 et seq.) of this title. For complete classification of this Act to the Code, see section 3126 of this title and Tables volume. For the effective date of this paragraph, referred to in subsec. (a)(11)(H)(i), (ii), see Effective Date of 1974 Amendment note set out below. The Social Security Act, referred to in subsecs. (a)(15), (d)(6), and (J)(4), is act Aug. 14, 1935, ch. 531, 49 Stat. 620, as amended. Title II of the Social Securi- ty Act is classified generally to subchapter II (§ 401 et seq.) of Title 42, The Public Health and Welfare. For complete classification of this Act to the Code, see sec- tion 1305 of Title 42 and Tables volume. Section 301 of the Tax Reduction Act of 1975, re- ferred to in subsec. (a)(21), is set out as a note under section 46 of this title. Section 101(6) of the Federal Credit Union Act, re- ferred to in subsec. (d)(1), is classified to section 1752(6) of Title 12, Banks and Banking. AMENDMENIS 1976-Subsec. (a). Pub. L. 94-455, §§ 803(b)(2), 1901(a)(56), 1906(b)(13)(A), struck out "or his dele- gate" following "Secretary" in pars. (5), (11), and (14), substituted references to Sept. 2, 1974, for references to the enactment of the Employee Retirement Income Security Act of 1974 in pars. (12), (13), (15), and (19), added par. (21), and added reference to par. (20) in the provisions following par. (21), such addition of refer- ence to par. (20) duplicating amendment by Pub. L. 94-267, § 1(c)(2). Pub, L. 94-267, § 1(c)(2,, substituted "(19), and (20)" for "and (19)". Subsec. (a)(20). Pub. L. 94-267, § l(c)(1), added subsec. (a)(20). Subsecs. (b), (c), (d). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (f). Pub. L. 94-455, § 1505(b), added reference to contracts (other than life, health, or accident, prop- erty, casualty, or liability insurance contracts) issued by an insurance company qualified to do a business in a State and struck out "or his delegate" following "Secretary". Subsecs. (h), (i), (J). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". 1974-Subsec. (a). Pub. L. 93-406, § 1021(a)(2), added provision that paragraphs (11). (12). (13), (14), (15), and (19) shall apply only in the case of a plan to which section 411 (relating to minimum vesting standards) applies without regard to subsection (e)(2) of this sec- tion. Subsec. (a)(3). Pub. L. 93-406, § 1016(a)(2)(A), substi- tuted provisions referring simply to a plan of which the trust is a part and the satisfaction by that plan of the requirements of section 410 (relating to minimum participation standards) for provisions referring to a trust, trusts, or trust or trusts and annuity plan or plans designated by the employer as constituting parts of a plan intended to qualify under subsec. (a) and spelling out the requisite coverage of the plan. Subsec. (a)(4). Pub. L. 93-406, § 1022(a), struck out provisons referring to persons whose principal duties consist in supervising the work of other employees and 71-999 0 - 78 - 21 (Vol. 7) Page 293 § 401
TITLE 26-INTERNAL REVENUE CODE added provisions directing the exclusion from consid- eration of employees described in section 410(b)(2) (A) and (C). Subsec. (a)(5). Pub. L. 93-406, §§ 1012(b), 1016(a)(2)(B), added provisions covering the determi- nation of whether two or more plans of an employer satisfy the requirements of par. (4) when considered as a single plan and substituted "shall not be considered discriminatory within the meaning of paragraph (4) of section 410(b) (without regard to paragraph (1)(A) thereof)" for "shall not be considered discriminatory within the meaning of paragraph (3)(B) or (4)". Subsec. (a)(7). Pub. L. 93-406, § 1016(a)(2)(C), substi- tuted provisions referring simply to the satisfaction by the plan of which a trust is a part of the requirements of section 411 (relating to minimum vesting standards) for provisions spelling out in detail the conditions which the plan had to satisfy in order that the trust forming part of that plan constitute a qualified trust under this section. Subsec. (a)(10)(A). Pub. L. 93-406, §§ 1022(b)(1), 2001(e)(4), inserted reference to section 410 in the- provisions preceding cl. (i) and substituted "subsection (e)" for "subsection (e)(3)(A)" in cl. (ii). Subsec. (a)(11). Pub. L. 93-406, § 1021(a)(1), added subsec. (a)(11). Subsec. (a)(12). Pub. L. 93-406, § 1021(b), added subsec, (a)(12). Subsec. (a)(13). Pub. L. 93-406, § 1021(c), added subsec. (a)(13). Subsec. (a)(14). Pub. L. 93-406, § 1021(d), added subsec. (a)(14). Subsec. (a)(15). Pub. L. 93-406, § 1021(e), added subsec. (a)(15). Subsec. (a)(16). Pub. L. 93-406, § 2004(a)(1), added subsec. (a)(16). Subsec. (a)(17). Pub. L. 93-406, § 2001(c), added subsec. (a)(17). Subsec. (a)(18). Pub. L. 93-406, § 2001(d)(1), added subsec. (a)(18). Subsec. (a)(19). Pub. L. 93-406, § 1021(f), added subsec. (a)(19). Subsec. (b. Pub. L. 93-406, § 1023, substituted refer- ence to the requirements of subsection (a) for the period beginning with the date on which a stock bonus, pension, profit-sharing, or annuity plan was put into effect, or for the period beginning with the earlier of the date on which there was adopted or put into effect any amendment which caused the plan to fail to satisfy such requirements, and ending with the time prescribed by law for filing the return of the em- ployer for his taxable year in which such plan or amendment was adopted (including extensions there- of) or such later time as the Secretary or his delegate may designate for reference to the requirements of paragraphs (3), (4), (5), and (6) of subsection (a) for the period beginning with the date on which a stock bonus, pension, profit-sharing, or annuity plan was put into effect and ending with the lth day of the third month following the close of the taxable year of the employer in which the plan was put in effect. Subsec. (d)(1). Pub. L. 93-406, § 1022(c), f), substi- tuted "October 10, 1962" for "the date of the enact- ment of this subsection" and "assets thereof are held by a bank or other person who demonstrates to the satisfaction of the Secretary or his delegate that the manner in which he will administer the trust will be consistent with the requirements of this section. A trust shall not be disqualified under this paragraph merely because a person (including the employer) other than the trustee or custodian so administering the trust" for "trustee is a bank, but a person (includ- ing the employer) other than a bank" and inserted ref- erence to an insured credit union (within the meaning of section 101(6) of the Federal Credit Union Act) in the definition of "bank". Subsec. (d)(3). Pub. L. 93-406, § 1022(b)(2), Inserted reference to the section 410(a)(3) definition of "years of service" and substituted reference to employees in- cluded in a unit of employees covered by a collective- bargaining agreement described in section 410(b)(2)(A) and employees who are nonresident aliens described in section 410(b)(2)(C) for reference to employees whose customary employment was for not more than 20 hours in any one week or was for not more than 5 months in any calendar year. Subsec. (d)(4)(B). Pub. L. 93-406, § 2001(h)(1), insert- ed "in excess of contributions made by an owner-em- ployee as an employee" after "benefits". Subsec. (d)(5). Pub. L. 93-406, § 2001(e)(1), substitut- ed "Subparagraphs (A) and (B) do not apply to contri- butions described in subsection (e)" for "Subpara- graphs (A) and (B) shall not apply to any contribution which is not considered to be an excess contribution (as defined in subsection (e)(1)) by reason of the appli- cation of subsection (e)(3)". Subsec. (d)(8). Pub. L. 93-406, § 2001(e)(2), struck out subsec. (d)(8) covering excess contributions. Subsec. (e). Pub. L. 93-406, § 2001(e)(3), struck out former pars. (1) and (2), which had defined and de- scribed the effect of excess contributions, redesignated former par. (3) as the entire subsec. (e) and in the pro- visions as thus carried forward as the entire subsec, (e) substituted "$7,500" for "$2,500" and inserted refer- ences to section 4972(b). Subsec. (fM. Pub. L. 93-406, § 1022(d), expanded provi- sions to cover annuity contracts. Subsec. (J). Pub. L. 93-406, § 2001(d)(2), added subsec. (j), Former subsec. (j) redesignated (k). Subsec. (k). Pub. L. 93-406, § 2001(d)(2), redesil.nated former subsec. (J as (k), 1971-Subsec. (I). Pub. L. 91-691 eliminated "multi- employer" which preceded "pension plans" in subsec- tion catchline, and substituted "one or more employ- ers" for "two or more employers who are not related (determined under regulations prescribed by the Sec- retary or his delegate)" in par. (1). 1966-Subsec. (a)(10)(A)(ii). Pub. L. 89-809, § 204(b)(1)(A), struck out "(determined without regard to section 404(a)(10))" following "deducted under sec- tion 404". Subsec. (c)(2)(A). Pub. L. 89-809, § 204(c), struck out "to the extent that such net earnings constitute earned income (as defined in section 911(b) but deter- mined with the application of subparagraph (B))" fol- lowing "The term 'earned income' means the net earn- ings from self-employment (as defined in section 1402(a))", added lause (i) and redesignated former clauses (i) to (ii) as (ii) to (iv) respectively, and struck out references to section 911(b) and subparagraph (B), as in effect for a taxable year beginning on January 1, 1963, in the material following clause (iv). Subsec. (c)(2)(B). Pub. L. 89-809, § 204(c), struck out subpar. (B) relating to earned income when both per- sonal services and capital are material income-produc- ing factors, See subsec. (c)(2)(A)(i). Subsec. (c)(2)(C). Pub. L. 89-809, § 205(a), added subpar. (C). Subsecs. (d)(5)(A), (B), (d)(6)(A), (e)(1)(A), (B)(i), (3). Pub. L. 89-809, § 204(b)(1)(B) to (E), struck out "(determined without regard to section 404(a)(10))" wherever appearing. 1965-Subsec. (d)(4)(B). Pub. L. 89-97 substituted "section 72(m)(7)" for "section 213(g)(3)". 1964-Subsec. (i). Pub. L. 88-272 added subsec. (il). Former subsec. (I) redesignated (J). Subsec. (J). Pub. L. 88-272 redesignated former subsec. (i) as (j). 1962-Subsec. (a)(5). Pub. L. 87-792, § 2(1) inserted provisions defining total compensation for purposes of par. (5) and par. (10) of this subsection. Subsec. (a)(7) to (10). Pub. L. 87-792, § 2(2), added pars. (7) to (10)' Subsec. (c). Pub. L. 87-792, § 2(3), added subsec. (c) and redesignated former subsec. (c) as (h). Subsecs. (d) to (g). Pub. L. 87-792, § 2(3), added sub- sees. (d) to (g). Subsec. (h). Pub. L. 87-863 added subsec. (h), and re- designated former subsec. (h) as (I). Pub. L. 87-792, § 2(3), redesignated former subsec. (c) as (h). Subsec. (i). Pub. L. 87-863 redesignated former subsec. (h) as (I). § 401 Page 294
TITLE 26-INTERNAL REVENUE CODE EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (a) of this section by section 803(b)(2) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1974, see section 803(j) of Pub. L. 94-455, set out as an Effective Date of 1976 Amend- ment note under section 46 of this title. Amendment of subsec. (a) of this section by section 1901(a)(56) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Amendment of subsec. f) of this section by section 1505(b) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1975, see section 1505(c) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 801 of this title. Section I(e) of Pub. L. 94-267 provided that: "The amendments made by this Act [amending sections 401 to 404 and 805 of this title, and enacting provisions set out as a note under section 402 of this title] shall apply with respect to payments made to an employee on or after July 4, 1974." EFFECTIVE DATE OF 1974 AMENDMENT Amendment of subsecs. (a)(3), (5), and (7) by sec- tions 1012(b) and 1016(a)(2) of Pub. L. 93-406 applica- ble, except as otherwise provided in section 1017(c) through (h) of Pub. L. 93-406, for plan years begin- ning after Sept. 2, 1974, but, in the case of plans in ex- istence on Jan. 1, 1974, amendment by sections 1012(b) and 196(a)(2) of Pub. L, 93-406 applicable for plan years beginning after Dec. 31, 1975, see section 1017 of Pub. L. 93-406, set out as an Effective Date; Transi- tional Rules note under section 410 of this title. Section 1021(a)(1) of Pub. L. 93-406 provided in part that subsec. (a)(11) is effective with respect to plan years beginning after Dec. 31, 1975. Section 1021(b) of Pub. L. 93-406 provided in part that subsec. (a)(12) is effective with respect to plan years beginning after Dec. 31, 1975. Section 1024 of Pub. L. 93-406 provided that: "Except as otherwise provided in section 1021, the amendments made by section 1021 [enacting subsecs. (a)(13), (14), (15), and (19) and provisions following subsec. (a)(19) of this section] shall apply to plan years to which part I applies. [For description of plan years to which part I applies, see section 1017 of Pub. L. 93-406, set out as an Effective Date; Transitional Rules note under section 410 of this title.] Except as otherwise provided in section 1022, the amendments made by section 1022 [amending subsecs. (a)(4), (10)(A), (d)(1), (3) of this section and 6051(a) of this title] shall apply to plan years to which part I applies. Section 1023 [amending subsec. (b) of this section] shall take effect on the date of the enactment of this Act [Sept. 2, 1974]." Subsec. (a)(16) applicable to years beginning after Dec. 31, 1975, see section 2004(d) of Pub. L. 93-406, set out as an Effective Date; Transitional Provisions note under section 415 of this title. Section 2001(2) to (4) of Pub. L. 93-406 provided that: "(2) The amendments made by subsection (C) [of section 2001 of Pub. L. 93-406, which added subsec. (a)(17) of this section] apply to "(A) taxable years beginning after December 31, 1975, and "(B) any other taxable years beginning after De- cember 31, 1973, for which contributions were made under the plan in excess of the amounts per- mitted to be made under sections 404(e) and 1379(b) [of this title] as in effect on the day before the date of the enactment of this Act [Sept. 2, 1974]. "(3) The amendments made by subsection (d) (of section 2001 of Pub. L. 93-406, which added subsecs. (a)(18) and () of this section] apply to taxable years beginning after December 31, 1975. "(4) The amendments made by subsections (e) and f) (of section 2001 of Pub. L. 93-406, which enacted section 4972 of this title, repealed subsec. (a)(8) of this section and section 72(m)(5)(A)(iii) of this title, and amended subsecs. (a)(10)(A)(ii)(d)(5), and (e) of this section] apply to contributions made in taxable years beginning after December 31, 1975." Section 1022(f) of Pub. L. 93-406 provided in part that the insertion of a reference to an insured credit union (within the meaning of section 101(6) of the Federal Credit Union Act) in the definition of "bank" in subsec. (d)(1) by section 1022(f) of Pub. L. 93-406 is effective Jan. 1, 1974. Amendment of subsec. (d)(4)(B) of this section by section 2001(h)(1) of Pub. L. 93-406 applicable to tax- able years ending after Sept. 2, 1974, see section 2001i)(6) of Pub. L. 93-406, set out as an Effective Date of 1974 Amendment note under section '12 of this title. Section 1022(d) of Pub. L. 93-406 provided in part that the amendment of subsec. (f) by section 1022(d) of Pub. L. 93-406 is effective as of Jan. 1, 1974. EFFECTIVE DATE OF 1971 AMENDMENT Section 1(b) of Pub. L. 91-691 provided that: "The amendments made by subsection (a) [amending subsec. (i) of this section] shall apply to taxable years beginning after December 31, 1953, and ending after August 16, 1954, but only with respect to contributions made after December 31, 1954." EFFECTIVE DATE OF 1966 AMENDMENT Section 204(d) of Pub. L. 89-809, as amended by Pub. L. 90-607, Oct. 21, 1968, 82 Stat. 1189, provided that: "The amendments made by subsections (a) and (b) [re- pealing section 404(a)(10) and amending this section and section 404(e) of this title] shall apply with re- spect to taxable years beginning after December 31, 1967. The amendment made by subsection C) [to subsec. (c)(2)(A), (B) of this section] shall apply with respect to taxable years beginning after December 31, 1967, and in the case of a taxpayer who applies the averaging provisions of section 401(e)(3) of the Inter- nal Revenue Code of 1954 [subsec. (e)(3) of this sec- tion] for a taxable year beginning after December 31, 1967, the computation of the amount deductible under section 404 of such Code [section 404 of this title] for any prior taxable year which began before January 1, 1968, shall be made, for purposes of such averaging provisions, as if the amendment made by subsection (C) were applicable to such prior taxable year." Section 205(b) of Pub. L. 89-809 provided that: "The amendment made by subsection (a) [adding subsec. (c)(2)(C) of this section] shall apply to taxable years ending after the date of the enactment of this Act [Nov. 13, 1966]." EFFECTIVE DATE OF 1965 AMENDMENT Amendment by Pub. L. 89-97, applicable to taxable years beginning after Dec. 31, 1966, see section 106(e) of Pub. L. 89-97, set out as an Effective Date of 1965 Amendment note under section 213 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Section 219(b) of Pub. L. 88-272 provided that: "The amendments made by subsection (a) [to this section] shall apply with respect to taxable years beginning after December 31, 1953, and ending after August 16, 1954, but only with respect to contributions made after December 31, 1954." EFFECTIVE DATE OF 1962 AMENDMENT Section 2(c) of Pub. L. 87-863 provided that: "The amendments made by subsections (a) and (b) [to this section and section 404 of this title] shall apply to tax- able years beginning after the date of the enactment of this Act (Oct. 23, 1962]." Amendment by Pub. L. 87-792 applicable to taxable years beginning after Dec. 31, 1962, see section 8 of Pub. L. 87-792, set out as an Effective Date of 1962 Amendment note under section 37 of this title. Page 295
TITLE 26-INTERNAL REVENUE CODE SHORT TITLE Section 1 of Pub. L. 87-792 provided: "That this Act [enacting sections 405 and 6047 of this title, and amending sections 37, 62, 72, 101. 104, 105, 172, 401 to 404, 503, 805, 1361, 2039, 2517, 3306, 3401 and 7207 of this title) may be cited as the 'Self-Employed Individ- uals Tax Retirement Act of 1962'." SALARY REDUCTION REGULATIONS Section 2006 of Pub. L. 93-406, as amended by Pub. L. 94-455, title XV, § 1506, Oct. 4, 1976. 90 Stat. 1520, provided that: "(a) Inclusion of certain contributions in income-Except in the case of plans or arrangements in existence on June 27, 1974, a contribution made before January 1, 1978, to an employees' trust described in section 401(a), 403(a) or 405(a) of the Internal Revenue Code of 1954 [subsec. (a) of this section, section 403(a) of this title, or section 405(a) of this title] which is exempt from tax under section 501(a) of such Code [section 501(a) of this title], or under an arrangement which, but for the fact that it was not in existence on June 27, 1974, would be an arrangement described in :.ubsection (b)(2) of this section, shall be treated as a contribution made by an employee if the contribution is made under an arrangement under which the con- tribution will be made only if the employee elects to receive a reduction in his compensation or to forego an increase in his compensation. "(b) Administration in the case of certain qualified pension or profit-sharing plans, etc., in existence on June 27, 1974- No salary reduction regulations may be issued by the Secretary of the Treasury in final form before Janu- ary 1, 1978, with respect to an arrangement which was in existence on June 27, 1974, and which, on that date- "(1) provided for contributions to an employee's trust described in section 401(a), 403(a), or 405(a) of the Internal Revenue Code of 1954 Esubsee. (a) of this section, section 403(a) of this title, or section 405(a) of this title] which is exempt from tax under section 501(a) of such Code [section 501(a) of this title], or "(2) was maintained as part of an arrangement under which an employee was permitted to elect to receive part of his compensation in one or more al- ternative forms if one of such forms results in the inclusion of amounts in income under the Internal Revenue Code of 1954 [this title]. "(c) Administration of law with respect to certain plans- "(1) Administration in the case of plans described in sub. section (b)-Until salary reduction regulations have been issued in final form, the law with respect to plans or arrangements described in subsection (b) shall be administered- "(A) without regard to the proposed salary re- duction regulations (37 FR 25938) and without regard to any other proposed salary reduction reg- ulations, and "(B) in the manner in which such law was ad- ministered before January 1, 1972. "(2) Administration in the case of qualified profit-shar. Ing plans-In the case of plans or arrangements de- scribed in subsection (b), in applying this section to the tax treatment of contributions to qualified profit-sharing plans where the contributed amounts are distributable only after a period of deferral, the law shall be administered in a manner consistent with- "(A) Revenue Ruling 56-497 (1956-2 C.B. 284), "(B) Revenue Ruling 63-180 (1963-2 C.B. 189), and "(C) Revenue Ruling 68-89 (1968-1 C.B. 402). "(d) Limitation on retroactivity of final regulations-In the case of any salary reduction regulations which become final after December 31, 1977- "(1) for puropses of chapter 1 of the Internal Rev- enue Code of 1954 (relating to normal taxes and sur- taxes) [chapter 1 of this title], such regulations shall not apply before January 1, 1978; and "(2) for purposes of chapter 21 of such Code (relat- ing to Federal Insurance Contributions Act) [chap- ter 21 of this title] and for purposes of chapter 24 of such Code (relating to collection of income tax at source on wages) [chapter 24 of this title], such reg- ulations shall not apply before the day on which such regulations are issued in final form. "() Salary reduction regulations defined-For purpose of this section, the term 'salary reduction regulations' means regulations dealing with the Includibility in gross income (at the time of contribution) of amounts contributed to a plan which includes a trust that qualifies under section 401(a) [subsec. (a) of this sec- tion], or a plan described in section 403(a) or 405(a) [section 403(a) or 405(a) of this title], including plans or arrangements described in subsection (b)(2), If the contribution is made under an arrangement under which the contribution will be made only if the em- ployee elects to receive a reduction in his compensa- tion or to forego an Increase in his compensation, or under an arrangement under which the employee is permitted to elect to receive part of his compensation in one or more alternative forms (if one of such forms results in the inclusion of amounts in income under the Internal Revenue Code of 1954) [this title]." CRoss REFERENCES Constructive ownership of stock not applicable to employees' trust, see section 318 of this title. Denial of exemption to trusts engaged in prohibited transactions, see section 503 of this title. Partner or proprietor of unincorporated business en- terprise not considered employee under this section, see section 1361 of this title. Payments under section not wages for purposes of- Collection of income tax at source on wages, see section 3401 of this title. Federal Insurance Contributions Act, see section 3121 of this title. Federal Unemployment Tax Act, see section 3306 of this title. Returns by exempt organizations, see section 6033 of this title. SECTION REFERM TO IN OTHER SECTIONS This section is referred to in sections 37, 62, 72, 83, 101, 104, 105, 120, 172, 219, 220, 318, 382, 402 to 415, 501, 503, 511, 513, 542, 805, 871, 1348, 1379, 1492, 1563, 2039, 2517, 3121, 3306, 3401, 4941, 4972, 4975, 6033, 6043, 6047, 6058, 6104, 6324, 7476 of this title; title 15 sections 77c, 78c, 78, 80a-3; title 29 sections 1053. 1082, 1103, 1107, 1108, 1132, 1301, 1321, 1322, 1344; title 42 section 409; title 45 section 702. § 402. Taxability of beneficiary of employees' trust (a) Taxability of beneficiary of exempt trust (1) General rule Except as provided in paragraphs (2) and (4), the amount actually distributed or made available to any distributee by any employees' trust described in section 401(a) which is exempt from tax under section 501(a) shall be taxable to him, in the year in which so dis- tributed or made available, under section 72 (relating to annuities). The amount actually distributed or made available to any distribu- tee shall not include net unrealized apprecia- tion in securities of the employer corporation attributable to the amount contributed by the employee. Such net unrealized apprecia- tion and the resulting adjustments to basis of such securities shall be determined in accor- dance with regulations prescribed by the Sec- retary. (2) Capital gains treatment for certain distributions In the case of an employee trust described in section 401(a), which is exempt from tax § 402 Page 296
TITLE 26-INTERNAL REVENUE CODE under section 501(a), so much of the total taxable amount (as defined in subparagraph (D) of subsection (e)(4)) of a lump sum distri- bution as is equal to the product of such total taxable amount multiplied by a fraction- (A) the numerator of which is the number of calendar years of active participation by the employee in such plan before January 1, 1974, and (B) the denominator of which is the number of calendar years of active partici- pation by the employee in such plan, shall be treated as a gain from the sale or ex- change of a capital asset held for more than 9 months. For purposes of computing the frac- tion described in this paragraph and the frac- tion under subsection (e)(4)(E), the Secretary may prescribe regulations under which plan years may be used in lieu of calendar years. For purposes of this paragraph, in the case of an individual who is an employee without regard to section 401(c)(1), determination of whether or not any distribution is a lump sum distribution shall be made without regard to the requirement that an election be made under subsection (e)(4)(B), but no dis- tribution to any taxpayer other than an indi- vidual, estate, or trust may be treated as a lump sum distribution under this paragraph. (3) Definitions For purposes of this subsection- (A) The term "securities" means only shares of stock and bonds or debentures issued by a corporation with interest cou- pons or in registered form. (B) The term "securities of the employer corporation" includes securities of a parent or subsidiary corporation (as defined in sub- sections (e) and f) of section 425) of the employer corporation. (4) Distributions by United States to nonresident aliens The amount includible under paragraph (1) or (2) of this subsection in the gross income of a nonresident alien individual with respect to a distribution made by the United States in respect of services performed by an employee of the United States shall not exceed an amount which bears the same ratio to the amount includible in gross income without regard to this paragraph as- (A) the aggregate basic pay paid by the United States to such employee for such services, reduced by the amount of such basic pay which was not includible in gross income by reason of being from sources without the United States, bears to (B) the aggregate basic pay paid by the United States to such employee for such services. In the case of distributions under the civil service retirement laws, the term "basic pay" shall have the meaning provided in section 8331(3) of title 5, United States Code. (5) Rollover amounts In the case of an employees' trust described in section 401(a) which is exempt from tax under section 501(a), if- (A) the balance of the credit of an em- ployee is paid to him- (1) within one taxable year of the em- ployee on account of a termination of the plan of which the trust is a part or, in the case of a profit-sharing or stock bonus plan, a complete discontinuance of contri- butions under such plan, or (ii) in one or more distributions which constitute a lump-sum distribution within the meaning of subsection (e)(4)(A) (de- termined without reference to subsection (e)(4)(13)), (B)(i) the employee transfers all the prop- erty he receives in such distribution to an individual retirement account described in section 408(a), an individual retirement an- nuity described in section 408(b) (other than an endowment contract), or a retire- ment bond described in section 409, on or before the 60th day after the day on which he received such property, to the extent the fair market value of such property exceeds the amount referred to in subsection (e)(4)(D)(i), or (ii) the employee transfers all the proper. ty he receives in such distribution to an em- ployee's trust described in section 401(a) which is exempt from tax under section 501(a), or to an annuity plan described in section 403(a) on or before the 60th day after the day on which he received such property, to the extent the fair market value of such property exceeds the amount referred to in subsection (e)(4)(D)(i), and (C) the amount so transferred consists of the property (other than money) distribut- ed, to the extent that the fair market value of such property does not exceed the amount required to be transferred pursuant to subparagraph (B), then such distributions are not includible in gross income for the year in which paid. For purposes of this title, a transfer described in subparagraph (B)(1) shall be treated as a rol- lover contribution as described in section 408(d)(3). Subparagraph (B)(ii) does not apply in the case of a transfer to an employ- ees' trust, or annuity plan if any part of a payment described in subparagraph (A) is at- tributable to a trust forming part of a plan under which the employee was an employee within the meaning of section 401(c)(1) at the time contributions were made on his behalf under the plan. (6) Special rollover rules For purposes of paragraph (5)(A)(i)- (A) Time of termination A complete discontinuance of contribu- tions under a profit-sharing or stock bonus plan shall be deemed to occur on the day the plan administrator notifies the Secre- tary (in accordance with regulations pre- scribed by the Secretary) that all contribu- tions to the plan have been completely dis- continued. For purposes of section 411(d)(3), the plan shall be considered to be terminated no later than the day such notice is filed with the Secretary. Page 297
TITLE 26-INTERNAL REVENUE CODE (B) Sale of subsidiary or assets (i) A payment of the balance to the credit of an employee of a corporation (hereinafter referred to as the employer corporation) which is a subsidiary corpo- ration (within the meaning of section 425(f)) or which is a member of a con- trolled group of corporations (within the meaning of section 1563(a), determined by substituting "50 percent" for "80 percent" each place it appears therein) in connec- tion with the liquidation, sale, or other means of terminating the parent-subsid- iary or controlled group relationship of the employer corporation with the parent corporation or controlled group, or (ii) a payment of the balance to the credit of an employee of a corporation (hereinafter referred to as the acquiring corporation) in connection with the sale or other transfer to the acquiring corpora- tion of all or substantially all of the assets used by the previous employer of the em- ployee (hereinafter referred to as the sell- ing corporation) in a trade or buisness conducted by the selling corporation, shall be treated as a payment or distribu- tion on account of the termination of the plan with respect to such employee if the employees of the employer corporation or the acquiring corporation (whichever ap- plies) are not active participants in such plan at the time of such payment or distri- bution. For purposes of this subparagraph, in no event shall a payment or distribution be deemed to be in connection with a sale or other transfer of assets, or a liquidation, sale, or other means of terminating such parent-subsidiary or controlled group rela- tionship, if such payment or distribution is made later than the end of the second cal- endar year after the calendar year in which occurs such sale or other transfer of assets, or such liquidation, sale, or other means of terminating such parent-subsidiary or con- trolled group relationship. (b) Taxability of beneficiary of nonexempt trust Contributions to an employees' trust made by an employer during a taxable year of the em- ployer which ends within or with a taxable year of the trust for which the trust is not exempt from tax under section 501(a) shall be included in the gross income of the employee in accor- dance with section 83 (relating to property transferred in connection with performance of services), except that the value of the employ- ee's interest in the trust shall be substituted for the fair market value of the property for pur- poses of applying such section. The amount ac- tually distributed or made available to any dis- tributee by any such trust shall be taxable to him in the year in which so distributed or made available, under section 72 (relating to annu- ities), except that distributions of income of such trust before the annuity starting date (as defined in section 72(c)(4)) shall be included in the gross income of the employee without regard to section 72(e)(1) (relating to amount not received as annuities). A beneficiary of any such trust shall not be considered the owner of any portion of such trust under subpart E of part I of subchapter J (relating to grantors and others treated as substantial owners). (c) Taxability of beneficiary of certain foreign situs trusts For purposes of subsections (a) and (b), a stock bonus, pension, or profit-sharing trust which would qualify for exemption from tax under section 501(a) except for the fact that it is a trust created or organized outside the United States shall be treated as if it were a trust exempt from tax under section 501(a). [(d) Repealed. Pub. L. 94-455, title XIX, § 1901(a) (57)(B), Oct. 4, 1976, 90 Stat. 1773] (c) Tax on lump sum distributions (1) Imposition of separate tax on lump sum distri. butions (A) Separate tax There is hereby imposed a tax (in the amount determined under subparagraph (B)) on the ordinary income portion of a lump sum distribution. (B) Amount of tax The amount of tax imposed by subpara- graph (A) for any taxable year shall be an amount equal to the amount of the initial separate tax for such taxable year multi- plied by a fraction, the numerator of which is the ordinary income portion of the lump sum distribution for the taxable year and the denominator of which is the total tax- able amount of such distribution for such year. (C) Initial separate tax The initial separate tax for any taxable, year is an amount equal to 10 times the tax which would be imposed by subsection (c) of section 1 if the recipient were an individ- ual referred to in such subsection and the taxable income were an amount equal to one-tenth of the excess of- (I) the total taxable amount of the lump sum distribution for the taxable year, over (ii) the minimum distribution allowance. (D) Minimum distribution allowance For purposes of this paragraph, the mini- mum distribution allowance for the taxable year is an amount equal to- (i) the lesser of $10,000 or one-half of the total taxable amount of the lump sum distribution for the taxable year, reduced (but not below zero) by (ii) 20 percent of the amount (if any) by which such total taxable amount exceeds $20,000. (E) Liability for tax The recipient shall be liable for the tax imposed by this paragraph. (2) Multiple distributions and distributions of an- nuity contracts. In the case of any recipient of a lump sum distribution for the taxable year with respect to whom during the 6-taxable-year period ending on the last day of the taxable year there has been one or more other lump sum distributions after December 31, 1973, or if the distribution (or any part hereof) is an an- § 402 Page 298
TITLE 26-INTERNAL REVENUE CODE nutty contract, in computing the tax imposed by paragraph (1)(A), the total taxable amounts of all such distributions during such 6-taxable-year period shall be aggregated, but the amount of tax so computed shall be re- duced (but not below zero) by the sum of- (A) the amount of the tax imposed by paragraph (1)(A) paid with respect to such other distributions, plus (B) that portion of the tax on the aggre- gated total taxable amounts which is attrib- utable to annuity contracts. For purposes of this paragraph, a beneficiary of a trust to which a lump sum distribution is made shall be treated as the recipient of such distribution if the beneficiary is an employee (including an employee within the meaning of section 401(c)(1)) with respect to the plan under which the distribution is made or if the beneficiary is treated as the owner of such trust for purposes of subpart E of part I of subchapter J. In the case of the distribution of an annuity contract, the taxable amount of such distribution shall be deemed to be the current actuarial value of the contract, deter- mined on the date of such distribution. In the case of a lump sum distribution with respect to any individual which is made only to two or more trusts, the tax imposed by paragraph (1)(A) shall be computed as if such distribu- tion was made to a single trust, but the liabil- ity for such tax shall be apportioned among such trusts according to the relative amounts received by each. The Secretary shall pre- scribe such regulations as may be necessary to carry out the purposes of this paragraph. (3) Allowance of deduction The ordinary income portion of a lump sum distribution for the taxable year shall be al- lowed as a deduction from gross income for such taxable year, but only to the extent in- cluded in the taxpayer's gross income for such taxable year. (4) Definitions and special rules (A) Lump sum distribution For purposes of this section and section 403, the term "lump sum distribution" means the distribution or payment within one taxable year of the recipient of the bal- ance to the credit of an employee which be- comes payable to the recipient- (i) on account of the employee's death, (ii) after the employee attains age 59 , (iii) on account of the employee's sepa- ration from the service, or (iv) after the employee has become dis- abled (within the meaning of section 72(m)(7)) from a trust which forms a part of a plan described in section 401(a) and which is exempt from tax under section 501 or from a plan described in section 403(a). Clause (iii) of this subparagraph shall be applied only with respect to an individual who is an employee without regard to section 401(c)(1), and clause (iv) shall be applied only with respect to an employee within the meaning of section 401(c)(1). Except for purposes of subsection (a)(2) and section 403(a)(2), a distribution of an annuity con- tract from a trust or annuity plan referred to in the first sentence of this subparagraph shall be treated as a lump sum distribution. For purposes of this subparagraph, a distri- bution to two or more trusts shall be treat- ed as a distribution to one recipient. (B) Election of lump sum treatment For purposes of this section and section 403, no amount which is not an annuity contract may be treated as a lump sum dis- tribution under subparagraph (A) unless the taxpayer elects for the taxable year to have all such amounts received during such year so treated at the time and in the manner provided under regulations pre- scribed by the Secretary. Not more than one election may be made under this sub- paragraph with respect to any individual after such individual has attained age 591/2. No election may be made under this subpar- agraph by any taxpayer other than an indi- vidual, an estate, or a trust. In the case of a lump sum distribution made with respect to an employee to two or more trusts, the elec- tion under this subparagraph shall be made by the personal representative of the em- ployee. (C) Aggregation of certain trusts and plans For purposes of determining the balance to the credit of an employee under subpara- graph (A)- (i) all trusts which are part of a plan shall be treated as a single trust, all pen- sion plans maintained by the employer shall be treated as a single plan, all profit- sharing plans maintained by the employer shall be treated as a single plan, and all stock bonus plans maintained by the em- ployer shall be treated as a single plan, and (ii) trusts which are not qualified trusts under section 401(a) and annuity con- tracts which do not satisfy the require- ments of section 404(a)(2) shall not be taken into account. (D) Total taxable amount For purposes of this section and section 403, the term "total taxable amount" means, with respect to a lump sum distribu- tion, the amount of such distribution which exceeds the sum of- (I) the amounts considered contributed by the employee (determined by applying section 72(f)), which employee contribu- tions shall be reduced by any amounts theretofore distributed to him which were not includible in gross income, and (ii) the net unrealized appreciation at- tributable to that part of the distribution which consists of the securities of the em- ployer corporation so distributed. (E) Ordinary income portion For purposes of this section, the term "or- dinary income portion" means, with respect to a lump sum distribution, so much of the total taxable amount of such distribution as is equal to the product of such total taxable amount multiplied by a fraction- Page 299 § 402
TITLE 26-INTERNAL REVENUE CODE (i) the numerator of which is the number of calendar years of active partici- pation by the employee in such plan after December 31, 1973, and (ii) the denominator of which is the number of calendar years of active partici- pation by the employee in such plan. (F) Employee For purposes of this subsection and sub- section (a)(2), except as otherwise provided in subparagraph (A), the term "employee" includes an individual who is an employee within the meaning of section 401(c)(1) and the employer of such individual is the person treated as his employer under sec- tion 401(c)(4). (G) Community property laws The provisions of this subsection, other than paragraph (3), shall be applied with- out regard to community property laws. (H) Minimum period of service For purposes of this subsection (but not for purposes of subsection (a)(2) or section 403(a)(2)(A)), no amount distributed to an employee from or under a plan may be treated as a lump sum distributed under subparagraph (A) unless he has been a par- ticipant in the plan for 5 or more taxable years before the taxable year in which such amounts are distributed. (I) Amounts subject to penalty This subsection shall not apply to amounts described in clause (ii) of subpara- graph (A) of section 72(m)(5) to the extent that section 72(m)(5) applies to such amounts. (Q) Unrealized appreciation of employer securi- ties In the case of any distribution including securities -,. the employer corporation which, without regard to the requirement of subparagraph (H), would be treated as a lump sum distribution under subparagraph (A), there shall be excluded from gross income the net unrealized appreciation at- tributable to that part of the distribution which consists of securities of the employer corporation so distributed. In the case of any such distribution or any lump sum dis- tribution including securities of the employ- er corporation, the amount of net unrea- lized appreciation of such securities and the resulting adjustments to the basis of such securities shall be determined under regula- tions prescribed by the Secretary. (K) Securities For purposes of this subsection, the terms securities and securities of the employer corporation have the respective meanings provided by subsection (a)(3). L) Election to treat pre-1973 participation as post-1973 participation For purposes of subparagraph (E), subsec- tion (a)(2), and section 403(a)(2), if a tax- payer elects (at the time and in the manner provided under regulations prescribed by the Secretary), all calendar years of an em- ployee's active participation in all plans in which the employee has been an active par- ticipant shall be considered years of active participation by such employee after De- cember 31, 1973. An election made under this subparagraph, once made, shall be ir- revocable and shall apply to all lump-sum distributions received by the taxpayer with respect to the employee. This subparagraph shall not apply if the taxpayer received a lump-sum distribution in a previous taxable year of the employee beginning after De- cember 31, 1975, unless no portion of such lump-sum distribution was treated under subsection (a)(2) or section 403(a)(2) as gain from the sale or exchange of a capital asset held for more than 9 months. (Aug. 16, 1954, ch. 736, 68A Stat. 135; Apr. 22, 1960, Pub. L. 86-437, §§ 1, 2(a), 74 Stat. 79; Oct. 10, 1962, Pub. L. 87-792, § 4(c), 76 Stat. 825; Feb. 26, 1964, Pub. L. 88-272, title II, §§ 221(c)(1), 232(e)(1)-(3), 78 Stat. 75, 111; Dec. 30, 1969, Pub. L. 91-172, title III, §321(b)(1), title V, 515(a)(1), 83 Stat. 590, 643; Sept. 2, 1974, Pub. L. 93-406, title II, §§ 2002(g)(5), 2005(a), (b)(1), (c)(1), (2). 88 Stat. 968, 987, 990, 991: Apr. 15, 1976, Pub. L. 94-267, § 1(a), 90 Stat. 365: Oct. 4, 1976, Pub. L. 94-455, title XIV, § 1402(b)(1)(C), title XV, § 1512(a), title XIX, §§ 1901(a)(57)(A)- (C)(i), 1906(b)(13)(A), 90 Stat. 1731, 1732, 1742, 1773, 1774, 1834.) TAXABLE YEARs ArrR 1977 Subsecs. (a)(2) and (e)(4)(L) of this sec- tion amended by Pub. L. 94-455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, effec- tive for tax.able years beginning after Dec. 31, 1977, by substituting "1 year" for "9 months". AMENDMENTS 1976-Subsec. (a)(1). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (a)(2). Pub. L. 94-455, §§ 1402(b)(1)(C), 1906(b)(13)(A), provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977 and struck out "or his delegate" following "Secre- tary". Subsec. (a)(4). Pub. L. 94-455, § 1901(a)(57)(A), sub- stituted "basic pay" for "basic salary", "civil service re- tirement laws" for "Civil Service Retirement Act (5 U.S.C. 2251)". and "section 8331(3) of title 5, United States Code" for "section 1(d) of such Act". Subsec. (a)(5). Pub. L. 94-267. § 1(a)(2), substituted "a payment" for "the lump-sum distribution". Subsec. (a)(5)(A). Pub. L. 94-267, § 1(a)(1), restruc- tured provision by adding cl. (1) and designating exist- ing provision as cl. (i1). Subsec. (a)(6). Pub. L. 94-267. § 1(a)(3), added par. (a)(6). Subsec. (a)(6)(A), Pub. L. 94-455. § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (d). Pub. L. 94-455, § 1901(a)(57)(B), struck out subsec. (d) which related to certain trust agree- ments made before Oct. 21, 1942. Subsec. (e)(2). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (e)(4)(A). Pub. L. 94-455, § 1901(a)(57)(C)(i), substituted "Except for purposes of subsection (a)(2) and section 403(a)(2)" for "For purposes of this sub- paragraph". Subsec. (e)(4)(B), (J). Pub. L. 94-455, § 1906(b)(13)(A). struck out "or his delegate" following "Secretary". Page 300 § 402
TITLE 26-INTERNAL REVENUE CODE Subsec. (W)(4(L). Pub. L. 94-455, §§ 1402(b)(1)(C), 15.Y 2(a), added subsec. (e)(4)(L) to be applicable to dis- tributions and payments after Dec. 31, 1975, in taxable years beginning after Dec. 31, 1975, and provided that "6 months" therein would be changed to "9 months" for taxable years beginning in 1977. 1974-Subsee. (a)(2). Pub. L. 93-406, § 2005(b)(1), substituted provisions covering capital gains treatment of portions of lump sum distributions determined through the application of a fraction formula suscepti- ble of producing a phaseout of capital gains treatment for provisions covering capital gains treatment of por- tions of lump sum distributions determined on a fixed formula. Subsec. (a)(3)(C). Pub. L. 93-406, § 2005(c)(1), struck out subsec. (a)(3)(C), which defined the term "total distribution payable". Subsec. (a)(5). Pub. L. 93-406, §§ 2002(g)(5), 2005(c)(2), substituted provisions covering rollover amounts for provisions covering limitation on capital gains treatment. Subsec. (e). Pub. L. 93-406, § 2005(a), substituted pro- visions covering tax on lump sum distributions for pro- visions covering plan termination distributions made after Dec. 31, 1953, and before Jan. 1, 1955. 1969-Subsec. (a)(5). Pub. L. 91-172, § 515(a)(1), added subsec. (a)(5). Subsec. (b). Pub. L. 91-172, §321(b)(1), substituted provision for inclusion of contributions made by an employer to a nonexempt trust in the "gross income of the employee in accordance with section 83 (relating to property transferred in connection with perfor- mance of services), except that the value of the em- ployee's interest in the trust shall be substituted for the fair market value of the property for purposes of applying such section" for prior provision for inclusion In the "gross income of an employee for the taxable year in which the contribution is made to the trust in the case of an employee whose beneficial interest in such contribution is nonforfeitable at the time the contribution is made", and provided that distributions of income of such trust before the annuity starting date (as defined in section 72(c)(4)) shall be included in the gross income of the employee without regard to section 72(e)(1) (relating to amount not received as an- nuities) and that a beneficiary of any such trust shall not be considered the owner of any portion of such trust under subpart E of part I of subch. J (relating to grantors and others treated as substantial owners). 1964-Subsec. (a)(1). Pub. L. 88-272, § 232(e)(1). de- leted "except that section 72(e)(3) shall not apply" fol- lowing "(relating to annuities)". Subsec. (a)(3)(B). Pub. L. 88-272, § 221(c)(1), substi- tuted "subsections (e) and (f) of section 425" for "sec- tion 421(d) (2) and (3)". Subsec. (b). Pub. L. 88-272, § 232(e)(2), deleted "except that section 72(e)(3) shall not apply" follow- ing "(relating to annuities)". Subsec. (d. Pub. L. 88-272, § 232(e)(3), deleted "except that section 72(e)(3) shall not apply" follow- ing "(relating to annuities)". 1962-Subsec. (a)(2). Pub. L. 87-792 inserted sen- tence providing that this paragraph shall not apply to distributions paid to any distributee to the extent such distributions are attributable to contributions made on behalf of the employee while he was an em- ployee within the meaning of section 401(c,(1l). 1960-Subsec. (a)(1). Pub. L. 86-437, § 2(a), substitut- ed "paragraphs (2) and (4)" for "paragraph (2)". Subsec. (a)(4). Pub. L. 86-437, § 1, added subsec. (a)(4). Erer ivE DATE OF 1976 AMENDMENT Section 1512(b) of Pub. L. 94-455 provided that: "The amendment made by this section (adding subsec. (e)(4)(L) of this section] shall apply to distributions and payments made after December 31, 1975, in tax- able years beginning after such date." Section 1402(b)(1) of Pub. L. 94-455 provided in part that the substitution of "9 months" for "6 months" in subsecs. (a)(2) and (e)(4)(L) of this section by section 1402(b)(1)(C) of Pub. L. 94-455 is effective with re- spect to taxable years beginning in 1977. Section 1901(a)(57)(C)(ii) of Pub. L. 94-455 provided that: "The amendment made by clause (i) [amending subsec. (e)(4)(A) of this section] shall apply with re- spect to distributions or payments made after Decem- ber 31, 1973, in taxable years beginning after such date." Amendment by Pub. L. 94-267 applicable with re- spect to payments made to an employee on or after July 4, 1974, see section I(e) of Pub. L. 94-267, set out as an Effective Date of 1976 Amendment note under section 401 of this title. EFFECTIVE DATE OF 1974 AMENDMENT Section 2002(i)(3) of Pub. L. 93-406 provided that: "The amendments made by subsection (g) (5) and (6) [of section 2002 of Pub. L. 93-406, which enacted subsec. (a)(5) of this section and section 403(a)(4) of this title] shall apply on and after the date of enact- ment of this Act [Sept. 2, 1974] with respect to contri- butions to an employees' trust described in section 401(a) of the Internal Revenue Code of 1954 [section 401(a) of this title] which is exempt from tax under section 501(a) of such Code [section 501(a) of this title] or an annuity plan described in section 403(a) of such Code [section 403(a) of this title]." Section 2005(d) of Pub. L. 93-406 provided that: "The amendments made by this section [striking out subsec. (a)(3)(C) of this section and subsec. (a)(5) of this section as in effect on Dec. 31, 1973, at which time subsec. (a)(5) had covered limitation on capital gains treatment, and amending subsec. (a)(2) and (e) of this section and sections 46, 50A, 56, 62, 72, 101, 122, 403, 405, 406, 407, 871, 877, 901, 1304, and 1348 of this title] shall apply only with respect to distributions or pay. ments made after December 31, 1073, in taxable years beginning after such date." EFFECTIVE DATE OF 1969 AMENDMENT Section 515(d) of Pub. L. 91-172 provided that: "The amendments made by this section [amending this sec- tion and sections 72, 403, 405, 406, 407 and 1304 of this title] shall apply to taxable years ending after Decem- ber 31, 1969." Amendment of subsec. (b) of this section by section 321(b)(1) of Pub. L. 91-172 applicable with respect to contributions made and premiums paid after Aug. 1, 1969, see section 321(d) of Pub. L. 91-172, set out as an Effective Date note under section 83 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment of subsec. (a)(3)(B) of section by Pub. L. 88-272 applicable to taxable years ending after Dec. 31, 1963, see section 221(e) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under sec- tion 421 of this title. Amendment of subsecs. (a)(1), (b) and (d) of this sec- tion by Pub. L. 88-272 applicable to taxable years be- ginning after Dec. 31, 1963, see section 232(g) of Pub. L. 88-272, set out as an Effective Date note under sec- tion 1301 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Amendment by Pub. L. 87-792 applicable to taxable years beginning after Dec. 31, 1962, see section 8 of Pub. L. 87-792, set out as an Effective Date of 1962 Amendments note under section 37 of this title. EFFECTIVE DATE OF 1960 AMENDMENT Section 3 of Pub. L. 86-437 provided that: "The amendments made by this Act [to subsec. (a) of this section and section 871(d) of this title] shall apply only with respect to taxable years beginning after De- cember 31, 1959." TRANSITIONAL RULES RELATING TO PERIOD FOR ROLLOVER CONTRIBUTION Section 1(d) of Pub. L. 94-267 provided that: "(1) In general.- Page 301 § 402
TITLE 26-INTERNAL REVENUE CODE "(A) Period for rollover contribution.-In the case of a payment described in section 402(a)(5)(A) (subsec. (a)(5)(A) of this section] (other than a payment described In section 402(a)(5)(A) as in effect on the day before the date of the enactment of this Act) [Apr. 15, 1976] or section 403(a)(4)(A) (other than a payment described in section 403(a)(4)(A) as in effect on the day before the date of the enactment of this Act [Apr. 15, 1976] of the Internal Revenue Code of 1954 [section 403(a)(4)(A) of this title] (relating to distributions of the balance to the credit of the employee) which is contributed by an employee after the date of the enactment of this Act [Apr. 15, 1976] to a trust, plan, account, annuity, or bond described in section 402(a)(5)(B) or 403(a)(4)(B) of such Code, [subsec. (a)(5)(B) of this section or section 403(a)(4)(B) of this title], the applicable period specified in section 402(a)(5)(B) or 403(a)(4)(B) of such Code (relating to rollover distributions to an- other plan or retirement account) shall not expire before December 31, 1976. "(B) Time of contribution.- (I) General rule.-If the initial portion of a payment the applicable period for which is de- termined under subparagraph (A) is contributed before December 31, 1976, by an individual to a trust, plan, account, annuity, or bond described in subparagraph (A) and the remaining portion of such payment is contributed by such individ- ual to such a trust, plan, account, annuity, or bond not later than 30 days after the date a credit or refund is allowed by the Secretary of the Treasury or his delegate under section 6402 of the Internal Revenue Code of 1954 [section 6402 of this title] with respect to the contribu- tion. then, for purposes of subparagraph (A) and sections 402(a)(5) and 403(a)(4) of such Code subsec. (a)(5) of this section and section 403(a)(4) of this title], at the election of the indi- vidual (made in accordance with regulations pre- scribed by the Secretary or his delegate), such remaining portion shall be considered to have been contributed on the date the initial portion of the payment was contributed. For purposes of this subparagraph, the initial portion of a pay- ment is the amount by which such payment ex- ceeds the amount el the tax imposed on such payment by chapter 1 of such Code (determined without regard to this subparagraph). [chapter 1 of this title] "(ii) Regulations.-For purposes of this subpar- agraph, the tax imposed on a payment by chap- ter 1 of the Internal Revenue Code of 1954 [chapter 1 of this title], and the date a credit or refund is allowed by the Secretary of the Trea- sury or his delegate under section 6402 [section 6402 of this title] with respect to a contribution, shall be determined under regulations prescribed by the Secretary of the Treasury or his delegate. "(C) Period of limitations.-If an individual has made the election provided by subparagraph (B), then- "(i) the period provided by the Internal Rev- enue Code of 1954 [this title] for the assessment of any deficiency for the taxable year in which the payment described in subparagraph (A) was made and each subsequent taxable year for which tax is determined by reference to the treatment of such payment under such Code or the status under such Code of any trust, plan, account, annuity, or bond described in subpara- graph (A) shall, to the extent attributable to such treatment, not expire before the expiration of 3 years from the date the Secretary of the Treasury or his delegate Is notified by the indi- vidual (in such manner as the Secretary of the Treasury or his delegate may prescribe) that such individual has made (or failed to make) the contribution of the remaining portion of the payment within the period specified in subpara- graph (B)(i), and "(ii) such deficiency may be assessed before the expiration of such 3-year period notwith- standing the provisions of section 6212(c) of such Code (section 6212(c) of this title] or the provi- sions of any other law or rule of law which would otherwise prevent such assessment. "(2) Rollover contribution for certain property sold.-Sections 402(a)(5)(C) and 403(a)(4)(C) of the Internal Revenue Code of 1954 [subsec. (a)(5)(C) of this section and section 403(a)(4)(C) of this title] (re- lating to the requirement that rollover amount must consist of property received in a distribution) shall not apply with respect to that portion of the proper- ty received in a payment described in section 402(a)(5)(A) (subsec. (a)(5)(A) of this section] (other than a payment described in section 402(a)(5)(A) as in effect on the day before the date of the enact- ment of this Act [Apr, 15, 1976] or 403(a)(4)(A) (other than a payment described in section 403(a)(4)(A) as in effect on the day before the date of the enactment of this Act) [Apr. 15, 1976) of such Code [section 403(a)(4)(A) of this title] which is sold or exchanged by the employee on or before the date of the enactment of this Act, [Apr. 15, 1976], if the employee transfers an amount of cash equal to the proceeds received from the sale or exchange of such property in excess of the amount considered contrib- uted by the employee (within the meaning of section 402(a)(4)(D)(i) of such Code) [subsec. (a)(4)(D)(i) of this section]. "(3) Nonrecognition of gain or loss.-For purposes of the Internal Revenue Code of 1954 [this title] no gain or loss shall be recognized with respect to the sale or exchange of property described in paragraph (2) If the proceeds of such sale or exchange are transferred by an employee in accordance with this subsection and the applicable provisions of section 402(a)(5) or 403(a)(4) of such Code. (subsec. (a)(5) of this section and section 403(a)(4) of this title]." CROSS REFERENCES Limitation on retirement income inapplicable to any amount excluded under this section, see section 37 of this title. SECTIoN REFERRED TO IN OTHER SEcTIONS This section is referred to in sections 37, 46. 50A, 56, 62, 101, 219, 220, 401, 403, 405 to 409, 415, 871, 901, 911, 1348, 1379, 1441, 2039, 4973 of this title. § 403. Taxation of employee annuities (a) Taxability of beneficiary under a qualified annu- ity plan (I) General rule Except as provided in paragraph (2), If an annuity contract is purchased by an employer for an employee under a plan which meets the requirements of section 404(a)(2) (wheth- er or not the employer deducts the amounts paid for the contract under such section), the employee shall include in his gross income the amounts received under such contract for the year received as provided in section 72 (relating to annuities). (2) Capital gains treatment for certain distributions (A) General rule If- (I) an annuity contract is purchased by an employer for an employee under a plan described in paragraph (1); (ii) such plan requires that refunds of contributions with respect to annuity con- tracts purchased under such plan be used Page 302 §403
TITLE 26-INTERNAL REVENUE CODE to reduce subsequent premiums on the contracts under the plan; and (iii) a lump sum distribution (as defined in section 402(e)(4)(A)) is paid to the re- cipient, so much of the total taxable amount (as de- fined in section 402(e)(4)(D)) of such distri- bution as is equal to the product of such total taxable amount multiplied by the frac- tion described in section 402(a)(2) shall be treated as a gain from the sale or exchange of a capital asset held for more than 9 months. For purposes of this paragraph, in the case of an individual who is an employ- ee without regard to section 401(c)(1), de- termination of whether or not any distribu- tion is a lump sum distribution shall be made without regard to the requirement that an election be made under subsection (e)(4)(B) of section 402, but no distribution to any taxpayer other than an individual, estate, or trust may be treated as a lump sum distribution under this paragraph. (B) Cross reference For Imposition of separate tax on ordinary income portion of lump sum distribution, see section 402(e). (3) Self-employed individuals For purposes of this subsection, the term "employee" includes an individual who is an employee within the meaning of section 401(c)(1), and the employer of such individual is the person treated as his employer under section 401(c)(4). (4) Rollover amounts In the case of an employee annuity de- scribed in 403(a), if- (A) the balance to the credit of an em- ployee is paid to him- (i) within one taxable year of the em- ployee on account of a termination of the plan of which such trust is a part or, in the case of a profit-sharing plan, a com- plete discontinuance of contributions under such plan, or (ii) in one or more distributions which constitutes a lump-sum distribution within the meaning of section 402(e)(4)(A) (determined without refer- ence to section 402(e)(4)(B)). (B)(i) the employee transfers all the prop- erty he receives in such distribution to an individual account described in section 408(a), an individual retirement annuity de- scribed in section 408(b) (other than an en- dowment contract), or a retirement bond described in section 409, on or before the 60th day after the day on which he received such property to the extent the fair market value of such property exceeds the amount referred to in section 402(e)(4)(D)(i), or (ii) the employee transfers all the proper- ty he receives in such distribution to an em- ployees' trust described in section 401(a) which is exempt from tax under section 501(a), or to an annuity plan described in subsection (a) on or before the 60th day after the day on which he received such property to the extent the fair market value of such property exceeds the amount referred to in section 402(e)(4)(D)(i), and (C) the amon t so transferred consists of the property distributed to the extent that the fair market value of such property does not exceed the amount required to be trans- ferred pursuant to subparagraph (B), then such distribution is not includible in gross income for the year in which paid. For purposes of this title, a transfer described in subparagraph (B)(i) shall be treated as a rol- lover contribution described in section 408(d)(3). Subparagraph (B)(ii) does not apply in the case of a transfer to an employ- ees' trust, or annuity plan if any part of a payment described in subparagraph (A) is at- tributable to an annuity plan under which the employee was an employee within the meaning of section 401(c)(1) at the time con- tributions were made on his behalf under the plan. (5) Special roilover rules For purposes of paragraph (4)(A)(i)- (A) Time of termination A complete discontinuance of contribu- tions under a profit-sharing plan shall be deemed to occur on the day the plan admin- istrator notifies the Secretary (in accor- dance with regulations prescribed by the Secretary) that all contributions to the plan have been completely discontinued. For purposes of section 411(d)(3), the plan shall be considered to be terminated no later than the day such notice is filed with the Secretary. (B) Sale of subsidiary or assets (I) A payment of the balance to the credit of an employee of a corporation (hereinafter referred to as the employer corporation) which is a subsidiary corpo- ration (within the meaning of section 425(f)) or which is a member of a con- trolled group of corporations (within the meaning of section 1563(a), determined by substituting "50 percent" for "80 percent" each place it appears therein) in connec- tion with the liquidation, sale, or other means of terminating the parent-subsid- iary or controlled group relationship of the employer corporation with the parent corporation or controlled group, or (ii) A payment of the balance to the credit of an employee of a corporation (hereinafter referred to as the acquiring corporation) in connection with the sale or other transfer to the acquiring corpora- tion of all or substantially all of the assets used by the previous employer of the em- ployee (hereinafter referred to as the sell- ing corporation) in a trade or business conducted by the selling corporation, shall be treated as a paynfent or distribu- tion on account of the the I termination of the plan with respect to such employee if the employees of the employer corporation or the acquiring corporation (whichever ap- plies) are not active participants in such plan at the time of such payment or distri- bution. For purposes of this subparagraph, in no event shall a payment or distribution be deemed to be in accordance with a sale or other transfer of assets, or a liquidation, Page 303 § 403
TITLE 26-INTERNAL REVENUE CODE sale, or other means of terminating such parent-subsidiary or controlled group rela- tionship, if such payment or distribution is made later than the end of the second cal- endar year after the calendar year in which occurs such sale or other transfer of assets, or such liquidation, sale, or other means of terminating such parent-subsidiary or con- trolled group relationship. (b) Taxability of beneficiary under annuity purchased by section 501(c)(3) organization or public school (1) General rule If- (A) an annuity contract is purchased- (I) for an employee by an employer de- scribea in section 501(c)(3) which is exempt from tax under section 501(a), or (ii) for an employee (other than an em- ployee described in clause (I)), who per- forms services for an educational organi- zation described in section 170(b)(1) (A)(ii), by an employer which is a State, a political subdivision of a State, or an agency or instrumentality of any one or more of the foregoing, (B) such annuity contract is not subject to subsection (a), and (C) the employee's rights under the con- tract are nonforfeitable, except for failure to pay future premiums, then amounts contributed by such employer for such annuity contract on or after such rights become nonforfeitable shall be ex- cluded from the gross income of the employee for the taxable year to the extent that the ag- gregate of such amounts does not exceed the exclusion allowance for such taxable year. The employee shall include in his gross income the amounts received under such con- tract for the year received as provided in sec- tion 72 (relating to annuities). (2) Exclusion allowance (A) In general For purposes of this subsection, the exclu- sion allowance for any employee for the taxable year is an amount equal to the excess, if any, of- (I) the amount determined by multiply- ing 20 percent of his includible compensa- tion by the number of years of service, over (ii) the aggregate of the amounts con- tributed by the employer for annuity con- tracts and excludible from the gross income of the employee for any prior tax- able year. (B) Election to have allowance determined under section 415 rules In the case of an employee who makes an election under section 415(c)(4)(D) to have the provisions of section 415(c)(4)(C) (relat- ing to special rule for section 403(b) con- tracts purchased by educational institu- tions, hospitals, and home health service agencies) apply, the exclusion allowance for any such employee for the taxable year is the amount which could be contributed (under section 415) by his employer under a 'So In original. plan described in section 403(a) if the annu- ity contract for the benefit of such employ- ee were treated as a defined contribution plan maintained by the employer. (3) Includible compensation For purposes of this subsection, the term "includible compensation" means, in the case of any employee, the amount of compensa- tion which is received from the employer de- scribed in paragraph (1)(A), and which Is in- cludible in gross income (computed without regard to sections 105(d) and 911) for the most recent period (ending not later than the close of the taxable year) which under para- graph (4) may be counted as one year of ser- vice. Such term does not include any amount contributed by the employer for any annuity contract to which this subsection applies. (4) Years of service In determining the number of years of ser- vice for purposes of this subsection, there shall be included- (A) one year for each full year during which the individual was a full-time em- ployee of the organization purchasing the annuity for him, and (B) a fraction of a year (determined in ac- cordance with regulations prescribed by the Secretary) for each full year during which such individual was a part-time employee of such organization and for each part of a year during which such individual was a full-time or part-time employee of such or- ganization. In no case shall the number of years of ser- vice be less than one. (5) Application to more than one annuity contract If for any taxable year of the employee this subsection applies to 2 or more annuity con- tracts purchased by the employer, such con- tracts shall be treated as one contract. (6) Forfeitable rights which become nonforfeitable For purposes of this subsection and section 72(f) (relating to special rules for computing employees' contributions to annuity con- tracts), if rights of the employee under an an- nuity contract described in subparagraphs (A) and (B) of paragraph (1) change from forfei- table to nonforfeitable rights, then the amount (determined without regard to this subsection) includible in gross income by reason of such change shall be treated as an amount contributed by the employer for such annuity contract as of the time such rights become nonforfeitable. (7) Custodial accounts for regulated investment company stock (A) Amounts paid treated as contributions For purposes of this title, amounts paid by an employer described in paragraph 1)(A) to a custodial account which satisfies the requirements of section 401(f)(2) shall be treated as amounts contributed by him for an annuity contract for his employee if the amounts are paid to provide a retire- ment benefit for that employee and are to be invested in regulated investment compa- ny stock to be held in that custodial ac- count. § 403 Page 304
TITLE 26-INTERNAL REVENUE CODE (B) Account treated as plan For purposes of this title, a custodial ac- count which satisfies the requirements of section 401(f)(2) shall be treated as an orga- nization described in section 401(W) solely for purposes of subchapter F and subtitle F with respect to amounts received by it (and income from investment thereof). (C) Regulated investment company For purposes of this paragraph, the term "regulated investment company" means a domestic corporation which is a regulated investment company within the meaning of section 851(a). (c) Taxability of beneficiary under nonqualified an- nuities or under annuities purchased by exempt organizations Premiums paid by an employer for an annu- ity contract which is not subject to subsection (a) shall be included in the gross income of the employee in accordance with section 83 (relat- ing to property transferred in connection with performance of services), except that the value of such contract shall be substituted for the fair market value of the property for purposes of applying such section. The preceding sen- tence shall not apply to that portion of the pre- miums paid which is excluded from gross income under subsection (b). The amount actu- ally paid or made available to any beneficiary under such contract shall be taxable to him in the year in which so paid or made available under section 72 (relating to annuities). (Aug. 16, 1954, ch. 736, 68A Stat. 137; Sept. 2, 1958, Pub. L. 85-866, title I, § 23(a)-(c), 72 Stat. 1620-1622; Oct. 4, 1961, Pub. L. 87-370, § 3(a), 75 Stat. 801; Oct. 10, 1962, Pub. L. 87-792, § 4(d), 76 Stat. 825; Feb. 26, 1964, Pub. L. 88-272, title II, § 232(e)(4)-(6), 78 Stat. 111; Dec. 30, 1969, Pub. L. 91-172, title III, § 321(b)(2), title V, § 515(a)(2), 83 Stat. 591, 644; Sept. 2, 1974, Pub. L. 93-406, title II, §§ 1022(e), 2002(g)(6), 2004(c)(4), 2005(b)(2), 88 Stat. 940, 969, 986, 991; Apr. 15, 1976, Pub. L. 94-267, § 1(b), 90 Stat. 366; Oct. 4, 1976, Pub. L. 94-455, title XIV, § 1402(b)(1)(D), title XV, § 1504(a), title XIX, §§ 1901(a)(58), (b)(8)(A), 1906(b)(13)(A), 90 Stat. 1731, 1732, 1738, 1774, 1794, 1834.) TAXABLE YEARs AFTER 1977 Subsec. (a)(2)(A) of this section amended by Pub. L. 94-455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, effective for tax- able years beginning after Dec. 31, 1977, by substituting "1 year"for "9 months". AMENDMENTS 1976-Subsec. (a)(2)(A). Pub. L. 94-455, § 1402(b) (1)(D), provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977. Subsec. (a)(4). Pub. L. 94-455, § 1901(a)(58), re-en- acted the provisions following subpar. (C) without sub- stantive change. Pub. L. 94-267, § 1(b)(2), substituted "a payment" for "the lump-sum distribution". Subsec. (a)(4)(A). Pub. L. 94-267, § l(b)(1). restruc- tured provisions by adding cl. (1) and designating exist- ing provision as cl. (ii). Subsec. (a)(5). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary", wherever appearing. Pub. L. 94-267, § l(b)(3), added subsec. (a)(5). Subsec. (b)(1)(A)(ii). Pub. L. 94-455, § 1901(b)(8)(A), substituted "educational organization described in sec- tion 170(b)(1)(A)(ii)" for "educational institution (as defined in section 151(e)(4))". Subsec. (b)(4)(B). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (b)(7)(C). Pub. L. 94-455, § 1504(a), struck out ", and which issues only redeemable stock" follow- ing "regulated investment company within the mean- ing of section 851(a)". 1974-Subsec. (a)(2). Pub. L. 93-406, § 2005(b)(2), substituted "a lump sum distribution (as defined in section 4002(e)(4)(A)) is paid to the recipient" for "the total amounts payable by reason of an employee's death or other separation from the service, or by reason of the death of an employee after the employ- ee's separation from the service, are paid to the payee within one taxable year of the payee" as cl. (iii) of subpar. (A), substituted "so much of the total taxable amount (as defined in section 402(e)(4)(D)) of such distribution as is equal to the product of such total taxable amount multiplied by the fraction described in section 402(a)(2) shall be treated as a gain from the sale or exchange of a capital asset held for more than 6 months. For purposes of this paragraph, in the case of an individual whn is an employee without regard to section 401(c)(1), determination of whether or not any distribution is a lump sum distribution shall be made without regard to the requirement that an election be made under subsection (e)(4)(B) of section 402, but no distribution to any taxpayer other than an individual, estate, or trust may be treated as a lump sum distribu- tion under this paragraph" for "then the amount of such payments, to the extent exceeding the amount contributed by the employee (determined by applying section 72(f)), which employee contributions shall be reduced by any amounts theretofore paid to him which were not includible in gross income, shall be considered a gain from the sale or exchange of a cap- ital asset held for more than 6 months. This subpara- graph shall not apply to amounts paid to any payee to the extent such amounts are attributable to contribu- tions made on behalf of the employee while he was an employee within the meaning of section 401(c)(1)" fol- lowing cl. (iii) of subpar. (A), substituted provisions setting out a cross reference to section 402(e) for pro- visions defining "total amounts" as subpar. (B), and struck out subpar. (C) setting out limitations on cap- ital gains treatment. Subsec. (a)(4). Pub. L. 93-406, § 2002(g)(6), added subsec. (a)(4). Subsec. (b)(2). Pub. L. 93-406, § 2004(c)(4), designat- ed existing provisions as subpar. (A) and added subpar. (B). Subsec. (b)(7). Pub. L. 93-406, § 1022(e), added subsec. (b)(7). 1969-Subsec. (a)(2). Pub. L. 91-172, § 515(a)(2), added subpar. (C). Subsec. (c). Pub. L. 91-172, § 321(b)(2), consolidated former provisions of subsec. (c) providing for taxabil- ity of beneficiary under a nonqualified annuity, the employees gross income to include amount contribut- ed by employer for annuity contract in the year in which amount is contributed, the amount to be includ. ed as provided in section 72 of this title and former subsec. (d) of this section providing for taxability of beneficiary under certain forfeitable contracts pur- chased by exempt organizations, including farmers' cooperatives, the gross income to include amount con- tributed by employer after Dec. 31, 1957, in the year of change from forfeitable to nonforfeitable rights, the new provisions including premiums paid by an employ- er in accordance with section 83, except that value of the contract shall be substituted for fair market value of the property for purposes of applying such section 83, such provision not to be applicable to that portion of premiums paid which is excluded from gross income under subsec. (b) of this section. Subsec. (d). Pub. L. 91-172, § 321(b)(2), struck out former subsec. (d) providing for taxability of benefi- ciary under certain forfeitable contracts purchased by Page 305
TITLE 26-INTERNAL REVENUE CODE exempt organizations, including farmers' cooperatives, gross income of the employee to include (amount con- tributed by employer after Dec. 31, 1957), in year of change from forfeitable to nonforfeitable rights, which are now covered by subsec. (c) of this section. 1964-Subsec. (a)(1). Pub. L. 88-272, § 232(e)(4), de- leted "except that section 72(e)(3) shall not apply" fol- lowing "(relating to annuities)". Subsec. (b)(1). Pub. L. 88-272, § 232(e)(5), deleted "except that section 72(e)(3) shall not apply" follow- ing "(relating to annuities)". Subsec. (c). Pub. L. 88-272, § 232(e)(6), deleted "except that section 72(e)(3) shall not apply" follow- ing "(relating to annuities)". 1962-Subsec. (a)(2)(A). Pub. L. 87-792, § 4(d)(1), (2), substituted "described in paragraph (1)" for "which meets the requirements of section 401(a)(3), (4). (5), and (6)" in cL. (1), and inserted sentence at the end thereof providing that this subparagraph shall not apply to amounts paid to any payee to the extent such amounts are attributable to contributions made on behalf of the employee while he was an employee within the meaning of section 401(c)(1). Subsec. (a)(3). Pub. L. 87-792, § 4(d)(3), added subsec. (a)(3). 1961-Subsec. (b. Pub. L. 87-370, § 3(a)(3), inserted "or public school" at the end of the catchline. Subsec. (b)(1)(A). Pub. L. 87-370. §3(a)(1), included annuity contracts purchased for an employee, other than one described in clause (i) of this subpar., who performs services for an educational institution, as de- fined in section 151(e)(4) of this title, by an employer which is a State, a politic,,I subdivision of a State, or an agency or instrumentality of either. Subsec. (b)(3). Pub. L. 87-370, § (3)(a)(2), substituted "the employer described in paragraph (1)(A)" for "the employer described in section 501(c)(3) and exempt from tax und'r section 501(a)". 1958-Subsec. (a)(1). Pub. L. 85-866. § 23(b), substi- tuted "which meets the requirements of section 404(a)(2) (whether or not the employer deducts the amounts paid for the contract under such section)," for "with respect to which the employer's contribution is deductible under section 404(a)(2), or if an annuity contract is purchased for an employee by an employer described in section 501(c)(3) which is exempt from tax under section 501(a),". Subsec. (b). Pub. L. 85-866, § 23(a), added subsec. (b) and redesignated former subsec. (b) as (c). Subsec. (cW. Pub. L. 85-866, § 23(a), redesignated former subsec. (b) as (c). Subsec. (d). Pub. L. 85-866, § 23(c), added subsec. (d). EFFELcrIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (a) and (b) of this section by section 1901(a)(58), (b)(8)(A) of Pub. L. 94-455, respec- tively, effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Section 1402(b)(1) of Pub. L. 94-455 provided in part that the substitution of "9 months" for "6 months" in subsec. (a)(2)(A) of this section by section 1402(b)(1)(D) of Pub. L. 94-455 is effective with re- spect to taxable years beginning in 1977. Section 1504(b) of Pub. L. 94-455 provided that: "The amendment made by this section [amending subsec. (b)(7) of this section] shall apply to taxable years beginning after December 31, 1975." Amendment by Pub. L. 94-267 applicable with re- spect to payments made to an employee on or after July 4, 1974, see section 1(e) of Pub. L. 94-267, set out as an Effective Date of 1976 Amendment note under section 401 of this title. EFFECTIVE DATE OF 1974 AMENDMENT Amendment of subsec. (a)(2) of this section by sec- tion 2005(b)(2) of Pub. L. 93-406 applicable only with respect to distributions or payments made after Dec. 31, 1973, in taxable years beginning after Dec. 31, 1973. see section 2005(d) of Pub. L. 93-406, set out as an Effective Date of 1974 Amendment note under sec- tion 402 of this title. Subsec. (a)(4) of this section applicable on and after Sept. 2. 1974, with respect to contributions to an em. ployees' trust described in section 401(a) which is exempt from tax under section 501(a) or an annuity plan described in section (a) of this section, see section 2002(i)(3) of Pub. L. 93-406, set out as an Effective Date of 1974 Amendment note under section 402 of this title. Amendment of subsec. (b)(2) of this section by sec- tion 2004(c)(4) of Pub. L. 93-406 applicable to years be- ginning after Dec. 31, 1975, see section 2004(d) of Pub. L. 93-406, set out as an Effective Date; Transition Pro- visions note under section 415 of this title. Section 1022(e) of Pub. L. 93-406 provided in part that subsec. (b)(7) is effective Jan. 1, 1974. EFFECTIVE DATE OF 1969 AMENDMENT Amendment of subsec. (a)(2) by section 515(a)(2) of Pub. L. 91-172 applicable to taxable years ending after Dec. 31, 1969, see section 515(d) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 402 of this title. Amendment of subsecs. (c) and (d) of this section by section 321(b)(2) of Pub. L. 91-172 applicable with re- spect to contributions made and premiums paid after Aug. 1, 1969, see section 321(d) of Pub. L. 91-172, set out as an Effective Date note under section 83 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272 applicable to taxable years beginning after Dec. 31, 1963, see section 232(g) of Pub. L. 88-272, set out as an Effective Date note under section 1301 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Amendment by Pub. L. 87-792 applicable to taxable years beginning after Dec. 31, 1962, see section 8 of Pub. L. 87-792, set out as an Effective Date of 1962 Amendments note under section 37 of this title. EFFECTIVE DATE OF 1961 AMENDMENT Section 3(b) of Pub. L. 87-370 provided that: "The amendments made by subsection (a) [to subsec. (b) of this section] shall apply with respect to taxable years beginning after December 31, 1957." EFFECTIVE DATES OF 1958 AMENDMENT Section 23(g) of Pub. L. 85-866 provided that: "The amendments made by subsections (a), (b), (c). and (d) [to subsecs. (a)(1), (b), (c) and (d) of this section, and to section 101(b)(2)(B) of this title] shall apply with respect to taxable years beginning after December 31, 1957. The amendments made by subsection (e) [to sec- tion 2039(c) of this title] shall apply with respect to estates of decedents dying after December 31, 1957. The amendments made by subsection f) [to section 2517(a), (b) of this title] shall apply with respect to calendar years after 1957." CROSS REFERENCES Limitation on retirement income inapplicable to any amount excluded under this section, see section 37 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 37, 72, 101, 104. 219, 220, 402, 404. 406 to 409, 412, 414, 415, 805, 871, 911, 1348, 1379, 1441. 2039, 2517, 3121, 3306. 3401, 4972, 4973, 4975, 6047, 6104, 7476 of this title; title 29 sec- tions 1103, 1132, 1344; title 42 section 409. SECTION REFERRED TO IN D.C. CODE This section is referred to in section 31-746 of the District of Columbia Code. Page 306 § 403
TITLE 26-INTERNAL REVENUE CODE § 404. Deduction for contributions of an employer to an employees' trust or annuity plan and compen- sation under a deferred-payment plan (a) General rule If contributions arc paid by an employer to or under a stock bonus, pension, profit-sharing, or annuity plan, or if compensation is paid or ac- crued on account of any employee under a plan deferring the receipt of such compensation, such contributions or compensation shall not be deductible under section 162 (relating to trade or business expenses) or section 212 (re- lating to expenses for the production of income); but, If they satisfy the conditions of either of such sections, they shall be deductible under this section, subject, however, to the fol- lowing limitations as to the amounts deductible in any year: (1) Pension trusts (A) In general In the taxable year when paid, if the con- tributions are paid into a pension trust, and if such taxable year ends within or with a taxable year of the trust for which the trust is exempt under section 501(a), in an amount determined as follows: (I) the amount necessary to satisfy the minimum funding standard provided by section 412(a) for plan years ending within or with such taxable year (or for any prior plan year), if such amount is greater than the amount determined under clause (ii) or (iii) (whichever is ap- plicable with respect to the plan), (ii) the amount necessary to provide with respect to all of the employees under the trust the remaining unfunded cost of their past and current service credits dis- tributed as a level amount, or a level per- centage of compensation, over the remain- ing future service of each such employee, as determined under regulations pre- scribed by the Secretary, but if such re- maining unfunded cost with respect to any 3 individuals is more than 50 percent of such remaining unfunded cost, the amount of such unfunded cost attribut- able to such individuals shall be distribut- ed over a period of at least 5 taxable years, (iii) an amount equal to the normal cost of the plan, as determined under regula- tions prescribed by the Secretary, plus, if past service or other supplementary pen- sion or annuity credits are provided by the plan, an amount necessary to amor- tize such credits in equal annual pay- ments (until fully amortized) over 10 years, as determined under regulations prescribed by the Secretary. In determining the amount deductible in such year under the foregoing limitations the funding method and the actuarial as- sumptions used shall be those used for such year under section 412, and the maximum amount deductible for such year shall be an amount equal to the full funding limitation for such year determined under section 412. (B) Special rule in case of certain amendments In the case of a plan which the Secretary of Labor finds to be collectively bargained which makes an election under this subpar- agraph (in such manner and at such time as may be provided under regulations pre- scribed by the Secretary), if the full fund- ing limitation determined under section 412(c)(7) for such year is zero, if as a result of any plan amendment applying to such plan year, the amount determined under section 412(c)(7)(B) exceeds the amount de- termined under section 412(c)(7)(A), and if the funding method and the actuarial as- sumptions used are those used for such year under section 412, the maximum amount deductible in such year under the limita- tions of this paragraph shall be an amount equal to the lesser of- (i) the full funding limitation for such year determined by applying section 412(c)(7) but increasing the amount re- ferred to in subparagraph (A) thereof by the decrease in the present value of all unamortized liabilities resulting from such amendment, or (ii) the normal cost under the plan re- duced by the amount necessary to amor- tize in equal annual installments over 10 years (until fully amortized) the decrease described in clause (i). In the case of any election under this sub- paragraph, the amount deductible under the limitations of this paragraph with re- spect to any of the plan years following the plan year for which such election was made shall be determined as provided under such regulations as may be prescribed by the Secretary to carry out the purposes of this subparagraph. (C) Certain collectively-bargained plans In the case of a plan which the Secretary of Labor finds to be collectively bargained, established or maintained by an employer doing business in not less than 40 States and engaged in the trade or business of fur- nishing or selling services described in sec- tion 167(l)(3)(A)(iii), with respect to which the rates have been established or approved by a State or political subdivision thereof, by any agency or instrumentality of the United States, or by a public service or public utility commission or other similar body of any State or political subdivision thereof, and in the case of any employer which is a member of a controlled group with such employer, subparagraph (B) shall be applied by substituting for the words "plan amendment" the words "plan amend- ment or increase in benefits payable under title II of the Social Security Act". For the purposes of this subparagraph, the term "controlled group" has the meaning pro- vided by section 1563(a), determined with- out regard to section 1563(a)(4) and (e)(3)(C). (D) Carryover Any amount paid in a taxable year in excess of the amount deductible in such year under the foregoing limitations shall be deductible in the succeeding taxable Page 307 § 404
TITLE 26-INTERNAL REVENUE CODE years in order of time to the extent of the difference between the amount paid and de- ductible in each such succeeding year and the maximum amount deductible for such year under the foregoing limitations. (2) Employees' annuit'es In the taxable year when paid, in an amount determined in accordance with para- graph (1), if the contributions are paid toward the purchase of retirement annuities, or retirement annuities and medical benefits as described in section 401(h), and such pur- chase is part of a plan which meets the re- quirements of section 401(a)(3), (4), (5), (6), (7), (8), (11), (12), (13), (14), (15), (16), (17), (18), (19), and (20) and, if applicable, the re- quirements of section 401(a)(9), (10), (17), and (18) and of section 401(d) (other than para- graph (1)), and if refunds of premiums, if any, are applied within the current taxable year or next succeeding taxable year toward the pur- chase of such retirement annuities, or such retirement annuities and medical benefits. (3) Stock bonus and profit-sharing trusts (A) Limits on deductible contributions In the taxable year when paid, if the con- tributions are paid into a stock bonus or profit-sharing trust, and if such taxable year ends within or with a taxable year of the trust with respect to which the trust is exempt under section 501(a), in an amount not in excess of 15 percent of the compensa- tion otherwise paid or accrued during the taxable year to all employees under the stock bonus or profit-sharing plan. If in any taxable year there is paid into the trust, or a similar trust then in effect, amounts less than the amounts deductible under the pre- ceding sentence, the excess, or if no amount is paid, the amounts deductible, shall be carried forward and be deductible when paid in the succeeding taxable years in order of time, but the amount so deductible under this sentence in any such succeeding taxable year shall not exceed 15 percent of the compensation otherwise paid or accrued during such succeeding taxable year to the beneficiaries under the plan, but the amount so deductible under this sentence in any one succeeding taxable year together with the amount so deductible under the first sentence of this subparagraph shall not exceed 25 percent of the compensation otherwise paid or accrued during such tax- able year to the beneficiaries under the plan. In addition, any amount paid into the trust in any taxable year in excess of the amount allowable with respect to such year under the preceding provisions of this sub- paragraph shall be deductible in the suc- ceeding taxable years in order of time, but the amount so deductible under this sen- tence in any one such succeeding taxable year together with the amount allowable under the first sentence of this subpara- graph shall not exceed 15 percent of the compensation otherwise paid or accrued during such taxable year to the beneficia- ries under the plan. The term "stock bonus or profit-sharing trust", as used in this sub- paragraph, shall not include any trust de- signed to provide benefits upon retirement and covering a period of years, if under the plan the amounts to be contributed by the employer can be determined actuarially as provided in paragraph (1). If the contribu- tions are made to 2 or more stock bonus or profit-sharing trusts, such trusts shall be considered a single trust for purposes of ap- plying the limitations in this subparagraph. (B) Profit-sharing plan of affiliated group In the case of a profit-sharing plan, or a stock bonus plan in which contributions are determined with reference to profits, of a group of corporations which is an affiliated group within the meaning of section 1504, if any member of such affiliated group is pre- vented from making a contribution which it would otherwise have made under the plan, by reason of having no current or accumu- lated earnings or profits or because such earnings or profits are less than the contri- butions which it would otherwise have made, then so much of the contribution which such member was so prevented from making may be made, for the benefit of the employees of such member, by the other members of the group, to the extent of cur- rent or accumulated earnings or profits, except that such contribution by each such other member shall be limited, where the group does not file a consolidated return, to that proportion of its total currcat and ac- cumulated earnigns or profits remaining after adjustment for its contribution de- ductible without regard to this subpara- graph which the total prevented contribu- tion bears to the total current and accumu- lated earnings or profits of all the members of the group remaining after adjustment for all contributions deductible without regard to this subparagraph. Contributions made 'under the preceding sentence shall be deductible u,der subparagraph (A) of this paragraph by the employer making such contribution, and, for the purpose of deter- mining amounts which may be carried for- ward and deducted under the second sen- tence of subparagraph (A) of this para- graph in succeeding taxable years, shall be deemed to have been made by the employer on behalf of whose employees such contri- butions were made. (4) Trusts created or organized outside the United States If a stock bonus, pension, or profit-sharing trust would qualify for exemption under sec- tion 501(a) except for the fact that it is a trust created or organized outside the United States, contributions to such a trust by an employer which is a resident, or corporation, or other entity of the United States, shall be deductible under the preceding paragraphs. (5) Other plans If the plan is not one included in paragraph (1), (2), or (3), in the taxable year in which an amount attributable to the contribution is in- cludible in the gross income of employees par- ticipating in the plan, but, in the case of a plan in which more than one employee par- § 404 Page 308
TITLE 26-INTERNAL REVENUE CODE ticipates only if separate accounts are ma n- tained for each employee. (6) Time when contributions deemed made For purposes of paragraphs (1), (2), and (3), a taxpayer shall be deemed to have made a payment on the last day of the preceding tax- able year if the payment is on account of such taxable year and is made not later than the time prescribed by law for filing the return for such taxable year (including exten- sions thereof). (7) Limit on deductions If amounts are deductible under paragraphs (1) and (3), or (2) and (3), or (1), (2), and (3), in connection with two or more trusts, or one or more trusts and an annuity plan, the total amount deductible In a taxable year under such trusts and plans shall not exceed the greater of 25 percent of the compensation otherwise paid or accrued during the taxable year to the beneficiaries of the trusts or plans, or the amount of contributions made to or under the trusts or plans to the extent such contributions do not exceed the amount of employer contributions necessary to satisfy the minimum funding standard provided by section 412 for the plan year which ends with or within such taxable year (or for any prior plan year). In addition, any amount paid into such trust or under such annuity plans in any taxable year in excess of the amount allowa- ble with respect to such year under the pre- ceding provisions of this paragraph shall be deductible in the succeeding taxable years in order of time, but the amount so deductible under this sentence in any one such succeed- ing taxable year together with the amount al- lowable under the first sentence of this para- graph shall not exceed 25 percent of the com- pensation otherwise paid or accrued during such taxable years to the beneficiaries under the trusts or plans. This paragraph shall not have the effect of reducing the amount other- wise deductible under paragraphs (1), (2), and (3), if no employee is a beneficiary under more than one trust or a trust and an annuity plan. (8) Self-employed individuals In the case of a plan included in paragraph (1), (2), or (3) which provides contributions or benefits for employees some or all of whom are employees within the meaning of section 401(c)(1), for purposes of this section- (A) the term "employee" includes an indi- vidual who is an employee within the mean- ing of section 401(c)(1), and the employer of such individual is the person treated as his employer under section 401(c)(4); (B) the term "earned income" has the meaning assigned to it by section 401(c)(2); (C) the contributions to such plan on behalf of an individual who is an employee within the meaning of section 401(c)(1) shall be considered to satisfy the conditions of section 162 or 212 to the extent that such contributions do not exceed the earned income of such individual derived from the trade or business with respect to which such plan is established, and to the extent that such contributions are not allocable (determined in accordance with regulations prescribed by the Secretary) to the pur- chase of life, accident, health, or other in- surance; and (D) any reference to compensation shall, in the case of an individual who is an em- ployee within the meaning of section 401(c)(1), be considered to be a reference to the earned income of such individual de- rived from the trade or business with re- spect to which the plan is established. (9) Plans benefiting self-employed individuals In the case of a plan included in paragraph (1), (2), or (3) which provides contributions or benefits for employees some or all of whom are employees within the meaning of section 401(c)(1)- (A) the limitations provided by para- graphs (1), (2), (3), and (7) on the amounts deductible for any taxable year shall be computed, with respect to contributions on behalf of employees (other than employees within the meaning of section 401(c)(1)), as if such employees were the only employees for whom contributions and benefits are provided under the plan; (B) the limitations provided by para- graphs (1), (2), (3), and (7) on the amounts deductible for any taxable year shall be computed, with respect to contributions on behalf of employees within the meaning of section 401(c)(1)- (i) as if such employees were the only employees for whom contributions and benefits are provided under the plan, and (ii) without regard to the second sen- tence of paragraph (3); and (C) the amounts deductible under para- graphs (1), (2), (3), and (7), with respect to contributions on behalf of any employee within the meaning of section 401(c)(1), shall not exceed the applicable limitation provided in subsection (e). (b) Method of contributions, etc., having the effect of a plan If there is no plan but a method of employer contributions or compensation has the effect of a stock bonus, pension, profit-sharing, or annu- ity plan, or similar plan deferring the receipt of compensation, subsection (a) shall apply as if there were such a plan. (c) Certain negotiated plans If contributions are paid by an employer- (1) under a plan under which such contribu- tions are held in trust for the purpose of paying (either from principal or income or both) for the benefit of employees and their families and dependents at least medical or hospital care, or pensions on retirement or death of employees; and (2) such plan was established prior to Janu- ary 1, 1954, as a result of an agreement be- tween employee representatives and the Gov- ernment of the United States during a period of Government operation, under seizure powers, of a major part of the productive fa- cilities of the industry in which such employ- er is engaged, such contributions shall not be deductible under this section nor be made nondeductible by this section, but the deductibility thereof 71-999 0 - 78 - 22 (Vol. 7) Page 309
TITLE 26-INTERNAL REVENUE CODE shall be governed solely by section 162 (relating to trade or business expenses). For purposes of this chapter and subtitle B, in the case of any individual who before July 1, 1974, was a par- ticipant in a plan described in the preceding sentence- (A) such individual, if he is or was an em- ployee within the meaning of section 401(c)(1), shall be treated (with respect to ser- vice covered by the plan) as being an employ- ee other than an employee within the mean- ing of section 401(c)(1) and as being an em- ployee of a participating employer under the plan, (B) earnings derived from service covered by the plan shall be treated as not being earned income within the meaning of section 401(c)(2), and (C) such individual shall be treated as an employee of a participating employer under the plan with respect to service before July 1, 1975, covered by the plan. Section 277 (relating to deductions incurred by certain membership organizations in transac- tions with members) does not apply to any trust described in this subsection. The first and third sentences of this subsection shall have no application with respect to amounts contribut- ed to a trust on or after any date on which such trust is qualified for exemption from tax under section 501(a). [(d) Repealed. Pub. L. 94-455, title XIX, § 1901(a)(59), Oct. 4, 1976, 90 Stat. 1774] (e) Special limitations for self-employed individuals (1) In general In the case of a plan included in subsection (a)(1), (2), or (3), which provides contribu- tions or benefits for employees some or all of whom are employees within the meaning of section 401(c)(1), the amounts deductible under subsection (a) in any taxable year with respect to contributions on behalf of any em- ployee within the meaning of section 401(c)(1) shall, subject to paragraphs (2) and (4), not exceed $7,500, or 15 percent of the earned income derived by such employee from the trade or business with respect to which the plan is established, whichever is the lesser. (2) Contributions made under more than one plan (A) Overall limitation In any taxable year in which amounts are deductible with respect to contributions under two or more plans on behalf of an in- dividual who is an employee within the meaning of section 401(c)(1) with respect to such plans, the aggregate amount deduct- ible for such taxable year under all such plans with respect to contributions on behalf of such employee shall (subject to paragraph (4)) not exceed $7,500, or 15 per- cent of the earned income derived by such employee from the trades or businesses with respect to which the plans are estab- lished, whichever is the lesser. (B) Allocation of amounts deductible In any case in which the amounts deduct- ible under subsection (a) (with the applica- tion of the limitations of this subsection) with respect to contributions made on behalf of an employee within the meaning of section 401(c)(1) under two or more plans are, by reason of subparagraph (A), less than the amounts deductible under such subsection determined without regard to such subparagraph, the amount deductible under subsection (a) with respect to such contributions under each such plan shall be determined in accordance with regulations prescribed by the Secretary. (3) Contributions allocable to insurance protection For purposes of this subsection, contribu- tions which are allocable (determined under regulations prescribed by the Secretary) to the purchase of life, accident, health, or other insurance shall not be taken into ac- count. (4) Limitations cannot be lower than $750 or 100 percent of earned income The limitations under paragraphs (1) and (2)(A) for any employee shall not be less than the lesser of- (A) $750, or (B) 100 percent of the earned income de- rived by such employee from the trades or businesses taken into account for purposes of paragraph (1) or (2)(A) as the case may be. This paragraph does not apply for any tax- able year to any employee whose adjusted gross income for such taxable year (deter- mined separately for each individual, without regard to any community property laws, and without regard to the deduction allowable under subsection (a) exceeds $15,000. (f) Certain loan repayments considered as contribu- tions For purposes of this section, any amount paid, directly or indirectly, by an owner-em- ployee (within the meaning of section 401(c)(3)) in repayment of any loan which under section 72(m)(4)(B) was treated as an amount received under a contract purchased by a trust described in section 401(a) which is exempt from tax under section 501(a) or purchased as a part of a plan described in section 403(a) shall be treated as a contribution to which this section applies on behalf of such owner-employee to such trust or to or under such plan. (g) Certain employer liability payments considered as contributions For purposes of this section any amount paid by an employer under section 4062, 4063, or 4064 of the Employee Retirement Income Secu- rity Act of 1974 shall be treated as a contribu- tion to which this section applies by such em- ployer to or under a stock bonus, pension, profit-sharing, or annuity plan. (Aug. 16, 1954, ch. 736, 68A Stat. 138; Sept. 2, 1958, Pub. L. 85-866, title I, § 24, 72 Stat. 1623; Oct. 10, 1962, Pub. L. 87-792. § 3, 76 Stat. 819; Oct. 23, 1962, Pub. L. 87-863, § 2(b), 76 Stat. 1141; Nov. 13, 1966, Pub. L. 89-809, title II, §204(a), (b)(2), (3), 80 Stat. 1577; Dec. 30, 1969, Pub. L. 91-172, title III, § 321(b)(3), 83 Stat. 591; Sept. 2, 1974, Pub. L. 93-406, title II, §§ 1013(c), 1016(a)(3), 2001(a), (g)(2)(E), F), 2004(b), (c)(1), 2007(a), (b), title IV, § 4081(a), 88 Stat. Page 310 9 404
TITLE 26-INTERNAL REVENUE CODE 921, 929, 952, 957, 986, 993, 994, 1033; Apr. 15, 1976, Pub. L. 94-267, § 1(c)(3), 90 Stat. 367; Oct. 4, 1976, Pub. L. 94-455, title XV, § 1502(a)(2), title XIX, §§ 1901(a)(59), 1906(b)(13)(A), 90 Stat. 1737, 1774, 1834.) REFERENCES IN TEXT The Social Security Act, referred to in subsec. (a)(1)(C), is act Aug. 14, 1935, ch. 531, 49 Stat. 620, as amended. Title II of the Social Security Act is classi- fied generally to subchapter II (§ 401 et seq.) of Title 42, The Public Health and Welfare. For complete clas- sification of this Act to the Code, see section 1305 of Title 42, and Tables volume. Sections 4062, 4063 and 4064 of the Employee Re- tirement Income Security Act of 1974, referred to in subsec. (g), are classified to sections 1362, 1363 and 1364, respectively, of Title 29, Labor. AMENDMENTs 1976-Subsecs. (a)(1)(B), (8)(C). Pub. L. 94-455. § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (a)(2). Pub. L. 94-267 substituted "(19), and (20)" for "and (19)". Subsec. (d). Pub. L. 94-455, § 1901(a)(59), struck out subsec. (d) which related to the taxability of the bene- ficiary under certain forfeitable contracts purchased by exempt organizations. Subsecs. (e)(2)(B), (3). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (e)(4). Pub. L. 94-455, § 1502(a)(2), added provisions following subpar. (B). 1974-Subsec. (a)(1). Pub. L. 93-406, § 1013(c)(1), ex- panded subpars. (A), (B), and (C) to accommodate the increased minimum funding standards required by sec- tion 412. Subsec. (a)(2). Pub, L. 93-406, §§ 1016(a)(3), 2001(g)(2)(E). 2004(c)(1), inserted references to the re- quirements of section 401(a)(11), (12), (13), (14), (15), (16), (17), (18), and (19), and, if applicable, the require- ments of section 401(a)(17) and (18). Subsec. (a)(3)(A). Pub. L. 93-406, § 2004(b), inserted but the amount so deductible under this sentence in any one succeeding taxable year together with the amount so deductible under the first sentence of this subparagraph shall not exceed 25 percent of the com- pensation otherwise paid or accrued during such tax- able year to the beneficiaries under the plan" follow- ing "If in any taxable year there is paid into the trust, or a similar trust then in effect, amounts less than the amounts deductible under the preceding sentence, the excess, or if no amount is paid, the amounts deduct- ible, shall be carried forward and be deductible when paid in the succeeding taxable years in order of time, but the amount so deductible under this sentence in any such succeeding taxable year shall not exceed 15 percent of the compensation otherwise paid or accrued during such succeeding taxable year to the beneficia- ries under the plan". Subsec. (a)(6). Pub. L. 93-406, § 1013(c)(2), substitut- ed provisions covering only taxpayers operating on the accrual basis for provisions covering the time when contributions shall be deemed made. Subsec. (a)(7). Pub. L. 93-406, § 1013(c)(3), inserted reference to the amount of contributions made to or under the trusts or plans to the extent such contribu- tions do not exceed the amount of employer contribu- tions necessary to satisfy the minimum funding stan- dards provided by section 412 for the plan year which ends with or within such taxable year (or for any prior plan year) and substituted "25 percent" for "30 per- cent" in the provision covering amounts paid into trusts or under an annuity plan in any taxable year in excess of the amount allowable with respect to such year. Subsec. (a)(9)(B)(ii). Pub. L. 93-406, § 2001(g)(2)(F), substituted "the second sentence of paragraph (3)" for "paragraph (1)(D), the second and third sentences of paragraph (3), and the second sentence of paragraph (7)". Subsec. (c). Pub. L. 93-406, § 2007(a), (b). substituted "or pensions" for "and pensions" in par. (1), substitut. ed "The first and third sentences of this subsection" for "This subsection" in provisions covering amounts contributed to a trust on or after any date on which such trust is qualified for exemption from tax under section 501(a), inserted provisions setting out specified treatment to be accorded individuals who before July 1, 1974, were participants in plans described in the subsections, and inserted provision that section 277 (relating to deductions incurred by certain member- ship organizations in transactions with members) does not apply to any trust described in the subsection. Subsec. (e)(1). Pub. L. 93-406, § 2001(a)(1), substitut- ed "subject to paragraphs (2) and (4), not exceed $7,500, or 15 percent" for "subject to the provisions of paragraph (2), not exceed $2,500, or 10 percent". Subsec. (e)(2)(A). Pub. L. 93-406, § 2001(a)(2), substi- tuted "shall (subject to paragraph (4)) not exceed $7,500, or 15 percent" for "shall not exceed $2,500 or 10 percent". Subsec. (e)(4). Pub. L. 93-406, §2001(a)(3), added subsee. (e)(4). Subsec. (g). Pub. L. 93-406, § 4081(a), added subsec. (g). 1969-Subsec. (a)(5). Pub. L. 91-172 substituted "If the plan is not one included in paragraph (1), (2), or (3), in the taxable year In which an amount attribut- able to the contribution is includible in the gross income of employees participating in the plan, but, in the case of a plan in which more than one employee participates only if separate accounts are maintained for each employee" for "In the taxable year when paid, if the plan is not one included in paragraph (1), (2), or (3), if the employees' rights to or derived from such employer's contribution or such compensation are nonforfeitable at the time the contribution or compensation is paid". 1966-Subsec. (a). Pub. L. 89-809, § 204(a), repealed par. (10) which provided for a special limitation on the amount allowed as a deduction for self-employed indi- viduals. Subsec. (e). Pub. L. 89-809, § 204(b)(2), (3), struck out references to par. (10) of subsec. (a) wherever appear- ing. 1962-Subsec. (a)(2). Pub. L. 87-863 inserted ", or re- tirement annuities and medical benefits as described In section 401(h)," following "purchase of retirement annuities", and ", or such retirement annuities and medical benefits" following "such retirement annu- ities." Pub. L. 87-792, § 3(a)(1), substituted "(5), (6), (7), and (8), and, if applicable, the requirements of section 401(a)(9) and (10) and of section 401(d) (other than paragraph (1))," for "(5), and (6),". Subsecs. (a)(8) to (10). Pub. L. 87-792, § 3(a)(2), added pars. (8) to (10). Subsecs. (e), (f). Pub. L. 87-792, § 3(b), added subsecs. (e) and (f). 1958-Subsec. (a). Pub. L. 85-866 substituted "income); but, if" for "income) but If" preceding par. (1). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (d) by section 1901(a)(59) of 'Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Amendment of subsec. (e) by section 1502(a)(2) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1975, see section 1502(b) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendments note under section 415 of this title. Amendment by Pub. L. 94-267 applicable with re- spect to payments made to an employee on or after July 4, 1974, see section l(e) of Pub. L. 94-267, set out as an Effective Date of 1976 Amendment note under section 401 of this title. Page 311 § 404
TITLE 26-INTERNAL REVENUE CODE EFFECTIVE DATE OF 1974 AMENDMENT Amendment of subsecs. (a)(1), (2), (6), and (7) by sec- tions 1013(c) and 1016(a)(3) of Pub. L. 93-406 Epplica- ble, except as otherwise provided in section 1017(c) through (h) of Pub. L. 93-406, for plan years begin- ning after Sept. 2. 1974, but, in the case of plans in ex- istence on Jan. 1, 1974, amendment by sections 1013(c) and 1016(a)(3) of Pub. L. 93-406 applicable for plan years beginning after Dec. 31, 1975, see section 1017 of Pub. L. 93-406, set out as an Effective Date; Transi- tional Rules note under section 410 of this title.. Amendment of subsecs. (a)(2), (3)(A) of this section by section 2004(b), (c)(1) of Pub. L. 93-406 applicable to years beginning after Dz--. 31, 1975, see section 2004(d) of Pub. L. 93-406, set out as an Effective Date; Transition Provisions note under section 415 of this title. Amendment of subsecs. (a)(2) and (a)(9)(B)(ii) of this section by section 2001(g)(2)(E), (F) of Pub. L. 93- 40 applicable to distributions made in taxable years beginning after Dec. ,1, 1975, see section 2001(i)(5) of Pub. L. 93-406, set out as an Effective Date of 1974 Amendment note under section 72 of this title. Section 2007(c) of Pub. L. 93-406 provided that: "The amendments made by this section [amending subsec. (c) of this section] shall apply to taxable years ending on or after June 30, 1972." Section 2001(i)(1) of Pub. L. 93-406 provided that: "The amendments made by subsections (a) [amending subsec. (e)(1) and (e)(2)(A) and adding subsec. (e)(4) of this section] and (b) [amending section 1379(b)(1) (A) and (B) of this title] apply to taxable years beginning after December 31, 1973." Subsec. (g) of this section effective on Sept. 2, 1974, with exceptions specified in section 1381(b), (c) of Title 29, Labor, see section 1381(a) of Title 29. EFFECTIVE DATE OF 1969 AMENDMENT Amendment by Pub. L. 91-172 applicable with re- spect to contributions made and premiums paid after Aug. 1, 1969, see section 321(d) of Pub. L. 91-172, set out as an Effective Date note under section 83 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendment of subsecs. (a) and (e) of this section by section 204(a), (b) of Pub. L. 89-809 applicable with re- spect to taxable years beginning after Dec. 31, 1967, see section 204(d) of Pub. L. 89-809, set out as an Ef- fective Date of 1966 Amendment note under section 401 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Amendment by Pub. L. 87-863 applicable to taxable years beginning after Oct. 23, 1962, see section 2(c) of Pub. L. 87-863, set out as an Effective Date of 1962 Amendments note under section 401 of this title. Amendment by Pub. L. 87-792 applicable to taxable years beginning after Dec. 31, 1962, see section 8 of Pub. L. 87-792, set out as an Effective Date of 1962 Amendments note under section 37 of this title. EFFECTIVE DATE OF 1958 AMENDMENT Amendment of subsec. (a) of this section by Pub. L. 85-866 applicable to taxable years beginning after Dec. 31, 1953, and ending after Au, 16, 1954, see section l(c) of Pub. L. 85-866, set out L; an Effective Date of • 1958 Amendment note under section 165 of this title. YEAR OF DEDUCTION FOR CERTAIN EMPLOYER CONTRIBU- TIONS FOR SEVERANCE PAYMENTS REQUIRED BY FOR- EIGN LAW Section 1022(j) of Pub. L. 93-406 provided that: "Effective for taxable years beginning after Decem- ber 31, 1973, if- "(1) an employer is engaged in a trade or business In a foreign country, "(2) such employer is required by the laws of that country to make payments, based on periods of ser- vice, to its employees or their beneficiaries after the employees' retirement, death, or other separation from the service, and "(3) such employer establishes a trust (whether or- ganized within or outside the United States) for the purpose of funding the payments required by such law, then, in determining for purposes of paragraph (5) of section 404(a) of the Internal Revenue Code of 1954 [subsec. (a) of this section] the taxable year in which any contribution to or under the plan is includible in the gross income of the nonresident alien employees of such employer, such paragraph (5) shall be treated as not requiring that separate accounts be maintained for such nonresident alien employees." CROSS REFERENCES Non-trade or non-business expenses deductible, see section 212 of this title. Ordinary necessary business expenses deductible, see section 162 of this title. Time for filing return, see sections 6072, 6081 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 62, 72, 83, 104, 172, 381, 401 to 403, 405, 406, 407, 413, 414, 542, 556, 679, 1379, 2517, 4941 of this title; title 15 sections 78c, 781, 80a-3; title 19 section 2373; title 29 sections 1103, 1321, 1322. § 405. Qualified bond purchase plans (a) Requirements for qualification A plan of an employer for the purchase for and distribution to his employees or their bene- ficiaries of United States bonds described in subsection (b) shall constitute a qualified bond purchase plan under this section if- (1) the plan meets the requirements of sec- tion 401(a)(3), (4), (5), (6), (7), (8), (16), and (19) and, if applicable, the requirements of section 401(a)(9) and (10) and of section 401(d) (other than paragraphs (1), (5)(B), and (8)); and (2) contributions under the plan are used solely to purchase for employees or their beneficiaries United States bonds described in subsection (b). (b) Bonds to which applicable (1) Characteristics of bonds This section shall apply only to a bond issued under the Second Liberty Bond Act, as amended, which by its terms, or by regula- tions prescribed by the Secretary under such Act- (A) provides for payment of interest, or investment yield, only upon redemption; (B) may be purchased only in the name of an individual; (C) ceases to bear interest, or provide in- vestment yield, not later than 5 years after the death of the individual in whose name it is purchased; (D) may be redeemed before the death of the individual in whose name it is pur- chased only if such individual- (I) has attained the age of 591/2 years, or (ii) has become disabled (within the meaning of section 72(m)(7)); and (E) is nontransferable. (2) Must be purchased in name of employee This section shall apply to a bond described in paragraph (1) only if it is purchased in the name of the employee. § 405 Page 312
TITLE 26-INTERNAL REVENUE CODE (c) Deduction for contributions to bond purchase plans Contributions paid by an employer to or under a qualified bond purchase plan shall be allowed as a deduction in an amount deter- mined under section 404 in the same manner and to the same extent as if such contributions were made to a trust described in section 401(a) which is exempt from tax under section 501(a). (d) Taxability of beneficiary of qualified bond pur- chase plan (1) Gross income not to include bonds at time of distribution For purposes of this chapter, in the case of a distributee of a bond described in subsection (b) under a qualified bond purchase plan, or from a trust described in section 401(a) which is exempt from tax under section 501(a), gross income does not include any amount attribut- able to the receipt of such bond. Upon re- dtr.ption of such bond, the proceeds shall be subject to taxation under this chapter, but the provisions of section 72 (relating to annu- ities, etc.) and section 1232 (relating to bonds and other evidences of indebtedness) shall not apply. (2) Basis The basis of any bond received by a distri- butee under a qualified bond purchase plan- (A) if such bond is distributed to an em- ployee, or with respect to an employee, who at the time of purchase of the bond, was an employee other than an employee within the meaning of section 401(c)(1), shall be the amount of the contributions by the em- ployee which were used to purchase the bond, and (B) if such bond is distributed to an em- ployee, or with respect to an employee, who, at the time of purchase of the bond, was an employee within the meaning of sec- tion 401(c)(1), shall be the amount of the contributions used to purchase the bond which were made on behalf of such employ- ee and were not allowed as a deduction under subsection (c). The basis of any bond described in subsection (b) received by a distributee from a trust de- scribed in section 401(a) which is exempt from tax under section 501(a) shall be deter- mined under regulations prescribed by the Secretary. (e) Capital gains treatment and limitation of tax not to apply to bonds distributed by trusts Subsections (a)(2) and (e) of section 402 shall not apply to any bond described in subsection (b) distributed to any distributee and, for pur- poses of applying such sections, any such bond distributed to any distributee and any such bond to the credit of any employee shall not be taken into account. (f) Employee defined For purposes of this section, the term "em- ployee" includes an individual who is an em- ployee within the meaning of section 401(c)(1), and the employer of such individual shall be the person treated as his employer under sec- tion 401(c)(4). (g) Proof of purchase At the time of purchase of any bond to which this section applies, proof of such purchase shall be furnished in such form as will enable the purchaser, and the employee in whose name such bond is purchased, to comply with the provisions of this section. (h) Regulations The Secretary shall prescribe such regula- tions as may be necessary to carry out the pro- visions of this section. (Added Pub. L. 87-792, § 5(a), Oct. 10, 1962, 76 Stat. 826, and amended Pub. L. 89-97, title I, § 106(d)(5), July 30, 1965, 79 Stat. 337; Pub. L. 91-172, title V, §515(c)(1), Dec. 30, 1969, 83 Stat. 645; Pub. L. 93-406, title II, §§ 2004(c)(2), 2005(c)(11), Sept. 2, 1974, 88 Stat. 986, 992; Pub. L. 94-455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) REFERENCES IN TEXT The Second Liberty Bond Act, as amended, referred to in subsec. (c), is act Sept. 24, 1917, ch. 56, 40 Stat. 288, as amended. For classification of this Act to the Code, see References in Text note set out under sec- tion 774 of Title 31, Money and Finance, and Tables volume. AMENDMENTS 1976-Subsecs (d), (h). Pub. L. 94-455 struck out "or his delegate" following "Secretary". 1974-Subsec. (a)(1). Pub. L. 93-406, § 2004(I), (2), In- serted references to section 401(a)(16) and (19). Subsec. (e). Pub. L. 93-406, § 2005(c)(11), substituted "Subsections (a)(2) and (e) of section 402" for "Section 72(n) and section 402(a)(2)". 1969-Subsec. (e). Pub. L. 91-172 substituted "Cap- ital gains treatment and limitation of tax" for "Cap- ital gains treatment" in subsec. catchline, substituted "Section 72(n) and section 402(a)(2)" for "Section 402(a)(2)" and "sections" for "section". 1965-Subsec. (b)(1)(D)(ii). Pub. L. 89-97 substituted "section 72(m)(7)" for "section 213(g)(3)". EFFECTIVE DATE OF 1974 AMENDMENT Amendment by section 2004(c)(2) of Pub. L. 93-406 applicable to years beginning after Dec. 31, 1975, see section 2004(d) of Pub. L. 93-406, set out as an Effec- tive Date; Transition Provisions note under section 415 of this title. Amendment of subsec. (e) of this section by section 2005(c)(11) of Pub. L. 93-406 applicable only with re- spect to distributions or payments made after Dec, 31, 1973, in taxable years beginning after Dec. 31, 1973 see section 2005(d) of Pub. L. 93-406, set out as an Effec- tive Date of 1974 Amendment note under section 402 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Amendment by Pub. L. 91-172 applicable to taxable years ending after Dec. 31, 1969, see section 515(d) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 402 of this title. EFFECTIVE DATE OF 1965 AMENDMENT Amendment by Pub. L. 89-97 applicable to taxable years beginning after Dec. 31, 1966, see section 106(e) of Pub. L. 89-97, set out as an Effective Date of 1965 Amendment note under section 213 of this title. EFFECTIVE DATE Section applicable to taxable years beginning after Dec. 31, 1962, see section 8 of Pub. L. 87-792, set out as an Effective Date of 1962 Amendment note under sec- tion 37 of this title. Page 313 § 405
TITLE 26-INTERNAL REVENUE CODE SECTION REFEaRRE TO IN OTHER SECTIONS This section is referred to in sections 37, 62, 172, 2M, 220, 406, 407, 412, 414, 415, 1379, 3121, 3306. 3401, 4972, 4975, 6047, 6104, 7476 of this title; title 29 sections 1103, 1132; title 42 section 409. § 406. Certain employees of foreign subsidiaries (a) Treatment as employees of domestic corporation For purposes of applying this part with re- spect to a pension, profit-sharing, or stock bonus plan described in section 401(a), an annu- ity 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 em- ployee of a foreign subsidiary (as defined in sec- tion 3121(l)(8)) of such domestic corporation shall be treated as an employee of such domes- tic corporation, if- (1) such domestic corporation has entered into an agreement under section 3121() which applies to the foreign subsidiary of which such individual is an employee; (2) the plan of such domestic corporation expressly provides for contributions or bene- fits for individuals who are citizens of the United States and who are employees of its foreign subsidiaries to which an agreement entered into by such domestic corporation under section 3121(t) applies; and (3) contributions under a funded plan of de- ferred compensation (whether or not a plan described in section 401(a), 403(a), or 405(a)) are not provided by any other person with re- spect to the remuneration paid to such indi- vidual by the foreign subsidiary. (b) Special rules for application of section 401(a) (1) Nondiscrimination requirements For purposes of applying section 401(a)(4) and section 410(b) (without regard to para- graph (1)(A) thereof) with respect to an indi- vidual who is treated as an employee of a do- mestic corporation under subsection (a)- (A) if such individual is an officer, share- holder, or person whose principal duties consist in supervising the work of other em- ployees of a foreign subsidiary of such do- mestic corporation, he shall be treated as having such capacity with respect to such domestic corporation; and (B) the determination of whether such in- dividual is a highly compensated employee shall be made by treating such individual's total compensation (determined with the application of paragraph (2) of this subsec- tion) as compensation paid by such domes- tic corporation and by determining such in- dividual's status with regard to such domes- tic corporation. (2) Determination of compensation For purposes 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 indi- vidual shall be the remuneration paid to such individual by the foreign subsidiary which would constitute his total compensa- tion if his services had been performed for such domestic corporation, and the basic or regular rate of compensation of such indi- vidual shall be determined under regula- tions prescribed by the Secretary; and (B) such individual shall be treated as having paid the amount paid by such do- mestic corporation which is equivalent to the tax imposed by section 3101, (c) Termination of status as deemed employee not to be treated as separation from service for pur- poses of capital gain provisions and limitation of tax For purposes of applying subsections (a)(2) and (e) of section 402, and section 403(a)(2) with respect to an individual who is treated as an employee of a domestic corporation under subsection (a), such individual shall not be con- sidered as separated from the service of such domestic corporation solely by reason of the fact that- (1) the agreement entered into by such do- mestic corporation under section 3121(l) which covers the employment of such individ- ual is terminated under the provisions of such section, (2) such individual becomes an employee of a foreign subsidiary with respect to which such agreement does not apply, (3) 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 an- other corporation controlled by such domes- tic corporation, or (4) the provision of the plan described in subsection (a)(2) is terminated. (d) Deductibility of contributions For purposes of applying sections 404 and 405(c) with respect to contributions made to or under a pension, profit-sharing, stock bonus, annuity, or bond purchase plan by a domestic corporation, or by another corporation which is entitled to deduct its contributions under sec- tion 404(a)(3)(B), on behalf 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 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 foreign subsidiary of which such individ- ual 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 corporation if he were an employee of the domestic corporation, and (3) any reference to compensation shall be considered to be a reference to the total com- pensation 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 with or within which the taxable year of such domestic corporation ends. (e) Treatment as employee under related 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 do- mestic corporation, with respect to the plan de- scribed in subsection (a)(2), for purposes of ap- plying the following provisions of this title: § 406 Page 314
TITLE 26-INTERNAL REVENUE CODE (1) Section 72(d) (relating to employees' an- nuities). (2) Section 72(f) (relating to special rules for computing employees' contributions). (3) Section 101(b) (relating to employees' death benefits). (4) Section 2039 (relating to annuities). (5) Section 2517 (relating to certain annu- ities under qualified plans). (Added Pub. L. 88-272, title II, § 220(a), Feb. 26, 1964, 78 Stat. 58, and amended Pub. L. 91-172, tltle V, § 515(c)(2), Dec. 30, 1069, 83 Stat. 645; Pub. L. 93-406, title II, §§ 1016(a)(4), 2005(c)(12), Sept. 2, 1974, 88 Stat. 929, 992; Pub. L. 94-455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (b)(2)(A). Pub. L. 94-455 struck out "or his delegate" following "Secretary". 1974-Subsec. (b)(1). Pub. L. 93-406, § 1016(a)(4), substituted "section 401(a)(4) and section 410(b) (with- out regard to paragraph (1)(A) thereof)" for "para- graphs (3)(B) and (4) of section 401(a)". Subsec. (c). Pub. L. 93-406. § 2005(c)(12), substituted "subsections (a)(2) and (e) of section 402" for "section 72(n), section 402(a)(2)". 1969-Subsec. (c). Pub. L. 91-172 substituted "provi- sions and limitation of tax" for "provisions" in subsec. catchline, substituted "section 72(n), section 402(a)(2)," for "section 402(a)(2)". EFFECTIVE DATE OF 1974 AMENDMENT Amendment by section 1016(a)(4) of Pub. L. 93-406 applicable, except as otherwise provided in section 1017(c) through (h) of Pub. L. 93-406, for plan years beginning after Sept. 2, 1974, but, In the case of plans in existence on Jan. 1, 1974, amendment by Pub. L. 93- 406 applicable for plan years beginning after Dec. 31, 1975, see section 1017 of Pub. L. 93-406, set out as an Effective Date: Transition of Rules note under section 410 of this title. Amendment of subsec. (c) of this section by section 2005(c)(12) of Pub. L. 93-406 applicable only with re- spect to distributions or payments made after Dec. 31, 1973, in taxable years beginning after Dec. 31, 1973, see section 2005(d) of Pub. L. 93-406, set out as an Ef- fective Date of 1974 Amendments note under section 402 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Amendment by Pub. L. 91-172 applicable to taxable years ending after Dec. 31, 1969, see section 515(d) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendments note under section 402 of this title. EFFECTIVE DATE Section 220(d) of Pub. L. 88-272 provided that: "The amendments made by subsections (a) [adding this sec- tion), (b) [adding section 407 of this title], and (c)(1) [to the analysis preceding section 401 of this title] shall apply to taxable years ending after December 31, 1963. The amendments made by subsections (c)(2) [to section 3121(a)(5) of this title] and (3) [to section 409(e) of Title 42, Public Health and Welfare] shall apply to remuneration paid after December 31, 1962." § 407. Certain employees of domestic subsidiaries en- gaged in business outside the United States (a) Treatment as employees of domestic parent corpo- ration (1) In general For purposes of applying this part with re- spect to a pension, profit-sharing, or stock bonus plan described in section 401(a), an an- nuity 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)) )f such domestic parent corporaiton shall be treated as an employee of such domestic parent corporation, if- (A) the plan of such domestic parent cor- poration expressly provides for contribu- tions 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 sub- sidiary. (2) Definitions For purposes of this section- (A) Domestic subsidiary A corporation shall be treated as a domes- tic subsidiary for any taxable year only if- (I) such corporation is a domestic corpo- ration 80 percent or more of the outstand- ing voting stock of which is owned by an- other domestic corporation; (ii) 95 percent or more of its gross income for the three-year period immedi- ately 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 satis- fied if it is reasonable to anticipate that, with respect to the first taxable year there- after 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 corpora- tion 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 applying section 401(a)(4) and section 410(b) (without regard to para- graph (1)(A) thereof) with respect to an indi- vidual who is treated as an employee of a do- mestic parent corporation under subsection (a)- (A) if such individual is an officer, share- holder, or person whose principal duties consist in supervising the work of other em- ployees of a domestic subsidiary, he shall be Page 315 §4,07
TITLE 26-INTERNAL REVENUE CODE treated as having such capacity with re- spect to such domestic parent corporation; and (B) the determination of whether such in- dividual is a highly compensated employee shall be made by treating such individual's total compensation (determined with the application of paragraph (2) of this subsec- tion) as compensation paid by such domes- tic parent corporation and by determining such individual's status with regard to such domestic parent corporation. (2) Determination of compensation For purposes 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 consti- tute his total compensation if his services had been performed for such domestic parent cor- poration, and the basic or regular rate of com- pensation of such individual shall be deter- mined under regulations prescribed by the Secretary. (c) Termination of status as deemed employee not to be treated as separation from service for pur- poses of capital gain provisions and limitations of tax For purposes of applying subsections (a)(2) and (e) of section 402, and section 403(a)(2) with respect to an individual who is treated as an employee of a domestic parent corporation under subsection (a), such 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), (2) such individual ceases to be an employee of a domestic subsidiary of such domestic parent corporation, if he becomes an employ- ee 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 contributions For purposes of applying sections 404 and 405(c) with respect to contributions made to or under a pension, profit-sharing, stock bonus, annuity, or bond purchase plan by a domestic parent corporation, or by another 7orporation which is entitled to deduct its contributions under section 404(a)(3)(B), on behalf of an indi- vidual 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 corpora- tion which is entitled to deduct its contribu- tions under such sections, (2) there shall be allowed as a deduction to the domestic subsidiary of which such indi- vidual 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 reference to the total com- pensation of such individual (determined with the application of subsection (b)(2)). Any amount deductible by a domestic subsid- iary under this subsection shall be deductible for its taxable year with or within which the taxable year of such domestic parent corpora- tion ends. (e) Treatment as employee under related provisions An individual who is treated as an employee of a domestic parent corporation under subsec- tion (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 provi- sions of this title: (1) Section 72(d) (relating to employees' an- nuities). (2) Section 72(f) (relating to special rules for computing employees' contributions). (3) Section 101(b) (relating to employees' death benefits). (4) Section 2039 (relating to annuities). (5) Section 2517 (relating to certain annu- ities under qualified plans). (Added Pub. L. 88-272, title II, § 220(b), Feb. 26, 1964, 78 Stat. 60, and amended Pub. L. 91-172, title V, § 515(c)(3), Dec. 30, 1969, 83 Stat. 646; Pub. L. 93-406, title II, §§ 1016(a)(5), 2005(c)(13), Sept. 2, 1974, 88 Stat. 929, 992; Pub. L. 94-455, title XlX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (b)(2). Pub. L. 94-455 struck out "or his delegate" following "Secretary". 1974-Subsec. (b)(1). Pub. L. 93-406, § 1016(a)(5), substituted "section 401(a)(4) and section 410(b) (with- out regard to paragraph (1)(A) thereof)" for "para- graphs (3)(B) and (4) of section 401(a)". Subsec. (c). Pub. L. 93-406, § 2005(c)(13), substituted "subsections (a)(2) and (e) of section 402" for "section 72(n), section 402(a)(2)". 1969-Subsec. Cc). Pub. L. 91-172 substituted "provi- sions and limitation of tax" for "provisions" in subsec. catchline, substituted "section 72(n), section 402(a)(2)," for "section 402(a)(2)". EFFECTIVE DATE OF 1974 AMENDMENT Amendment of subsec. (b)(1) of this section by Pub. L. 93-406 applicable, except as otherwise provided in section 1017(c) through (h) of Pub. L. 93-406, for plan years beginning after Sept. 2, 1974, but, in the case of plans in existence on Jan. 1, 1974, amendment by Pub. L. 93-406 applicable for plan years beginning after Dec. 31, 1975, see section 1017 of Pub. L. 93-406, set out as an Effective Date; Transitional Rules note under section 410 of this title. Amendment of subsec. (c) of this section by Pub. L. 93-406 applicable only with respect to distributions or payments made after Dec. 31, 1973, in taxable years beginning after Dec. 31, 1973, see section 2005(d) of Pub. L. 93-406, set out as an Effective Date of 1974 Amendment note under section 402 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Amendment by Pub. L. 91-172 applicable to taxable years ending after Dec. 31, 1969, see section 515(d) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 402 of this title. Page 316
TITLE 26-INTERNAL REVENUE CODE EFFECTIVE DATE Section applicable to taxable years ending after Dec. 31, 1963, see section 220(d) of Pub. L. 88-272, set out as an Effective Date note under section 406 of this title. § 408. Individual retirement accounts (a) Individual retirement account For purposes of this section, the term "indi- vidual retirement account" means a trust cre- ated or organized in the United States for the exclusive benefit of an individual or his benefi- ciaries, but only if the written governing instru- ment creating the trust meets the following re- quirements: (1) Except in the case of a rollover contribu- tion described in subsection (d)(3) in section 402(a)(5), 403(a)(4), or 409(b)(3)(C), no contri- bution will be accepted unless it is in cash, and contributions will not be accepted for the taxable year in excess of $1,500 on behalf of any individual. (2) The trustee is a bank (as defined in sec- tion 401(d)(1)) or such other person who dem- onstrates to the satisfaction of the Secretary that the manner in which such other person will administer the trust will be consistent with the requirements of this section. (3) No part of the trust funds will be invest- ed in life insurance contracts. (4) The interest of an individual in the bal- ance in his account is nonforfeitable. (5) The assets of the trust will not be com- mingled with other property except in a common trust fund or common investment fund. (6) The entire interest of an individual for whose benefit the trust is maintained will be distributed to him not later than the close of his taxable year in which he attains age 70V2, or will be distributed, commencing before the close of such taxable year, in accordance with regulations prescribed by the Secretary, over- (A) the life of such individual or the lives of such individual and his spouse, or (B) a period not extending beyond the life expectancy of such individual or the life ex- pectancy of such individual and his spouse. (7) If an individual for whose benefit the trust is maintained dies before his entire in- terest has been distributed to him, or if distri- bution has been commenced as provided in paragraph (6) to his surviving spouse and such surviving spouse dies before the entire interest has been distributed to such spouse, the entire interest (or the remaining part of such interest if distribution thereof has com- menced) will, within 5 years after his death (or the death of the surviving spouse), be dis- tributed, or applied to the purchase of an im- mediate annuity for his beneficiary or benefi- ciaries (or the beneficiary or beneficiaries of his surviving spouse) which will be payable for the life of such beneficiary or beneficia- ries (or for a term certain not extending beyond the life expectancy of such beneficia- ry or beneficiaries) and which annuity will be immediately distributed to such beneficiary or beneficiaries. The preceding sentence does not apply if distributions over a term certain commenced before the death of the individ- ual for whose benefit the trust was main- tained and the term certain is for a period permitted under paragraph (6). (b) Individual retirement annuity For purposes of this section, the term "indi- vidual retirement annuity" means an annuity contract, or an endowment contract (as deter- mined under regulations prescribed by the Sec- retary), issued by an insurance company which meets the following requirements: (1) The contract is not transferable by the owner. (2) The annual premium under the contract will not exceed $1,500 and any refund of pre- miums will be applied before the close of the calendar year following the year of the refund toward the payment of future premi- ums or the purchase of additional benefits. (3) The entire interest of the owner will be distributed to him not later than the close of his taxable year in which he attains age 70 2, or will be distributed, in accordance with reg- ulations prescribed by the Secretary, over- (A) the life of such owner or the lives of such owner and his spouse, or (B) a period not extending beyond the life expectancy of such owner or the life expec- tancy of such owner and his spouse. (4) If the owner dies before his entire inter- est has been distributed to him, or if distribu- tion has been commenced as provided in para- graph (3) to his surviving spouse and such surviving spouse dies before the entire inter- est has been distributed to such spouse, the entire interest (or the remaining part of such interest if distribution thereof has com- menced) will, within 5 years after his death (or the death of the surviving spouse), be dis- tributed, or applied to the purchase of an im- mediate annuity for his beneficiary or benefi- ciaries (or the beneficiary or beneficiaries of his surviving spouse) which will be payable for the life of such beneficiary or beneficia- ries (or for a term certain not extending beyond the life expectancy of such beneficia- ry or beneficiaries) and which annuity will be immediately distributed to such beneficiary or beneficiaries. The preceding sentence shall have no application if distributions over a term certain commenced before the death of the owner and the term certain is for a period permitted under paragraph (3). (5) The entire interest of the owner is non- forfeitable. Such term does not include such an annuity contract for any taxable year of the owner in which it is disqualified on the application of subsection (e) or for any subsequent taxable year. For purposes of this subsection, no con- tract shall be treated as an endowment contract if it matures later than the taxable year in which the individual in whose name such con- tract is purchased attains age 70/2; if it is not for the exclusive benefit of the individual in whose name it is purchased or his beneficiaries; or if the aggregate annual premiums under all such contracts purchased in the name of such individual for any taxable year exceed $1,500. Page 317/ § 408
TITLE 26-INTERNAL REVENUE CODE () Accounts established by employers and certain as- sociations of employees A trust created or organized in the United States by an employer for the exclusive benefit of his employees or their beneficiaries, or by an association of employees (which may include employees within the meaning of section 401(c)(1)) for the exclusive benefit of its mem- bers or their beneficiaries, shall be treated as an individual retirement account (described in subsection (a)), but only if the written govern- ing instrument creating the trust meets the fol- lowing requirements: (1) The trust satisfies the requirements of paragraphs (1) through (7) of subsection (a). (2) There is a separate accounting for the interest of each employee or member (or spouse of an employee or member). The assets of the trust may be held in a common fund for the account of all individuals who have an interest in the trust. (d) Tax treatment of distributions (1) In general Except as otherwise provided in this subsec- tion, any amount paid or distributed out of an individual retirement account or under an in- dividual retirement annuity shall be included in gross income by the payee or distributee, as the case may be, for the taxable year in which the payment or distribution is received. Notwithstanding any other provision of this title (including chapters 11 and 12), the basis I any person in such an account or annuity is zero. (2) Distributions of annuity contracts Paragraph (1) does not apply to any annu- ity contract which meets the requirements of paragraphs (1), (3), (4), and (5) of subsection (b) and which is distributed from an individ- ual retirement account. Section 72 applies to any such annuity contract, and for purposes of section 72 the investment in such contract is zero. (3) Rollover contribution An amount is described in this paragraph as a rollover contribution if it meets the require- ments of subparagraphs (A) and (B). (A) In general Paragraph (1) does not apply to any amount paid or distributed out of an indi- vidual retirement account or individual re- tirement annuity to the individual for whose benefit the account or annuity is maintained if- (i) the entire amount received (includ- ing money and any other property) is paid into an individual retirement account or individual retirement annuity (other than an endowment contract) or retirement bond for the benefit of such individual not later than the 60th day after the day on which he receives the payment or dis- tribution; or (ii) the entire amount received (includ- ing money and any other property) repre- sents the entire amount in the account or the entire value of the annuity and no 'So in original. The word "of" probably should appear here. amount in the account and no part of the value of the annuity is attributable to any source other than a rollover contribution from an employees' trust described in sec- tion 401(a) which is exempt from tax under section 501(a) (other than a trust forming part of a plan under which the individual was an employee within the meaning of section 401(c)(1) at the time contributions were made on his behalf under the plan), or an annuity plan de- scribed in section 403(a) (other than a plan under which the individual was an employee within the meaning of section 401(c)(1) at the time contributions were made on his behalf under the plan) and any earnings on such sums and the entire amount thereof is paid into another such trust (for the benefit of such individual) or annuity plan not later than the 60th day on which he receives the payment or distribution. (B) Limitation This paragraph does not apply to any amount described in subparagraph (A)(i) re- ceived by an individual from an individual retirement account or individual retirement annuity if at any time during the 3-year period ending on the day of such receipt such individual received any other amount described in that subparagraph from an in- dividual retirement account, individual re- tirement annuity, or a retirement bond which was not includible in his gross income because of the application of this para- graph. (4) Excess contributions returned before due date of return Paragraph (1) does not apply to the distri- bution of any contribution paid during a tax- able year to an individual retirement account or for an individual retirement annuity to the extent that such contribution exceeds the amount allowable as a deduction under sec- tion 219 or 220 if- (A) such distribution is received on or before the day prescribed by law (including extensions of time) for filing such individ- ual's return for such taxable year, (B) no deduction is allowed under section 219 or 220 with respect to such excess con- tribution, and (C) such distribution is accompanied by the amount of net income attributable to such excess contribution, In the case of such a distribution, for pur- poses of section 61, any net income described in subparagraph (C) shall be deemed to have beer earned and receivable in the taxable year in which such excess contribution is made. (5) Transfer of account incident to divorce The transfer of an individual's interest in an individual retirement account, individual retirement annuty, or retirement bond to his former spouse under a divorce decree or under a written instrument incident to such divorce is not to be considered a taxable transfer made by such individual notwith- standing any other provision of this subtitle, and such interest at the time of the transfer § 408 Page 318
TITLE 26-INTERNAL REVENUE CODE is to be treated as an individual retirement ac- count of such spouse, and not of such individ- ual. Thereafter such account, annuity, or bond for purposes of this subtitle is to be treated as maintained for the benefit of such spouse. (e) Tax treatment of accounts and annuities (1) Exemption from tax Any individual retirement account is exempt from taxation under this subtitle unless such account has ceased to be an indi- vidual retirement account by reason of para- graph (2) or (3). Notwithstanding the preced- ing sentence, any such account is subject to the taxes imposed by section 511 (relating to imposition of tax on unrelated business income of charitable, etc. organizations). (2) Lois of exemption of account where employee engages in prohibited transaction (A) In general If, during any taxable year of the individ- ual for whose benefit any individual retire- ment account is established, that individual or his beneficiary engages in any transac- tion prohibited by section 4975 with respect to such account, such account ceases to be an individual retirement account as of the first day of such taxable year. For purposes of this paragraph- (i) the individual for whose benefit any account was established is treated as the creator of such account, and (ii) the separate account for any individ- ual within an individual retirement ac- count maintained by an employer or asso- ciation of employees is treated as a sepa- rate individual retirement account. (B) Account treated as distributing all its assets In any case in which any account ceases to be an individual retirement account by reason of subparagraph (A) as of the first day of any taxable year, paragraph (1) of subsection (d) applies as if there were a dis- tribution on such first day in an amount equal to the fair market value (on such first day) of all assets in the account (on such first day). (3) Effect of borrowing on annuity contract If during any taxable year the owner of an individual retirement annuity borrows any money under or by use of such contract, the contract ceases to be an individual retirement annuity as of the first day of such taxable year. Such owner shall include in gross income for such year an amount equal to the fair market value of such contract as of such first day. (4) Effect of pledging account as security If, during any taxable year of the individual for whose benefit an individual retirement ac- count is established, that individual uses the account or any portion thereof as security for a loan, the portion so used is treated as dis- tributed to that individual, (5) Purchase of endowment contract by individual retirement account If the assets of an individual retirement ac- count or any part of such assets are used to purchase an endowment contract for the benefit of the individual for whose benefit the account is established- (A) to the extent that the amount of the assets involved in the purchase are not at- tributable to the purchase of lif.a insurance, the purchase is treated as a rollover contri- bution described in subsection (d)(3), and (B) to the extent that the amount of the assets involved in the purchase are attribut- able to the purchase of life, health, acci- dent, or other insurance, such amounts are treated as distributed to that individual (but the provisions of subsection (f) do not apply). (6) Commingling individual retirement account amounts in certain common trust funds and common investment funds Any common trust fund or common invest- ment fund of individual retirement account assets which is exempt from taxation under this subtitle does not cease to be exempt on account of the participation or inclusion of assets of a trust exempt from taxation under section 501(a) which is described in section 401(a). (f) Additional tax on certain amounts included in gross income before age 59Y2 (1) Early distribution from an individual retire- ment account, etc. If a distribution from an individual retire- ment account or under an individual retire- ment annuity to the individual for whose benefits such account or annuity was estab- lished is made before such individual attains age 59V2, his tax under this chapter for the taxable year in which such distribution is re- ceived shall be increased by an amount equal to 10 percent of the amount of the distribu- tion which is includible in his gross income for such taxable year. (2) Disqualification cases If an amount is includible in gross income for a taxable year under subsection (e) and the taxpayer has not attained age 591 before the beginning of such taxable year, his tax under this chapter for such taxable year shall be increased by an amount equal to 10 per- cent of such amount so required to be includ- ed in his gross income. (3) Disability cases Paragraphs (1) and (2) do not apply if the amount paid or distributed, or the disqualifi- cation of the account or annuity under sub- section (e), is attributable to the taxpayer be- coming disabled within the meaning of sec- tion 72(m)(7). (g) Community property laws This section shall be applied without regard to any community property laws. (h) Custodial accounts For purposes of this section, a custodial ac- count shall be treated as a trust if the assets of such account are held by a bank (as defined in section 401(d)(1)) or another person who dem- onstrates, to the satisfaction of the Secretary, that the manner in which he will administer the account will be consistent with the require- ments of this section, and if the custodial ac- count would, except for the fact that it is not a trust, constitute an individual retirement ac- Page 319
TITLE 26-INTERNAL REVENUE CODE count described in subsection (a). For purposes of this title, in the case of a custodial account treated as a trust by reason of the preceding sentence, the custodian of such account shall be treated as the trustee thereof. (I) Reports The trustee of an individual retirement ac- count and the issuer of an endowment contract described in subsection (b) or an individual re- tirement annuity shall make such reports re- garding such account, contract, or annuity to the Secretary and to the individuals for whom the account, contract, or annuity is, or is to be, maintained with respect to contributions, distri- butions, and such other matters as the Secre- tary may require under regulations. The re- ports required by this subsection shall be filed at such time and in such manner and furnished to such individuals at such time and in such manner as may be required by those regula- tions. (j) Cross references (1) For tax on excess contributions in individual retire. ment accounts or annuities, see section 4963. (2) For tax on certain accumulations in individual re- tirement accounts or annuities, see section 4974. (Added Pub. L. 93-406, title II, § 2002(b), Sept. 2, 1974, 88 Stat. 959, and amended Pub. L. 94- 455, title XV, § 1501(b)(2), (5), (10), title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1735- 1737, 1834.) AMENDMENTS 1976-Subsecs. (a)(2), (6), (b). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c)(2). Pub. L. 94-455, § 1501(b)(2), substitut- ed "member (or spouse of an employee or member)" for "member". Subsec. (d)(1). Pub. L. 94-455. § 1501(b)(10), substi- tuted "Notwithstanding any other provision of this title (including chapters 11 and 12), the basis" for "The basis". Subsec. (d)(4). Pub. L. 94-455, § 1501(b)(5), added ref- erence to section 220 and substituted "In the case of such a distribution, for purposes of section 61, any net income described in subparagraph (C) shall be deemed to have been earned and receivable in the taxable year in which such excess contribution is made" for "Any net income described in subparagraph (C) shall be in- cluded in the grons income of the individual for the taxable year in which received". Subsecs. (h), (I). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". EFFECTIVE DATE OF 1976 AMENDMEFr Amendment of subsecs. (c), (d) by section 1501(b)(2), (5), (10) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1501(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 420 of this title. EFFECTIVE DATE Section applicable to taxable years beginning after Dec. 31, 1974, see section 2002(i)(1) of Pub. L. 93-406, set out as an Effective Date note under section 219 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 37, 46, 50A, 56, 72, 219, 220, 402, 403, 409, 415, 805, 901, 2039, 2517, 4973, 4974, 4975, 6047, 6058, 6104, 6693 of this title; title 12 section 1464; title 29 sections 1051, 1081, 1103, 1107. 1108. § 409. Retirement bonds (a) Retirement bond For purposes of this section and section 219(a), the term "retirement bond" means a bond issued under the Second Liberty Bond Act, as amended, which by its terms, or by regu- lations prescribed by the Secretary under such Act- (1) provides for payment of interest, or in- vestment yield, only on redemption; (2) provides that no interest, or investment yield, is payable if the bond is redeemed within 12 months after the date of its issu- ance; (3) provides that it ceases to bear interest, or provide investment yield on the earlier of- (A) the date on which the individual in whose name it is purchased (hereinafter in this section referred to as the "registered owner") attains age 70 ; or (B) 5 years after the date on which the registered owner dies, but not later than the date on which he would have attained the age 70/2 had he lived; (4) provides that, except in the case of a rol- lover contribution described in subsection (b)(3)(C) or in section 402(a)(5), 403(a)(4), or 408(d)(3) the registered owner may not con- tribute for the purchase of such bonds in excess of $1,500 for any taxable year; and (5) is not transferable. (b) Income tax treatment of bonds (1) In general Except as otherwise provided in this subsec- tion, on the redemption of a retirement bond the entire proceeds shall be included in the gross income of the taxpayer entitled to the proceeds on redemption. If the registered owner has not tendered it for redemption before the close of the taxable year in which he attains age 70 , such individual shall in- clude in his gross income for such taxable year the amount of proceeds he would have received if the bond had been redeemed at age 70%2. The provisions of section 72 (relat- ing to annuities) and section 1232 (relating to bonds and other evidences of indebtedness) shall not apply to a retirement bond. (2) Basis The basis of a retirement bond is zero. (3) Exceptions (A) Redemption within 12 months If a retirement bond is redeemed within 12 months after the date of its issuance, the proceeds are excluded from gross income if no deduction is allowed under section 219 on account of the purchase of such bond. (B) Redemption after age 70 If a retirement bond is redeemed after the close of the taxable year in which the regis- tered owner attains age 701/, the proceeds from the redemption of the bond are ex- cluded from the gross income of the regis- tered owner to the extent that such pro. ceeds were includible in his gross income for such taxable year. § 409 Page 320
TITLE 26-INTERNAL REVENUE CODE (C) Rollover into an individual retirement ac- count or annuity or a qualified plan If a retirement bond is redeemed at any time before the close of the taxable year in which the registered owner attains age 701/2, and the registered owner transfers the entire amount of the proceeds from the re- demption of the bond to an individual re- tirement account described in section 408(a) or to an individual retirement annuity de- scribed in section 408(b) (other than an en- dowment contract) which is maintained for the benefit of the registered owner of the bond, or to an employees' trust described in section 401(a) which is exempt from tax under section 501(a), or an annuity plan de- scribed in section 403(a) for the benefit of the registered owner, on or before the 60th day after the day on which he received the proceeds of such redemption, then the pro- ceeds shall be excluded from gross income and the transfer shall be treated as a rol- lover contribution described in section 408(d)(3). This subparagraph does not apply in the case of a transfer to such an employ- ees' trust or such an annuity plan unless no part of the value of such proceeds is attrib- utable to any source other than a rollover contribution from such an employees' trust or annuity plan (other than an annuity plan or a trust forming part of a plan under which the individual was an employee within the meaning of section 401(c)(1) at the time contributions were made on his behalf under the plan). (c) Additional tax on certain redemptions before age 59V (1) Early redemption of bond If a retirement bond is redeemed by the registered owner before he attains age 591/2, his tax under this chapter for the taxable year in which the bond is redeemed shall be increased by an amount equal to 10 percent of the amount of the amount of the proceeds of the redemption includible in his gross income for the taxable year. (2) Disability cases Paragraph (1) does not apply for any tax- able year during which the retirement bond is redeemed if, for that taxable year, the regis- tered owner is disabled within the meaning of section 72(m)(7). (3) Redemption within one year Paragraph (1) does not apply if the regis- tered owner tenders the bond for redemption within 12 months after the date of its issu- ance. (Added Pub. L. 93-406, title II, § 2002(c), Sept. 2, 1974, 88 Stat. 964, and amended Pub. L. 94-455, title XV, § 1501(b)(6), title XIX, §§ 1901(a)(60), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1736, 1774, 1834.) REFERENCES IN TEXT The Second Liberty Bond Act, as amended, referred to in subsec. (a), is act Sept. 24, 1917, ch. 56, 40 Stat. 288, as amended. For classification of this Act to the Code, see References in Text note set out under sec- tion 774 of Title 31, Money and Finance, and Tables volume. AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, §§ 1501(b)(6), 1906(b)(13)(A), struck out "or his delegate" following "Secretary" in the provisions preceding par. (1) and substituted "for any taxable year" for "in any taxable year" in par. (4), respectively. Subsec. (b)(3)(C). Pub. L. 94-455, § 1901(a)(60), sub. stituted "section 408(d)(3)" for "section 403(d)(3)". EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (a) by section 1501(b)(6) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1501(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 220 of this title. Amendment of subsec. (b) by section 1901(a)(60) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE Section applicable to taxable years beginning after Dec. 31, 1974, see section 2002()(1) of Pub. L. 93-406, set out as an Effective Date note under section 219 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 37, 219, 220, 402, 403, 408, 415, 2039. 2517, 4973. 4975 of this title; title 29 sections 1051, 1081. 1108. SUBPART B--SPECIAL RULES Sec. 410. Minimum participation standards. 411. Minimum vesting standards. 412. Minimum funding standards. 413. Collectively bargained plans. I 414. Definitions and special rules. 415. Limitations on benefits and contribution under qualified plans. AMENDMENTS 1974-Pub. L. 93-406, title II, § 1011, Sept. 2, 1974, 88 Stat. 898, added subpart heading and analysis of sec- tions. § 410. Minimum participation standards (a) Participation (1) Minimum age and service conditions (A) General rule A trust shall not constitute a qualified trust under section 401(a) if the plan of which it is a part requires, as a condition of participation in the plan, that an employee complete a period of service with the em- ployer or employers maintaining the plan extending beyond the later of the following dates- (I) the date on which the employee at- tains the age of 25; or (ii) the date on which he completes 1 year of service. (B) Special rules for certain plans (I) In the case of any plan which pro- vides that after not more than 3 years of service each participant has a right to 100 percent of his accrued benefit under the plan which is nonforfeitable (within the meaning of section 411) at the time such benefit accrues, clause (ii) of subpara- graph (A) shall be applied by substituting "3 years of service" for "1 year of service". ISo in original. Does not conform to section catch- line. Page 321 § 410
TITLE 26-INTERNAL REVENUE CODE (ii) In the case of any plan maintained exclusively for employees of an education- al institution (as defined in section 170(b)(1)(A)(ii) by an employer which is exempt from tax under section 501(a) which provides that each participant having at least 1 year of service has a right to 100 percent of his accrued benefit under the plan which is nonforfeitable (within the meaning of section 411) at the time such benefit accrues, clause (1) of subparagraph (A) shall be applied by sub- stituting "30" for "25". This clause shall not apply to any plan to which clause (i) applies. (2) Maximum age conditions A trust shall not constitute a qualified trust under section 401(a) if the plan of which it is a part excludes from participation (on the basis of age) employees who have attained a specified age, unless- (A) the plan is a- (i) defined benefit plan, or (ii) target benefit plan (as defined under regulations prescribed by the Secretary), and (B) such employees begin employment with the employer after they have attained a specified age which is not more than 5 years before the normal retirement age under the plan. (3) Definition of year of service (A) General rule For purposes of this subsection, the term "year of service" means a 12-month period during which the employee has not less than 1,000 hours of service. For purposes of this paragraph, computation of any 12- month period shall be made with reference to the date on which the employee's em- ployment commenced, except that, under regulations prescribed by the Secretary of Labor, such computation may be made by reference to the first day of a plan year in the case of an employee who does not com- plete 1,000 hours of service during the 12- month period beginning on the date his em- ployment commenced. (B) Seasonal industries In the case of any seasonal Industry where the customary period of employment is less than 1,000 hours during a calendar year, the term "year of service" shall be such period as may be determined under regulations prescribed by the Secretary of Labor. (C) Hours of service For purposes of this subsection, the term "hour of service" means a time of service determined under regulations prescribed by the Secretary of Labor. (D) Maritime industries For purposes of this subsection, in the case of any maritime industry, 125 days of service shall be treated as 1,000 hours of service. The Secretary of Labor may pre- scribe regulations to carry out this subpara- graph. (4) Time of participation A plan shall be treated as not meeting the requirements of paragraph (1) unless it pro- vides that any employee who has satisfied the minimum age and service requirements speci- fied in such paragraph, and who is otherwise entitled to participate in the plan, commences participation in the plan no later than the earlier of-- (A) the first day of the first plan year be- ginning after the date on which such em- ployee satisfied such requirements, or (B) the date 6 months after the date on which he satisfied such requirements, unless such employee was separated from the service before the date referred to in subpara- graph (A) or (B), whichever is applicable. (5) Breaks in service (A) General rule Except as otherwise provided in subpara- graphs (B), (C), and (D), all years of service with the employer or employers maintain- ing the plan shall be taken into account in computing the period of service for pur- poses of paragraph (1). (B) Employees under 3-year 100 percent %esting In the case of any employee who has any 1-year break in service (as defined in section 411(a)(6)(A)) under a plan to which the ser- vice requirements of clause (i) of paragraph (1)(B) apply, if such employee has not satis- fied such requirements, service before such break shall not be required to be taken into account. (C) 1-year break in service In computing an employee's period of ser- vice for purposes of paragraph (1) in the case of any participant who has any 1-year break in service (as defined in section 411(a)(6)(A)), service before such break shall not be required to be taken into ac- count under the plan until he has complet- ed a year of service (as defined in paragraph (3)) after his return. (D) Nonvested participants In the case of a participant who does not have any nonforfeitable right to an accrued benefit derived from employer contribu- tions, years of service with the employer or employers maintaining the plan before a break in service shall not be required to be taken into account in computing the period of service for purposes of paragraph (1) if the number of consecutive 1-year breaks in service equals or exceeds the aggregate number of such years of service before such break. Such aggregate number of years of service before such break shall be deemed not to include any years of service not re- quired to be taken into account under this subparagraph by reason of any prior break In serice. (b) Eligibility (1) In general A trust shall not constitute a qualified trust under section 401(a) unless the trust, or two or more trusts, or the trust or trusts and an- nuity plan or plans are designated by the em- ployer as constituting parts of a plan intend- Page 322 §410
TITLE 26-INTERNAL REVENUE CODE ed to qualify under section 401(a) which bene- fits either- (A) 70 percent or more of all employees, or 80 percent or more of all the employees who are eligible to benefit under the plan if 70 percent or more of all the employees are eligible to benefit under the plan, excluding in each case employees who have not satis- fied the minimum age and service require- ments, if any, prescribed by the plan as a condition of participation, or (B) such employees as qualify under a classification set up by the employer and found by the Secretary not to be discrimi- natory in favor of employees who are offi- cers, shareholders, or highly compensated. (2) Exclusion of certain employees For purposes of paragraph (1), there shall be excluded from consideration- (A) employees not included in the plan who are included in a unit of employees cov- ered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representa- tives and one or more employers, if there is evidence that retirement benefits were the subject of good faith bargaining between such employee representatives and such employer or employers. (B) in the case of a trust established or maintained pursuant to an agreement which the Secretary of Labor finds to be a collective bargaining agreement between air pilots represented in accordance with title II of the Railway Labor Act and one or more employers, all employees not covered by such agreement, and (C) employees who are nonresident aliens and who receive no earned income (within the meaning of section 911(b)) from the em- ployer which constitutes income from sources within the United States (within the meaning of section 861(a)(3)). Subparagraph (B) shall not apply in the case of a plan which provides contributions or benefits for employees whose principal duties are not customarily performed aboard air- craft in flight. (c) Application of participation standards to certain plans (1) The provisions of this section (other than paragraph (2) of this subsection) shall not apply to- (A) a governmental plan (within the meaning of section 414(d)), (B) a church plan (within the meaning of section 414(e)) with respect to which the election provided by subsection (d) of this section has not been made, (C) a plan which has not at any time after September 2, 1974, provided for employer contributions, and (D) a plan established and maintained by a society, order, or association described in section 501(c)(8) or (9) if no part of the con- tributions to or under such plan are made by employers of participants in such plan. (2) A plan described in paragraph (1) shall be treated as meeting the requirements of this section, for purposes of section 401(a), if such plan meets the requirements of section 401(a)(3) as in effect on September 1, 1974. (d) Election by church to have participation, vesting, funding, etc., provisions apply (1) In general If the church or convention or association of churches which maintains any church plan makes an election under this subsection (in such form and manner as the Secretary may by regulations prescribe), then the provisions of this title relating to participation, vesting, funding, etc. (as in effect from time to time) shall apply to such church plan as if such provisions did not contain an exclusion for church plans. (2) Election irrevocable An election under this subsection with re- spect to any church plan shall be binding with respect to such plan, and, once made, shall be irrevocable. (Added Pub. L. 93-406, title II, § 1011, Sept. 2, 1974, 88 Stat. 898, and amended Pub. L. 94-455, title XIX, §§ 1901(a)(61), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1774, 1834.) REFERENCES IN TEXT The Railway Labor Act, referred to in subsec. (b)(2)(B), is act May 20, 1926, ch. 347, 44 Stat. 577, as amended. Title II of the Railway Labor Act was added by act Apr. 10, 1936, ch. 166, 49 Stat. 1189, and is clas- sified generally to subchapter II (§ 181 et seq.) of Title 45, Railroads. For complete classification of this Act to the Code, see section 151 of Title 45 and Tables volume. AMENDMENTS 1976-Subsec. (a)(2)(A)(ii). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (a)(5)(C), (D). Pub. L. 94-455, § 1901(a)(61)(A), substituted "purposes of paragraph (1)" for "purposes of subsection (a)(1)". Subsec. (b)(1)(B). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c)(1)(C). Pub. L. 94-455, § 1901(a)(61)(B), substituted "September 2, 1974," for "the date of the enactment of the Employee Retirement Income Secu- rity Act of 1974". Subsec. (c)(2). Pub. L. 94-455, § 1901(a)(61)(C), sub- stituted "September 1, 1974" for "the day before the date of the enactment of this section". Subsec. (d)(1). Pub. L. 94-455, ! 1906(b)(13)(A), struck out "or his delegate" following "Secretary". EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (a) to (c) by section 1901(a)(61) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE; TRANSITIONAL RULES Section 1017 of Pub. L. 93-408, as amended by Pub. L. 94-12, title IV, § 402, Mar. 29, 1975, 89 Stat. 47, pro- vided that: "(a) General Rule.-Except as otherwise provided in this section, the amendments made by this part [con- sisting of sections 1011 to 1017 of Pub. L. 93-406, which enacted sections 410, 411, 412, 413, 414, and 4971 of this title, amended sections 275, .01(a)(3), (5), (7), 404(a)(1), (2), (6). (7). 406, 407, 805, 6161, 6201, 6204, 6211, 6212, 6213, 6214, 6344, 6501, 6503, 6512, 6601, 6653, 6659, 6676. 6677, 6679, 6682, 6688, 6861, 6862, and 7422 of this title, and enacted provisions set out as notes under sections 410, 411 and 412 of this title] Page 323 § 410
TITLE 26-INTERNAL REVENUE CODE shall apply for plan years beginning after the date of the enactment of this Act [Sept. 2, 1974). "(b) Existing plans.-Except as otherwise provided in subsections c) through (i), in the case of a plan in existence on January 1, 1974, the amendments made by this part shall apply for plan years beginning after December 31, 1975. "(c) Existing plans under collective bargaining agree- ments. "1) Application of vesting rules to certain plan provisions. "(A) Waiver of application.-In the case of a plan maintained on January 1, 1974, pursuant to one or more agreements which the Secretary of Labor finds to be collective bargaining agreements be. tween employee representatives and one or more employers, during the special temporary waiver period the plan shall not be treated as not meeting the requirements of section 411(b)(1) or (2) of the Internal Revenue Code of 1954 [section 411(b)(1) or (2) of this title] solely by reason of a supple- mentary or special plan provision (within the meaning of subparagraph (D)). "(B) Special temporary waiver period.-For pur- poses of this paragraph, the term 'special tempo- rary waiver period' means plan years beginning after December 31, 1975, and before the earlier of- "(i) the date on which the last of the collective bargaining agreements relating to the plan ter- minates (determined without regard to any ex- tension thereof agreed to after the date of the enactment of this Act [Sept. 2, 1974]), or "(i) January 1, 1981. For purposes of clause (i), any plan amendment made pursuant to a collective bargaining agree- ment relating to the plan which amends the plan solely to conform to any requirement contained in this Act [see Short Title note set out under section 1001 of Title 29, Labor] shall not be treated as a termination of such collective bargaining agree- ment. "(C) Determination by Secretary of Labor re- quired.-Subparagraph (A) shall not apply unless the Secretary of Labor determines that the partici- pation and vesting rules in effect on the date of the enactment of this Act [Sept. 2, 1974] are not less favorable to the employees, in the aggregate than the rules provided under sections 410 and 411 of the Internal Revenue Code of 1954 [this section and section 411 of this title]. "(D) Supplementary or special plan provisions.- For purposes of this paragi aph, the term 'supple- mentary or special plan provision' means any plan provision which- "(i) provides supplementary benefits, not in excess of one-third of the basic benefit, in the form of an annuity for the life of the partici- pant, or "(i) provides that, under a contractual agree- ment based on medical evidence as to the effects of working in an adverse environment for an ex- tended period'of time, a participant having 25 years of service is to be treated as having 30 years of service. "2) Application of funding rules. "CA) In general.-In the case of a plan main- tained on January 1, 1974, pursuant to one or more agreements which the Secretary of Labor finds to be collective bargaining agreements between em- ployee representatives and one or more employers, section 412 of the Internal Revenue Code of 1954 [section 412 of this title], and other amendments made by this part to the extent such amendments relate to such section 412 [section 412 of this title], shall not apply during the special temporary waiver period (as defined in paragraph (1)(B)). "(B) Waiver of underfunding,-In the case of a plan maintained on January 1, 1974, pursuant to one or more agreements which the Secretary of Labor finds to be collective bargaining agreements between employee representatives and one or more employers, if by reason of subparagraph CA) the requirements of section 401(a)(7) of the Internal Revenue Code of 1954 [section 401(a)(7) of this title] apply without regard to the amendment of such section 401(a)(7) [section 401(a)(7) of this title] by section 1016(a)(2)(C) of this Act [section 1016(a)(2)(C) of Pub. L. 93-406], the plan shall not be treated as not meeting such requirements solely by reason of the application of the amendments made by sections 1011 and 1012 of this Act [enact- ing this section and section 411 of this title] or re- lated amendments made by this part. "CC) Labor organization conventions.-In the case of a plan maintained by a labor organization, which is exempt from tax under section 501(c)(5) of the Internal Revenue Code of 1954 [section Ol(c)(5) of this title] exclusively for the benefit of its employees and their beneficiaries, section 412 of such Code [section 412 of this title] and other amendments made by this part to the extent such amendments relate to such section 412 [section 412 of this title], shall be applied by substituting for the term 'December 31, 1975' in subsection (b), the earlier of- "(i) the date on which the second convention of such labor organization held after the date of the enactment of this Act [Sept. 2, 1974] ends, or "(ii) December 31, 1980, but in no event shall a date earlier than the later of December 31, 1975, or the date determined under subparagraph CA) or (B) be substituted. "(d) Existing plans may elect new provisions.-In the case of a plan in existence on January 1, 1974, the pro- visions of the Internal Revenue Code of 1954 (this title] relating to participation, vesting, funding, and form of benefit (as in effect from time to time) shall apply in the case of the plan year (which begins after the date of the enactment of this Act .Sept. 2, 1974] but before the applicable effective date determined under subsection (b) or (c)) selected by the plan ad- ministrator and to all subsequent plan years, if the plan administrator elects (in such manner and at such time as the Secretary of the Treasury or his delegate shall by regulations prescribe) to have such provisions so apply. Any election made under this subsection, once made, shall be irrevocable. "(e) Certain definitions and special rules.-Section 414 of the Internal Revenue Code of 1954 [section 414 of this title] (other than subsections (b) and (c) of such section 414), as added by section 1015(a) of this Act [section 1015(a) of Pub. L. 93-406], shall take effect on the date of the enactment of this Act [Sept. 2, 1974]. "Cf) Transitional rules with respect to breaks in ser- vice. "l) Participation.-In the case of a plan to which section 410 of the Internal Revenue Code of 1954 [this section] applies, if any plan amendment with respect to breaks in service (which amendment is made or becomes effective after January 1, 1974, and before the date on which such section 410 [this sec- tion] first becomes effective with respect to such plan) provides that any employee's participation in the plan would commence at any date later than the later of- "CA) the date on which his participation would commence under the break in service rules of sec- tion 410(a)(5) of such Code [subsec. (a)(5) of this section], or "(B) the date on which his participation would commence under the plan as in effect on January 1,1974, such plan shall not constitute a plan described in section 403(a) or 405(a) of such Code [section 403(a) or 405(a) of this title] and a trust forming a part of such plan shall not constitute a qualified trust under section 401(a) of such Code [section 401(a) of this title]. "2) Vesting.-In the case of a plan to which sec- tion 411 of the Internal Revenue Code of 1954 (see- Page 324 § 410
TITLE 26-INTERNAL REVENUE CODE tion 411 of this title] applies, if any plan amendment with respect to breaks in service (which amendment is made or becomes effective after January 1, 1974, and before the date on which such section 411 [sec- tion 411 of this title] first becomes effective with re- spect to such plan) provides that the nonforfeitable benefit derived from employer contributions to which any employee would be entitled is less than the lesser of the nonforfeitable benefit derived from employer contributions to which he would be enti- tled under- "(A) the break in service rules of section 411(a)(6) of such Code (section 411(a)(6) of this title], or "(B) the plan as in effect on January 1, 1974, such plan shall not constitute a plan described in section 403(a) or 405(a) of such Code [section 403(a) or 405(a) of this title] ,a.d a trust forming a part of such plan shall not constitute a qualified trust under section 401(a) of such Code (section 401(a) of this title]. Subparagraph (B) shall not apply if the break in service rules under the plan would have been in violation of any law or rule of law in effect on Janu- ary 1, 1974. "(g) 3-year delay for certain provisions.-Subpara- graphs (B) and (C) of section 404(a)(1) [section 404(a)(1) of this title] shall apply only in the case of plan years beginning on or after 3 years after the date of the enactment of this Act [Sept. 2, 1974]. "(h)(1) Except as provided in paragraph (2), section 413 of the Internal Revenue Code of 1954 [section 413 of this title] shall apply to plan years beginning after December 31, 1953. "(2)(A) For plan years beginning before the applica- ble effective date of section 410 of such Code [this sec- tion], the provisions of paragraphs (1) and (8) of sub- section (b) of such section 413 [section 413 of this title] shall be applied by substituting '401(a)(3)' for '410'. "(B) For plan years beginning before the applicable effective date of section 411 of such Code (section 411 of this title], the provisions of subsection (b)(2) of such section 413 [section 413 of this title] shall be ap- plied by substituting '401(a)(7)' for '411(dl(3)'. "(C)(i) The provisions of subsection (b)(4) of such section 413 shall not apply to plan years beginning before the applicable effective date of section 411 of such Code [section 411 of this title]. "(ii) The provisions of subsection (b)(5) (other than the second sentence thereof) of such section 413 [sec- tion 413 of this title] shall not apply to plan years be- ginning before the applicable effective date of section 412 of such Code [section 412 of this title]. "(i) Contributions to H.R. 10 plans.-Notwithstand- ing subsections (b) and (c)(2), in the case of a plan in existence on January 1, 1974, the amendment made by section 1013(c)(2) of this Act [amending section 404(a)(6) of this title] shall apply, with respect to a plan which provides contributions or benefits for em- ployees some or all of whom are employees within the meaning of section 401(c)(1) of the Internal Revenue Code of 1954 (section 401(c)(1) of this title], for plan years beginning after December 31, 1974, but only if the employer (within the meaning of section 401(c)(4) of such Code) [section 401(c)(4) of this title] elects in such manner and at such time as the Secretary of the Treasury or his delegate shall by regulations pre- scribe, to have such amendment so apply. Any election made under this subsection, once made, shall be irrev- ocable," SECTION REFERRM TO IN OTHER SECTIONS This section is referred to in sections 401, 406, 407, 411, 412, 413, 414, 4975 of this title; title 29 sections 1003, 1201, 1202, 1321. § 411. Minimum vesting standards (a) General rule A trust shall not constitute a qualified trust under section 401(a) unless the plan of which such trust is a part provides that an employee's right to his normal retirement benefit is non- forfeitable upon the attainment of normal re- tirement age (as defined in paragraph (8)) and in addition satisfies the requirements of para- graphs (1) and (2) of this subsection and the re- quirements of paragraph (2) of subsection (b), and in the case of a defined benefit plan, also satisfies the requirements of paragraph (1) of subsection (b). (1) Employee contributions A plan satisfies the requirements of this paragraph if an employee's rights in his ac- crued benefit derived from his own contribu- tions are nonforfeitable. (2) Employer contributions A plan satisfies the requirements of this paragraph if it satisfies the requirements of subparagraph (A), (B), or (C). (A) 10-year vesting A plan satisfies the requirements of this subparagraph if an employee who has at least 10 years of service has a nonforfeita- ble right to 100 percent of his accrued bene- fit derived from employer contributions. (B) 5- to 15-year vesting A plan satisfies the requirements of this subparagraph if an employee who has com- pleted at least 5 years of service has a non- forfeitable right to a percentage of his ac- crued benefit derived from employer contri- butions which percentage is not less than the percentage determined under the fol- lowing table: Nonforfeltable Years of service: percentage 5 ------------------.--.--.----.----.- ,-,......-...........,..,.. 25 6 ...------------------..-...-. ,.--.------......... 30 7 .-...--------------... ------.-.-. ,... . . . .,. 35 8 ...--------------------.. ............................-. °-.--- - .- 40 9 ........................................... 4 5 10 .......................................... 50 11 .......................................... 6 0 12 ......................................................................... 70 13 .......................................... 80 14 .......................................... 90 15 or m ore .......................................................... 100. (C) Rule of 45 (i) A plan satisfies the requirements of this subparagraph if an employee who is not separated from the service, who has completed at least 5 years of service, and with respect to whom the sum of his age and years of service equals or exceeds 45, has a nonforfeitable right to a percentage of his accrued benefit derived from employ- er contributions determined under the fol- lowing table: If years of service and sum of age and then the non- equal service equals or forfeitable or exceed- exceeds- percentage is- 5 ............................... 45 ........................ 50 6 ............................... 47 ........................ 60 7 ............................... 49 ........................ 70 8 ............................... 51 ....... ..................... 80 9 ............................... 53 ........................ 90 10 ............................. 55 ........................ 100. 71-999 0 - 78 - 23 (Vol. 7) Page 325
TITLE 26-INTERNAL REVENUE CODE (ii) Notwithstanding clause (1), a plan shall not be treated as satisfying the re- quirements of this subparagraph unless any employee who has completed at least 10 years of service has a nonforfeitable right to not less than 50 percent of his accrued benefit derived from employer contribu- tions and to not less than an additional 10 percent for each additional year of service thereafter. (3) Certain ptrmitted forfeitures, suspensions, etc. For purposes of this subsection- (A) Forfeiture on account of death A right to an accrued benefit derived from employer contributions shall not be treated as forfeitable solely because the plan pro- vides that it is not payable if the partici- pant dies (except in the case of a survivor annuity which is payable as provided in sec- tion 401(a)(11)). (B) Suspension of benefits upon reemployment of retiree A right to an accrued benefit derived from employer contributions shall not be treated as forfeitable solely because the plan pro- vides that the payment of benefits is sus- pended for such period as the employee is employed, subsequent to the commence- ment of payment of such benefits- (i) in the case of a plan other than a multi-employer plan, by the employer who maintains the plan under which such benefits were being paid; and (ii) in the case of a multiemployer plan, in the same industry, the same trade or craft, and the same geographic area cov- ered by the plan as when such benefits commenced. The Secretary of Labor shall prescribe such regulations as may be necessary to carry out the purposes of this subparagraph, in- cluding regulations with respect to the meaning of the term "employed". (C) Effect of retroactive plan amendments A right to an accrued benefit derived from employer contributions shall not be treated as forfeitable solely because plan amend- ments may be given retroactive application as provided in section 412(c)(8). (D) Withdrawal of mandatory contribution (i) A right to an accrued benefit derived from employer contributions shall not be treated as forfeitable solely because the plan provides that, in the case of a partici- pant who does not have a nonforfeitable right to at least 50 percent of his accrued benefit derived from employer contribu- tions, such accrued benefit may be forfeit- ed on account of the withdrawal by the participant of any amount attributable to the benefit derived from mandatory con- tributions (as defined in subsection (c)(2)(C)) made by such participant. (ii) Clause (I) shall not apply to a plan unless the plan provides that any accrued benefit forfeited under a plan provision desrrlbed in such clause shall be restored upon repayment by the participant of the full amount of the withdrawal described in such clause plus, in the case of a de- fined benefit plan, interest. Such interest shall be computed on such amount at the rate determined for purposes of subsec- tion (c)(2)(C) on the date of such repay- ment (computed annually from the date of such withdrawal). In the case of a de- fined contribution plan, the plan provi- sion required under this clause may pro- vide that such repayment must be made before the participant has any one-year break in service commencing after the withdrawal. (iii) In the case of accrued benefits de- rived from employer contributions which accrued before September 2, 1974, a right to such accrued benefit derived from em- ployer contributions shall not be treated as forfeitable solely because the plan pro- vides that an amount of such accrued benefit may be forfeited on account of the withdrawal by the participant of an amount attributable to the benefit de- rived from mandatory contributions (as defined in subsection (c)(2)(C)) made by such participant before September 2, 1974 If such amount forfeited is proportional to such amount withdrawn. This clause shall not apply to any plan to which any mandatory contribution is made after September 2, 1974. The Secretary shall prescribe such regulations as may be nec- essary to carry out the purposes of this clause. (iv) For purposes of this subparagraph, in the case of any class-year plan, a with- drawal of employee contributions shall be treated as a withdrawal of such contribu- tions on a plan year by plan year basis in succeeding order of time. (v) For nonforfeitability where the em- ployee has a nonforfeitable right to at least 50 percent of his accrued benefit, see section 401(a)(19). (4) Service included In determination of nonforfei- table percentage In computing the period of service under the plan for purposes of determining the non- forfeitable percentage under paragraph (2), all of an employee's years of service with the employer or employers maintaining the plan shall be taken into account, except that the following may be disregarded: (A) years of service before age 22, except that in the case of a plan which does not satisfy subparagraph (A) or (B) of para- graph (2), the plan may not disregard any such year of service during which the em- ployee was a participant; (B) years of service during a period for which the employee declined to contribute to a plan requiring employee contributions; (C) years of service with an employer during any period for which the employer did not maintain the plan or a predecessor plan (as defined under regulations pre- scribed by the Secretary; (D) service not required to be taken into account under paragraph (6); (E) years of service before January 1, 1971, unless the employee has had at least 3 years of service after December 31, 1970; and Page 326 411
TITLE 26-INTERNAL REVENUE CODE (F) years of service before the first plan year to which this section applies, if such service would have been disregarded under the rules of the plan with regard to breaks in service as in effect on the applicable date. (5) Year of service (A) General rule For purposes of this subsection, except as provided in subparagraph (C), the term "year of service" means a calendar year, plan year, or other 12-consecutive month period designated by the plan (and not pro- hibited under regulations prescribed by the Secretary of Labor) during which the par- ticipant has completed 1,000 hours of ser- vice. (B) Hours of service For purposes of this subsection, the term "hours of service" has the meaning pro- vided by section 410(a)(3,(C). (C) Seasonal induotries In the case of any seasonal industry where the customary period of employment Is less than 1,000 hours during a calendar year, the term "year of service" shall be such period as may be determined under regulations prescribed by the Secretary of Labor. (D) Maritime industries For purposes of this subsection, in the case of any maritime industry, 125 days of service shall be treated as 1,000 hours of service. The Secretary of Labor may pre- scribe regulations to carry out the purposes of this subparagraph. (6) Breaks in service (A) Definition of 1-year break in service For purposes of this paragraph, the term "1-year break in service" means a calendar year, plan year, or other 12-consecutive- month period designated by the plan (and not prohibited under regulations prescribed by the Secretary of Labor) during which the participant has not completed more than 500 hours of service. (B) 1 year of service after 1-year break in service For purposes of paragraph (4), in the case of any employee who has any 1-year break in s ervice, years of service before such break shall not be required to be taken into ac- count until he has completed a year of ser- vice after his return. (C) 1-year break in service under defined contri- bution plan For purposes of paragraph (4), in the case of any participant in a defined contribution plan, or an insured defined benefit plan which satisfies the requirements of subsec- tion (b)(1)(F), who has any 1-year break in service, years of service after such break shall not be required to be taken into ac- count for purposes of determining the non- forfeitable percentage of his accrued bene- fit derived from employer contributions which accrued before such break. (D) Nonvested participants For purposes of paragraph (4), in the case of a participant who, under the plan, does not have any nonforfeitable right to an ac- crued benefit derived from employer contri- butions, years of service before any 1-year break in service shall not be required to be taken into account if the number of con- secutive 1-year breaks in service equals or exceeds the aggregate number of such years of service prior to such break. Such aggre- gate number of years of service before such break shall be deemed not to include any years of service not required to be taken into account under this subparagraph by reason of any prior break in service. (7) Accrued benefit (A) In general For purposes of this section, the term "ac- crued benefit" means- (i) in the case of a defined benefit plan. the employee's accrued benefit deter- mined under the plan and, except as pro- vided in subsection (c)(3), expressed in the form of an annual benefit commencing at normal retirement age, or (ii) in the case of a plan which is not a defined benefit plan, the balance of the employee's account. (B) Effect of certain ditributions Notwithstanding paragraph (4), for pur- poses of determining the employee's ac- crued benefit under the plan, the plan may disregard service performed by the employ- ee with respect to which he has received- (I) a distribution of the present value of his entire nonforfeitable benefit if such distribution was in an amount (not more than $1,750) permitted under regulations prescribed by the Secretary, or (ii) a distribution of the present value of his nonforfeitable benefit attributable to such service which he elected to receive. Clause (I) of this subparagraph shall apply only if such distribution was made on termi- nation of the employee's participation in the plan. Clause (i) of this subparagraph shall apply only if such distribution was made on termination of the employee's par- ticipation in the plan or under such other circumstances as may be provided under regulations prescribed by the Secretary. (C) Repayment of subparagraph (B) distributions For purposes of determining the employ- ee's accrued benefit under a plan, the plan may not disregard service as provided in subparagraph (B) unless the plan provides an opportunity for the participant to repay the full amount of the distribution de- scribed in such subparagraph (B) with, in the case of a defined benefit plan, interest at the rate determined for purposes of sub- section (c)(2)(C) and provides that upon such repayment the employee's accrued benefit shall be recomputed by taking into account service so disregarded. This subpar- agraph shall apply only in the case of a par- ticipant who- (i) received such a distribution in any plan year to which this section applies, which distribution was less than the pre- sent value of his accrued benefit, Page 327
TITLE 26-INTERNAL REVENUE CODE (it) resumes employment covered under the plan, and (liI) repays the full amount of such dis- tribution with, in the case of a defined benefit plan, interest at the rate deter- mined for purposes of subsection (c)(2)(C). In the case of a defined contribution plan, the plan provision required under this sub- paragraph may provide that such repay- ment must be made before the participant has any one-year break in service commenc- ing after such withdrawal. (8) Normal retirement age For purposes of this section, the term "normal retirement age" means the earlier of- (A) the time a plan participant attains normal retirement age under the plan, or (B) the latter of- (i) the time a plan participant attains age 65, or (ii) the 10th anniversary of the time a plan participant commenced participation in the plan. (9) Normal retirement benefit For purposes of this section, the term "normal retirement benefit" means the great- er of the early retirement benefit under the plan, or the benefit under the plan commenc- ing at normal retirement age. The normal re- tirement benefit shall be determined without regard to- (A) medical benefits, and (B) disability benefits not in excess of the qualified disability benefit. For purposes of this paragraph, a qualified disability benefit is a disability benefit pro- vided by a plan which does not exceed the benefit which would be provided for the par- ticipant if he separated from the service at normal retirement age. For purposes of this paragraph, the early retirement benefit under a plan shall be determined without regard to any benefits commencing before benefits payable under title II of the Social Security Act become payable which- (i) do not exceed such social security benefits, and (ii) terminate when such social security benefits commence. (10) Changes In vesting schedule (A) General rule A plan amendment changing any vesting schedule under the plan shall be treated as not satisfying the requirements of para- graph (2) if the nonforfeitable percentage of the accrued benefit derived from employ- er contributions (determined as of the later of the date such amendment is adopted, or the date such amendment becomes effec- tive) of any employee who is a participant in the plan is less than such nonforfeitable percentage computed under the plan with- out regard to such amendment. (B) Election of former schedule A plan amendment changing any vesting schedule under the plan shall be treated as not satisfying the requirements of para- graph (2) unless each participant having not less than 5 years of service is permitted to elect, within a reasonable period after the adoption of such amendment, to have his nonforfeitable percentage computed under the plan without regard to such amendment. (b) Accrued benefit requirements (1) General rules (A) 3-percent method A defined benefit plan satisfies the re- quirements of this paragraph if the accrued benefit to which each participant is entitled upon his separation from the service is not less than- (1) 3 percent of the normal retirement benefit to which he would be entitled if he commenced participation at the earli- est possible entry age under the plan and served continuously until the earlier of age 65 or the normal retirement age speci- fied under the plan, multiplied by (it) the number of years (not in excess of 33Va) of his participation in the plan. In the case of a plan providing retirement benefits based on compensation during any period, the normal retirement benefit to which a participant would be entitled shall be determined as if he continued to earn an- nually the average rate of compensation which he earned during consecutive years of service, not in excess of 10, for which his compensation was the highest. For purposes of this subparagraph, social security bene- fits and all other relevant factors used to compute benefits shall be treated as re- maining constant as of the current year for all years after such current year. (B) 133Vs percent rule A defined benefit plan satisfies the re- quirements of this paragraph for a particu- lar plan year if under the plan the accrued benefit payable at the normal retirement age is equal to the normal retirement bene- fit and the annual rate at which any indi- vidual who is or could be a participant can accrue the retirement benefits payable at normal retirement age under the plan for any later plan year is not more than 133V percent of the annual rate at which he can accrue benefits for any plan year beginning on or after such particular plan year and before such later plan year. For purposes of this subparagraph- (1) any amendment to the plan which is In effect for the current year shall be treated as in effect for all other plan years; (i) any change in an accrual rate which does not apply to any individual who is or could be a participant in the current year shall be disregarded; (11) the fact that benefits under the plan may be payable to certain employees before normal retirement age shall be dis- regarded; and (iv) social security benefits and all other relevant factors used to compute benefits shall be treated as remaining constant as §411 Page 328
TITLE 26-INTERNAL REVENUE CODE of the current year for all years after the current year. (C) Fractional rule A defined benefits plan satisfies the re- quirements of this paragraph if the accrued benefit to which any participant is entitled upon his separation from the service is not less than a fraction of the annual benefit commencing at normal retirement age to which he would be entitled under the plan as in effect on the date of his separation if he continued to earn annually until normal retirement age the same rate of compensa- tion upon which his normal retirement benefit would be computed under the plan, determined as if he had attained normal re- tirement age on the date on which any such determination is made (but taking into ac- count no more than the 10 years of service immediately preceding his separation from service). Such fraction shall be a fraction, not exceeding 1, the numerator of which is the total number of his years of participa- tion in the plan (as of the date of his sepa- ration from the service) and the denomina- tor of which is the total number of years he would have participated in the plan if he separated from the service at the normal re- tirement age. For purposes of this subpara- graph, social security benefits and all other relevant factors used to compute benefits shall be treated as remaining constant as of the current year for all years after such current year. (D) Accrual for service before effective date Subparagraphs (A), (B), and (C) shall not apply with respect to years of participation before the first plan year to which this sec- tion applies, but a defined benefit plan sat- isfies the requirements of this subpara- graph with respect to such years of partici- pation only if the accrued benefit of any participant with respect to such years of participation is not less than the greater of- (i) his accrued benefit determined under the plan, as in effect from time to time prior to September 2, 1974, or (i) an accrued benefit which is not less than one-half of the accrued benefit to which such participant would have been entitled if subparagraph (A), (B), or (C) applied with respect to such years of par- ticipation. (E) First two years of service Notwithstanding subparagraphs (A), (B), and (C) of this paragraph, a plan shall not be treated as not satisfying the require- ments of this paragraph solely because the accrual of benefits under the plan does not become effective until the employee has two continuous years of service. For pur- poses of this subparagraph, the term "years of service" has the meaning provided by section 410(a)(3)(A). (F) Certain insured defined benefit plans Notwithstanding subparagraphs (A), (B), and (C), a defined benefit plan satisfies the requirements of this paragraph if such plan- (i) is funded exclusively by the purchase of insurance contracts, and (ii) satisfies the requirements of para- graphs (2) and (3) of section 412() (relat- ing to certain insurance contract plans), but only if an employee's accrued benefit as of any applicable date is not less than the cash surrender value his insurance con- tracts would have on such applicable date if the requirements of paragraphs (4), (5), and (6) of section 412(1) were satisfied. (G) Accrued benefit may not decrease on account of increasing age or service Notwithstanding the preceding subpara- graphs, a defined benefit plan shall be treated as not satisfying the requirements of this paragraph if the participant's ac- crued benefit is reduced on account of any increase in his age or service. The preceding sentence shall not apply to benefits under the plan commencing before entitlement to benefits payable under title II of the Social Security Act which benefits under the plan- (i) do not exceed such social security benefits, and (ii) terminate when such social security benefits commence. (2) Separate accounting required in certain cases A plan satisfies the requriements of this paragraph if- (A) in the case of the defined benefit plan, the plan requires separate accounting for the portion of each employee's accrued benefit derived from any voluntary employ- ee contributions permitted under the plan; and (B) in the case of any plan which is not a defined benefit plan, the plan requires sepa- rate accounting for each employee's accrued benefit. (3) Year of participation (A) Definition For purposes of determining an employ- ee's accrued benefit, the term "year of par- ticipation" means a period of service (begin- ning at the earliest date on which the em- ployee is a participant in the plan and which is included in a period of service re- quired to be taken into account under sec- tion 410(a)(5)) as determined under regula- tions prescribed by the Secretary of Labor which provide for the calculation of such period on any reasonable and consistent basis. (B) Less than full time service For purposes of this paragraph, except as provided in subparagraph (C), in the case of any employee whose customary employ- ment is less than full time, the calculation of such employee's service on any basis which provides less than a ratable portion of the accrued benefit to which he would be entitled under the plan if his customary em- ployment were full time shall not be treated as made on a reasonable and consistent basis. Page 329 §411
TITLE 26-INTERNAL REVENUE CODE (C) Less than 1,000 hours of service during year For purposes of this paragraph, in the case of any employee whose service is less than 1,000 hours during any calendar year, plan year or other 12-consecutive month period designated by the plan (and not pro- hibited under regulations prescribed by the Secretary of Labor) the calculation of his period of service shall not be treated as not made on a reasonable and consistent basis solely because such service is not taken into account. (D) Seasonal industries In the case of any seasonal industry where the customary period of employment is less than 1,000 hours during a calendar year, the term "year of participation" shall be such period as determined under regula. tions prescribed by the Secretary of Labor. (E) Maritime industries For purposes of this subsection, in the case of any maritime industry, 125 days of service shall be treated as a year of partici- pation. The Secretary of Labor may pre- scribe regulations to carry out the purposes of this subparagraph. (c) Allocation of accrued benefits between employer and employee contributions (1) Accrued benefit derived from employer contri- butions For purposes of this section, an employee's accrued benefit derived from employer contri- butions as of any applicable date is the excess, if any, of the accrued benefit for such employee as of such applicable date over the accrued benefit derived from contributions made by such employee as of such date. (2) Accrued benefit derived from employee contri- butions (A) Plans other than defined benefit plans In the case of a plan other than a defined benefit plan, the accrued benefit derived from contributions made by an employee as of any applicable date is- (i) except as provided in clause (ii), the balance of the employee's separate ac- count consisting only of his contributions and the income, expenses, gains, and losses attributable thereto, or (ii) if a separate account is not main- tained with respect to an employee's con- tributions under such a plan, the amount which bears the same ratio to his total ac- crued benefit as the total amount of the employee's contributions (less withdraw- als) bears to the sum of such contribu- tions and the contributions made on his behalf by the employer (less withdraw- als). (B) Defined benefit plans (i) In general In the case of a defined benefit plan providing an annual benefit in the form of a single life annuity (without ancillary benefits) commencing at normal retire- ment age, the accrued benefit derived from contributions made by an employee as of any applicable date is the annual benefit eaual to the employee's accumu- lated contributions multiplied by the ap- propriate conversion factor. (ii) Appropriate conversion factor For purposes of clause (i), the term "ap- propriate conversion factor" means the factor necessary to convert an amount equal to the accumulated contributions to a single life annuity (without ancillary benefits) commencing at normal retire- ment age and shall be 10 percent for a normal retirement age of 65 years. For other normal retirement ages the conver- sion factor shall be determined in accor- dance with regulations prescribed by the Secretary. (C) Definition of accumulated contributions For purposes of this subsection, the term "accumulated contribution" means the total of- (1) all mandatory contributions made by the employee, (it) interest (if any) under the plan to the end of the last plan year to which subsection (a)(2) does not apply (by reason of the applicable effective date), and (iii) interest on the sum of the amounts determined under clauses (i) and (il) com- pounded annually at the rate of 5 percent per annum from the beginning of the first plan year to which subsection (a)(2) ap- plies (by reason of the applicable effective date) to the date upon which the employ- ee would attain normal retirement age. For purposes of this subparagraph, the term "mandatory contributions" means amounts contributed to the plan by the em- ployee which are required as a condition of employment, as a condition of participation in such plan, or as a condition of obtaining benefits under the plan attributable to em- ployer contributions. (D) Adjustments The Secretary is authorized to adjust by regulation the conversion factor described in subparagraph (B), the rate of interest de- scribed in clause (iii) of subparagraph (C), or both, from time to time as he may deem necessary. The rate of interest shall bear the relationship to 5 percent which the Sec- retary determines to be comparable to the relationship which the long-term money rates and investment yields for the last period of 10 calendar years ending at least 12 months before the beginning of the plan year bear to the long-term money rates and investment yields for the 10-calendar year period 1964 through 1973. No such adjust- ment shall be effective for a plan year be- ginning before the expiration of 1 year after such adjustment is determined and published. (E) Limitation The accrued benefit derived from employ- ee contributions shall not exceed the great- er of- (i) the employee's accrued benefit under the plan, or (i) the accrued benefit derived from em- ployee contributions determined as Page 330 § 411
TITLE 26-INTERNAL REVENUE CODE though the amounts calculated under clauses (i) and (iii) of subparagraph (C) were zero. (3) Actuarial adjustment For purposes of this section, in the case of any defined benefit plan, if an employee's ac- crued benefit is to be determined as an amount other than an annual benefit com- mencing at normal retirement age, or if the accrued benefit derived from contirbutions made by an employee is to be determined with respect to a benefit other than an annual benefit in the form of a single life an- nuity (without ancillary benefits) commenc- ing at normal retirement age, the employee's accrued benefit, or the accrued benefits de- rived from contributions made by an employ- ee, as the case may be, shall be the actuarial equivalent of such benefit or amount deter- mined under paragraph (1) or (2). (d) Special rules (1) Coordination with section 401(a)(4) A plan which satisfies the requirements of this section shall be treated as satisfying any vesting requirements resulting from the ap- plication of section 401(a)(4) unless- (A) there has been a pattern of abuse under the plan (such as a dismissal of em- ployees before their accrued benefits become nonforfeitable) tending to discrimi- nate in favor of employees who are officers, shareholders, or highly compensated, or (B) there have been, or there is reason to believe there will be, an accrual of benefits or forfeitures tending to discriminate in favor of employees who are officers, share- holders, or highly compensated. (2) Prohibited discrimination Subsection (a) shall not apply to benefits which may not be provided for designated employees in the event of early termination of the plan under provisions of the plan adopted pursuant to regulations prescribed by the Secretary to preclude the discrimination prohibited by section 401(a)(4). (3) Termination or partial termination; discontinu- ance of contributions Notwithstanding the provisions of subsec- tion (a), a trust shall not constitute a quail- fied trust under section 401(a) unless the plan of which such trust is a part provides that- (A) upon its termination or partial termi- nation, or (B) in the case of a plan to which section 412 does not apply, upon complete discon- tinuance of contributions under the plan, the rights of all affected employees to bene- fits accrued to the date of such termination, partial termination, or discontinuance, to the extent funded as of such date, or the amounts credited to the employees' accounts, are non- forfeitable. This paragraph shall not apply to benefits or contributions which, under provi- sions of the plan adopted pursuant to regula- tions prescribed by the Secretary to preclude the discrimination prohibited by section 401(a)(4), may not be used for designated em- ployees in the event of early termination of the plan. (4) Class year plans The requirements of subsection (a)(2) shall be deemed to be satisfied in the case of a class year plan if such plan provides that 100 per- cent of each employee's right to or derived from the contributions of the employer on his behalf with respect to any plan year are non- forfeitable not later than the end of the 5th plan year following the plan year for which such contributions were made. For purposes of this section, the term "class year plan" means a profit-sharing, stock bonus, or money purchase plan which provides for the sepa- rate nonforfeitability of employees' rights to or derived from the contributions for each plan year. (5) Treatment of voluntary employee contributions In the case of a defined benefit plan which permits voluntary employee contributions, the portion of an employee's accrued benefit derived from such contributions shall be treated as an accrued benefit derived from employee contributions under a plan other than a defined benefit plan. (6) Accrued benefit not to be decreased by amend- ment A plan shall be treated as not satisfying the requirements of this section if the accrued benefit of a participant is decreased by an amendment of the plan, other than an amendment described in section 412(c)(8). (e) Application of vesting standards to certain plans (1) The provisions of this section (other than paragraph (2)) shall not apply to- (A) a governmental plan (within the meaning of section 414(d)), (B) a church plan (within the meaning of section 414(e)) with respect to which the election provided by section 410(d) has not been made, (C) a plan which has not, at any time after September 2, 1974, provided for em- ployer contributions, and (D) a plan established and maintained by a society, order, or association described in section 501(c)(8) or (9), if no part of the contributions to or under such plan are made by employers of participants in such plan. (2) A plan described in paragraph (1) shall be treated as meeting the requirements of this section, for purposes of section 401(a), if such plan meets the vesting requriements re- sulting from the application of sections 401(a)(4) and 401(a)(7) as in effect on Sep- tember 1, 1974. (Added Pub, L. 93-406, title II, § 1012(a), Sept. 2, 1974, 88 Stat. 901, and amended Pub. L. 94- 455, title XIX, §§ 1901(a)(62), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1774, 1834.) REFERENCES IN TEXT The Social Security Act, referred to in subsecs. (a)(9) and (b)(1)(0), is act Aug. 14, 1935, ch. 531, 49 Stat. 620, as amended. Title II of the Social Security Act is clas- sified generally to subchapter II (§ 401 et seq.) of " itle 42, The Public Health and Welfare. For complete :as- sification of this Act to the Code, see section 1305 of Title 42, and Tables volume. Page 331
TITLE 26-INTERNAL REVENUE CODE AMENDMENTS 1976-Subsee. (a). Pub. L. 94-455, §§ 1901(a)(62)(A)- (C), 1906(b)(13)(A), substituted "paragraph (8)" for "subsection (a)(8)" in the provisions preceding par. (1), substituted references to Sept. 2, 1974, for references to the date of enactment of the Employee Retirement Income Security Act of 1974 in par. (3)(D)(iii), struck out "or his delegate" following "Secretary" in pars. (4)(C) and (7)(B), and substituted "(B)" for "(b)" in the catchline of par. (7)(C). Subsec. (b)(1)(D)(i). Pub. L. 94-455, § 1901(a)(62)(D), substituted reference to Sept. 2. 1974, for reference to the date of enactment of the Employee Retirement Income Security Act of 1974. Subsecs. (c)(2)(B)(ii), (D), (d)(2). (3). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (e)(l)(C). Pub. L. 94-455, § 1901(a)(62)(D), substituted reference to Sept. 2, 1974, for reference to the date of enactment of the Employee Retirement Income Security Act of 1974. Subsec. (e)(2). Pub. L. 94-455, § 1901(a)(62)(E). sub- stituted reference to Sept. 1, 1974, for refernece to the date before the date of enactment of the Employee Retirement Income Security Act of 1974. EFFECTIvE DATE OF 1976 AMENDMENT Amendment of subsecs. (a). (b), (e) by section 1901(a)(62) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976. see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE Except as otherwise provided in section 1017(c) through (h) of Pub. L. 93-406, section applicable for plan years beginning after Sept. 2, 1974, and, in the case of plans in existence on Jan. 1. 1974, for plan years beginning after Dec. 31, 1975, see section 1017 of Pub. L. 93-406, set out as an Effective Date; Transi- tional Rules note under section 410 of this title. ALTERNATE METHODS OF SATISFYING REQUIREMENTS FOR VESTING AND AccRuED BENEFITS Section 1012(c) of Pub. L. 93-406 provided that: "In the case of any plan maintained on January 1, 1974, if, not later than 2 years after the date of the en- actment of this Act [Sept. 2, 1974], the plan adminis- trator petitions the Secretary of Labor, the Secretary of Labor may prescribe an alternate method which shall be treated as satisfying the requirements of sub- section (a)(2) of section 411 of the Internal Revenue Code of 1954 [subsec. (a)(2) of this section], or of sub- section (b)(1) (other than subparagraph (D) thereof) of such section 411 [this section], or of both such pro- visions for a period of not more than 4 years. The Sec- retary may prescribe such alternate method only when he finds that- "(1) the application of such requirements would increase the costs of the plan to such an extent that there would result a substantial risk to the volun- tary continuation of the plan or a substantial cur- tailment of benefit levels or the levels of employees' compensation, "(2) the application of such requirements or dis- continuance of the plan would be adverse to the in- terests of plan participants in the aggregate, and "1(3) a waiver or extension of time granted under section 412(d) or (e) would be inadequate. In the case of any plan with respect to which an alter- nate method has been prescribed under the preceding provisions of this subsection for a period of not more than 4 years, if, not later than 1 year before the expi- ration of such period, the plan administrator petitions the Secretary of Labor for an extension of such alter- nate method, and the Secretary makes the findings re- quired by the preceding sentence, such alternate method may be extended for not more than 3 years." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 401, 410, 413, 414 of this title; title 29 sections 1202, 1222, 1343. § 412. Minimum funding standardt (a) General rule Except as provided in subsection (h), this sec- tion applies to a plan if, for any plan year be- ginning on or after the effective date of this section for such plan- (1) such plan included a trust which quali- fied (or was determined by the Secretary to have qualified) under section 401(a), or (2) such plan satisfied (or was determined by the Secretary to have satisfied) the re- quirements of section 403(a) or 405(a). A plan to which this section applies shall have satisfied the minimum funding standard for such plan for a plan year if as of the end of such plan year, the plan does not have an accu- mulated funding deficiency. For purposes of this section and section 4971, the term "accu- mulated funding deficiency" means for any plan the excess of the total charges to the funding standard account for all plan years (be- ginning with the first plan year to which this section applies) over the total credits to such account for such years or, if less, the excess of the total charges to the alternative minimum funding standard account for such plan years over the total credits to such account for such years. (b) Funding standard account (1) Account required Each plan to which this section applies q shall establish and maintain a funding stan- dard account. Such account shall be credited and charged solely as provided in this section. (2) Charges to account For a plan year, the funding standard ac- count shall be charged with the sum of- (A) the normal cost of the plan for the plan year, (B) the amounts necessary to amortize in equal annual installments (until fully amor- tized)- (I) in the case of a plan in existence on January 1, 1974, the unfunded past ser- vice liability under the plan on the first day of the first plan year to which this section applies, over a period of 40 plan years, (ii) in the case of a plan which comes into existence after January 1, 1974, the unfunded past service liability under the plan on the first day of the first plan year to which this section applies, over a period of 30 plan years (40 plan years in the case of a multiemployer plan), (iII) separately, with respect to each plan year, the net increase (if any) in un- funded past service liability under the plan arising from plan amendments adopted in such year, over a period of 30 plan years (40 plan years in the case of a multiemployer plan), (iv) separately, with respect to each plan year, the net experience loss (if any) under the plan, over a period of 15 plan Page 332 § 412
TITLE 26-INTERNAL REVENUE CODE years (20 plan years in the case of a mul- tiemployer plan), and (v) separately, with respect to each plan year, the net loss (if any) resulting from changes in actuarial assumptions used under the plan, over a period of 30 plan years, (C) the amount necessary to amortize each waived funding deficiency (within the meaning of subsection (d)(3)) for each prior plan year in equal annual installments (until fully amortized) over a period of 15 plan years, and (D) the amount necessary to amortize in equal annual installments (until fully amor- tized) over a period of 5 plan years any amount credited to the funding standard account under paragraph (3)(D). (3) Credits to account For a plan year, the funding standard ac- count shall be credited with the sum of- (A) the amount considered contributed by the employer to or under the plan for the plan year, (B) the amount necessary to amortize in equal annual installments (until fully amor- tized)- (I) separately, with respect t.n each plan year, the net decrease (if any) in unfund- ed past service liability under the plan arising from plan amendments adopted in such year, over a period of 30 plan years (40 plan years in the case of a multiem- ployer plan), (ii) separately, with respect to each plan year, the net experience gain (if any) under the plan, over a period of 15 plan years (20 plan years in the case of a mul- tlemployer plan), and (iii) separately, with respect to each plan year, the net gain (if any) resulting from changes in actuarial assumptions used under the plan, over a period of 30 plan years, (C) the amount of the waived funding de- ficiency (within the meaning of subsection (d)(3) for the plan year, and (D) in the case of a plan year for which the accumulated funding deficiency is de- termined under the funding standard ac- count if such plan year follows a plan year for which such deficiency was determined under the alternative minimum funding standards, the excess (if any) of any debit balance in the funding standard account (determined without regard to this subpara- graph) over any debit balance in the alter- native minimum funding standard account. (4) Combining and offsetting amounts to be amor- tized Under regulationm prescribed by the Secre- tary, amounts required to be amortized under paragraph (2) or paragraph (3), as the case may be- (A) may be combined into one amount under such paragraph to be amortized over a period determined on the basis of the re- maining amortization period for all items entering into such combined amount, and (B) may be offset against amounts re- quired to be amortized under the other such paragraph, with the resulting amount to be amortized over a period determined on the basis of the remaining amortization pe- riods for all items entering into whichever of the two amounts being offset is the greater. (5) Interest The funding standard account (and items therein) shall be charged or credited (as de- termined under regulations prescribed by the Secretary) with interest at the appropriate rate consistent with the rate or rates of inter- est used under the plan to determine costs. (c) Special rules (I) Determinations to be made under funding method For purposes of this section, normal costs, accrued liability, past service liabilities, and experience gains and losses shall be deter- mined under the funding method used to de- termine costs under the plan. (2) Valuation of assets (A) In general For purposes of this section, the value of the plan's assets shall be determined on the basis of any reasonable actuarial method of valuation which takes into account fair market value and which is permitted under regulations prescribed by the Secretary. (B) Election with respect to bonds The value of a bond or other evidence of indebtedness which is not in default as to principal or interest may, at the election of the plan administrator, be determined on an amortized basis running from initial cost at purchase to par value at maturity or ear- liest call date. Any election under this sub- paragraph shall be made at such time and in such manner as the Secretary shall by regulations provide, shall apply to all such evidences of indebtedness, and may be re- voked only with the consent of the Secre- tary. (3) Actuarial assumptions must be reasonable For purposes of this section, all costs, liabil- ities, rates of interest, and other factors under the plan shall be determined on the basis of actuarial assumptions and methods which, in the aggregate, are reasonable (taking into account the experience of the plan and reasonable expectations) and which, in combination, offer the actuary's best esti- mate of anticipated experience under the plan. (4) Treatment of certain changes as experience gain or loss For purposes of this section, if- (A) a change in benefits under the Social Security Act or in other retirement benefits created under Federal or State law, or (B) a change in the definition of the term "wages" under section 3121, or a change in the amount of such wages taken into ac- count under regulations prescribed for pur- poses of section 401(a)(5), results in an increase or decrease in accrued liability under a plan, such increase or de- crease shall be treated as an experience loss or gain. Page 333
TITLE 26-INTERNAL REVENUE CODE (5) Change in funding method or in plan year re- quires approval If the funding method for a plan is changed, the new funding method shall become the funding method used to deter- mine costs and liabilities under the plan only if the change is approved by the Secretary. If the plan year for a plan is changed, the new plan year shall become the plan year for the plan only if the change is approved by the Secretary. (6) Full funding If, as of the close of a plan year, a plan would (without regard to this paragraph) have an accumulated funding deficiency (de- termined without regard to the alternative minimum funding standard account permit- ted under subsection (g)) in excess of the full funding limitation- (A) the funding standard account shall be credited with the amount of such excess, and (B) all amounts described in paragraphs (2)(B), (C), and (D) and (3)(B) of subsection (b) which are required to be amortized shall be considered fully amortized for purposes of such paragraphs. (7) Full funding limitation For purposes of paragraph (6), the term full funding limitation means the excess (if any) of- (A) the accrued liability (including normal cost) under the plan (determined under the entry age normal funding method if such accrued liability cannot be directly calculat- ed under the funding method used for the plan), over (B) the lesser of the fair market value of the plan's assets or the value of such assets determined under paragraph (2). (8) Certain retroactive plan amendments For purposes of this section, any amend- ment applying to a plan year which- (A) is adopted after the close of such plan year but no later than 2 and one-half months after the close of the plan year (or, in the case of a multiemployer plan, no later than 2 years after the close of such plan year), (B) does not reduce the accrued benefit of any participant determined as of the begin- ning of the first plan year to which the amendment applies, and (C) does not reduce the accrued benefit of any participant determined as of the time of adoption except to the extent required by the circumstances, shall, at the election of the plan administra- tor, be deemed to have been made on the first day of such plan year. No amendment de- scribed in this paragraph which reduces the accrued benefits of any participant shall take effect unless the plan administrator files a notice with the Secretary of Labor notifying him of such amendment and the Secretary of Labor has approved such amendment, or within 90 days after the date on which such notice was filed, failed to disapprove such amendment. No amendment described in this subsection shall be approved by the Secretary of Labor unless he determines that such amendment is necessary because of a substan- tial business hardship (as determined under subsection (d)(2)) and that a waiver under subsection (d)(1) is unavailable or inadequate. (9) 3-year valuation For purposes of this section. a determina- tion of experience gains and losses and a valu- ation of the plan's liability shall be made not less frequently than once every 3 years, except that such determination shall be made more frequently to the extent required in particular cases under regulations prescribed by the Secretary. (10) Time when certain contributions deemed made For purposes of this section, any contribu- tions for a plan year made by an employer after the last day of such plan year, but not later than two and one-half months after such day, shall be deemed to have been made on such last day. For purposes of this para- graph, such two and one-half month period may be extended for not more than six months under regulations prescribed by the Secretary. (d) Variance from minimum funding standard (1) Waiver in case of substantial business hardship If an employer or in the case of a multiem- ployer plan, 10 percent or more of the number of employers contributing to or under the plan, are unable to satisfy the minimum funding standard for a plan year without substantial business hardship and if application of the standard would be adverse to the interests of plan participants in the ag- gregate, the Secretary may waive the require- ments of subsection (a) for such year with re- spect to all or any portion of the minimum funding standard other than the portion thereof determined under subsection (b)(2)(C). The Secretary shall not waive the minimum funding standard with respect to a plan for more than 5 of any 15 consecutive plan years. (2) Determination of substantial business hardship For purposes of this section, the factors taken into account in determining substantial business hardship shall include (but shall not be limited to) whether or not- (A) the employer is operating at an eco- nomic loss, (B) there is substantial unemployment or underemployment in the trade or business and in the industry concerned, (C) the sales and profits of the industry concerned are depressed or declining, and (D) it is reasonable to expect that the plan will be continued only if the waiver is granted. (3) Waived funding deficiency For purposes of this section, the term "waived funding deficiency" means the por- tion of the minimum funding standard (deter- mined without regard to subsection (b)(3)(C)) for a plan year waived by the Secretary and not satisfied by employer contributions. (e) Extension of amortization periods The period of years required to amortize any unfunded liability (described in any clause of subsection (b)(2)(B)) of any plan may be ex- §412 Page 334
TITLE 26-INTERNAL REVENUE CODE tended by the Secretary of Labor for a period of time (not in excess of 10 years) if he deter- mines that such extension would carry out the purposes of the Employee Retirement Income Security Act of 1974 and would provide ade- quate protection for participants under the plan and their beneficiaries and if he deter. mines that the failure to permit such extension would- (1) result in- (A) a substantial risk to the voluntary continuation of the plan, or (B) a substantial curtailment of pension benefit levels or employee compensation, and (2) be adverse to the interests of plan par- ticipants in the aggregate. (f) Benefits may not be increased during waiver or extension period (1) In general No amendment of the plan which increases the liabilities of the plan by reason of any in- crease in benefits, any change in the accrual of benefits, or any change in the rate at which benefits become nonforfeitable under the plan shall be adopted if a waiver under subsection (d)(1) or an extension of time under subsection (e) is in effect with respect to the plan, or if a plan amendment described in subsection (c)(8) has been made at any time in the preceding 12 months (24 months for multiemployer plans). If a plan is amend- ed in violation of the preceding sentence, any such waiver or extension of time shall not apply to any plan year ending on or after the date on which such amendment is adopted. (2) Exception Paragraph (1) shall not apply to any plan amendment which- (A) the Secretary of Labor determines to be reasonable and which provides for only de minimis increases in the liabilities of the plan. (B) only repeals an amendment described in subsection (c)(8), or (C) is required as a condition of qualifica- tion under this part. (g) Alternative minimum funding standard (1) In general A plan which uses a funding method that requires contributions in all years not less than those required under the entry age normal funding method may maintain an al- ternative minimum funding standard account for any plan year. Such account shall be cred- ited and charged solely as provided in this subsection. (2) Charges and credits to account For a plan year the alternative minimum funding standard account shall be- (A) charged with the sum of- (1) the lesser of normal cost under the funding method used under the plan or normal cost determined under the unit credit method, (i) the excess, if any, of the present value of accrued benefits under the plan over the fair market value of the assets, and (ili) an amount equal to the excess (if any) of credits to the alternative mini- mum standard account for all prior plan years over charges to such account for all such years, and (B) credited with the amount considered contributed by the employer to or under the plan for the plan year. (3) Special rules The alternative minimum funding standard account (and items therein) shall be charged or credited with interest in the manner pro- vided under subsection (b)(5) with respect to the funding standard account. (h) Exceptions This section shall not apply to- (1) any profit-sharing or stock bonus plan, (2) any insurance contract plan described in subsection (i), (3) any governmental plan (within the meaning of section 414(d)), (4) any church plan (within the meaning of section 414(e)) with respect to which the elec- tion provided bj section 410(d) has not been made, (5) any plan which has not, at any time after September 2, 1974, provided for employ- er contributions, or (6) any plan established and maintained by a society, order, or association described in section 501(c)(8) or (9), if no part of the con- tributions to or under such plan are made by employers of participants in such plan. No plan described in paragraph (3), (4), or (6) shall be treated as a qualified plan for purposes of section 401(a) unless such plan meets the re- quirements of section 401(a)(7) as in effect on September 1, 1974. (I) Certain insurance contract plans A plan is described in this subsection if- (1) the plan is funded exclusively by the purchase of individual insurance contracts. (2) such contracts provide for level annual premium payments to be paid extending not later than the retirement age for each indi- vidual participating in the plan, and com- mencing with the date the individual became a participant in the plan (or, in the case of an increase in benefits, commencing at the time such increase becomes effective), (3) benefits provided by the plan are equal to the benefits provided under each contract at normal retirement age under the plan and are guaranteed by an insurance carrier (li- censed under the laws of a State to do busi- ness with the plan) to the extent premiums have been paid, (4) premiums payable for the plan year, and all prior plan years, under such contracts have been paid before lapse or there is rein- statement of the policy, (5) no rights under such contracts have been subject to a security interest at any time during the plan year, and (6) no policy loans are outstanding at any time during the plan year. A plan funded exclusively by the purchase of group insurance contracts which is determined under regulations prescribed by the Secretary to have the same characteristics as contracts Page 335
TITLE 26-INTERNAL REVENUE CODE described in the preceding sentence shall be treated as a plan described in this subsection. (Added Pub. L. 93-406, title II, § 1013(a), Sept. 2, 1974, 88 Stat. 914, and amended Pub. L. 94- 455, title XIX, §§ 1901(a)(63), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1775, 1834.) RErERNcEs IN TExT The Social Security Act, referred to in subsec. (c)(4)(A), is act Aug. 14, 1935, ch. 531, 49 Stat. 620, as amended, which is classified generally to chapter 7 (§ 301 et seq.) of Title 42, The Public Health and Wel- fare. For complete classification of this Act to the Code, see section 1305 of Title 42 Tables volume. The Employee Retirement Income Security Act of 1974. referred to in subsec. (e). is Pub. L. 93-406, Sept. 2, 1974, 88 Stat. 832, as amended. For complete classifi- cation of this Act to the Code, see Short Title note set out under section 1001 of Title 29, Labor and Tables volume. AMmNMErrs 1976-Subsecs. (a) to (d). Pub. L. 94-455. § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (h). Pub. L. 94-455, § 1901(a)(63), substituted reference to Sept. 2, 1974, for reference to the date of enactment of the Employee Retirement Income Secu- rity Act of 1974 In par. (5) and substituted reference to Sept. 1, 1974. for reference to the day before the date of enactment of the Employee Retirement Income Se- curity Act of 1974 in the provisions following par. (6). Subsec. (i). Pub. L. 94-455, §1906(b)(13)(A), struck out "or his delegate" following "Secretary". Emr cTivE DATE OF 1976 AziNmmEr Amendment of subsec. (h) by section 1901(a)(63) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1076 Amendment note under section 2 of this title. EmwcTv DATE Except as otherwise provided in section 1017(c) through (h) of Pub. L. 93-406, section applicable for plan years beginning after Sept. 2, 1974, and, in the case of plans in existence on Jan. 1, 1974, for plan years beginning after Dec. 31, 1975, see section 1017 of Pub. L. 93-406, set out as an Effective Date; Transi- tional Rules note under section 410 of this title. ALTERNATIVE AMORTIZATION METHOD FOR CERTAIN MULTIEMPLOYER PLANS Section 1013(d) of Pub. L. 93-406 provided that: "(1) General rule.-In the case of any multiem. ployer plan (as defined in section 414(f) of the Inter- nal Revenue Code of 1954) [section 414(f) of this title] to which section 412 of such Code [this sec- tion] applies, if- "(A) on January 1, 1974, the contributions under the plan were based on a percentage of pay, "(B) the actuarial assumptions with respect to pay are reasonably related to past and projected experience, and "(C) the rates of interest under the plan are de- ternined on the basis of reasonable actuarial as- sumptions, the plan may elect (in such manner and at such time as may be provided under regulations prescribed by the Secretary of the Treasury or his delegate) to fund the unfunded past service liability under the plan existing as of the date 12 months following the first date on which such section 412 [this section] first applies to the plan by charging the funding standard account with an equal annual percentage of the aggregate pay of all participants in the plan in lieu of the level dollar charges to such account re- quired under clauses (I), (it), and (liI) of section 412(b)(2)(B) of such Code (subsee. (b)(2)(B) of this section] and section 302(b)(2)(B)(i), (i), and (iii) of this Act (section 1082(b)(2)(B)(i), (ii), and (iii) of Title 29, Labor]. "(2) Limitation.-In the case of a plan which makes an election under paragraph (1), the aggre- gate of the charges required under such paragraph for a plan year shall not be less than the interest on the unfunded past service liabilities described in clauses (I), (ii), and (iii) of section 412(b)(2)(B) of the Internal Revenue Code of 1954 [subsec. (b)(2)(B) of this title]." SEcTzoN Rmnam To IN O2nER SECTioNs This section is referred to in sections 404, 411, 413, 414, 4971. 4972, 6059, 6110, 6692 of this title; title 29 sections 1083, 1202, 1342, 1343. § 413. Collectively bargained plans, etc. (a) Application of subsection (b) Subsection (b) applies to- (1) a plan maintained pursuant to an agree- ment which the Secretary of Labor finds to be a collective-bargaining agreement between employee representatives and one or more employers, and (2) each trust which Is a part of such plan. (b) General rule If this subsection applies to a plan, notwith- standing any other provision of this title- (1) Participation Section 410 shall be applied as if all employ- ees of each of the employers who are parties to the collective-bargaining agreement and who are subject to the same benefit computa- tion formula under the plan were employed by a single employer. (2) Discrimination, etc. Sections 401(a)(4) and 411(d)(3) shall be ap- plied as if all participants who are subject to the same benefit computation formula and who are employed by employers who are par- ties to the collective bargaining agreement were employed by a single employer. (3) Exclusive benefit For purposes of section 401(a), in determin- ing whether the plan of an employer is for the exclusive benefit of his employees and their beneficiaries, all plan participants shall be considered to be his employees. (4) Vesting Section 411 (other than subsection (d)(3)) shall be applied as if all employers who have been parties to the collective-bargaining agreement constituted a single employer, except that the application of any rules with respect to breaks in service shall be made under regulations prescribed by the Secretary of Labor. (5) Funding The minimum funding standard provided by section 412 shall be determined as if all participants in the plan were employed by a single employer. (6) Liability for funding tax For a plan year the liability under section 4971 of each employer who is a party to the collective bargaining agreement shall be de- termined in a reasonable manner not incon- sistent with regulations prescribed by the Secretary- § 413 Page 336
TITLE 26-INTERNAL REVENUE CODE (A) first on the basis of their respective delinquencies in meeting required employer contributions under the plan, and (B) then on the basis of their respective li- abilities for contributions under the plan. (7) Deduction limitations Each applicable limitation provided by sec- tion 404(a) shall be determined as if all par- ticipants in the plan were employed by a single employer. The amounts contributed to or under the plan by each employer who is a party to the agreement, for the portion of his taxable year which is included within such a plan year, shall be considered not to exceed such a limitation if the anticipated employer contributions for such plan year (determined in a manner consistent with the manner in which actual employer contributions for such plan year are determined) do not exceed such limitation. If such anticipated contributions exceed such a limitation, the portion of each such employer's contributions which is not deductible under section 404 shall be deter- mined in accordance with regulations pre- scribed by the Secretary. (8) Employees of labor unions For purposes of this subsection, employees or employee representatives shall be treated as employees of an employer described in sub- section (a)(1) if such representatives meet the requirements of sections 401(a)(4) and 410 with respect to such employees. (c) Plans maintained by more than one employer In the case of a plan maintained by more than one employer- (1) Participation Section 410(a) shall be applied as if all em- ployees of each of the employers who main- tain the plan were employed by a single em- ployer. (2) Exclusive benefit For purposes of section 401(a), in determin- ing whether the plan of an employer is for the exclusive benefit of his employees and their beneficiaries all plan participants shall be considered to be his employees. (3) Vesting Section 411 shall be applied as if all employ- ers who maintain the plan constituted a single employer, except that the application of any rules with respect to breaks in service shall be made under regulations prescribed by the Secretary of Labor. (4) Funding The minimum funding standard provided by section 412 shall be determined as if all participants in the plan were employed by a single employer. (6) Liability for funding tax For a plan year the liability under section 4971 of each employer who maintains the plan shall be determined in a reasonable manner not inconsistent with regulations pre- scribed by the Secretary- (A) first on the basis of their respective delinquencies in meeting required employer contributions under the plan, and (B) then on the basis of their respective li- abilities for contributions under the plan. (6) Deduction limitations Each applicable limitation provided by sec- tion 404(a) shall be determined as if all par- ticipants in the plan were employed by a single employer. The amounts contributed to or under the plan by each employer who maintains the plan, for the portion of this taxable year which is included within such a plan year, shall be considered not to exceed such a limitation if the anticipated employer contributions for such plan year (determined in a reasonable manner not inconsistent with regulations prescribed by the Secretary) do not exceed such limitation. If such anticipat- ed contributions exceed such a limitation, the portion of each such employer's contributions which is not deductible under section 404 shall be determined in accordance with regu- lations prescribed by the Secretary. Allocations of amounts under paragraphs (4), (5), and (6), among the employers maintaining the plan, shall not be inconsistent with regula- tions prescribed for this purpose by the Secre- tary. (Added rab. L. 93-406, title II, § 1014, Sept. 2, 1974, 85 S;at. 924, and amended Pub. L. 94-455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) AMEDMxENTS 1976-Subsecs. (b), (c). Pub. L 94-455 struck out "or his delegate" following "Secretary". EFMCTIVE DATE Except as otherwise provided in section 1017(c) through (h) of Pub. L. 93-406, section applicable for plan years beginning after Sept. 2, 1974, and, in the case of plans in existence on Jan. 1, 1974, for plan years beginning after Dec. 31, 1975, see section 1017 of Pub. L. 93-406, set out as an Effective Date; Transi- tional Rules note under section 410 of this title. SEcTiON RxniutIx TO IN OTHErs SECTIONS This section is referred to in section 4971 of this title. § 414. Definitions and special rules (a) Service for predecessor employer For purposes of this part-- (1) in any case in which the employer main- tains a plan of a predecessor employer, ser- vice for such predecessor shall be treated as service for the employer, and (2) in any case in which the employer main- tains a plan which is not the plan maintained by a predecessor employer, service for such predecessor shall, to the extent provided in regulations prescribed by the Secretary, be treated as service for the employer. (b) Employees of controlled group of corporations For purposes of sections 401. 410, 411, and 415, all employees of all corporations which are members of a controlled group of corporations (within the meaning of section 1563(a), deter- mined without regard to section 1563(a)(4) and (e)(3)(C)) shall be treated as employed by a single employer. With respect to a plan adopted by more than one such corporation, the mini- mum funding standard of section 412, the tax imposed by section 4971, and the applicable limitations provided by section 404(a) shall be determined as if all such employers were a Page 337 § 414
TITLE 26-INTERNAL REVENUE CODE single employer, and allocated to each employ- er in accordance with regulations prescribed by the Secretary. (c) Employees of partnerships, proprietorships, etc., which are under common control For purposes of sections 401, 410, 411, and 415, under regulations prescribed by the Secre- tary, all employees of trades or businesses (whether or not incorporated) which are under common control shall be treated as employed by a single employer. The regulations pre- scribed under this subsection shall be based on principles similar to the principles which apply in the case of subsection (b). (d) Governmental plan For purposes of this part, the term "govern- mental plan" means a plan established and maintained for its employees by the Govern- ment of the United States, by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing. The term "governmental plan" also includes any plan to which the Railroad Retire- ment Act of 1935 or 1937 applies and which is financed by contributions required under that Act and any plan of an international organiza- tion which is exempt from taxation by reason of the International Organizations Immunities Act (59 Stat. 669). (e) Church plan (1) In general For purposes of this part the term "church pla" means- (A) a plan established and maintained for its employees by a church or by a conven- tion or association of churches which is exempt from tax under section 501, or (B) a plan described in paragraph (3). (2) Certain unrelated business or multiemployer plans The term "church plan" does not include a plan- (A) which is established and maintained primarily for the benefit of employees (or their beneficiaries) of such church or con- vention or association of churches who are employed in connection with one or more unrelated trades or businesses (within the meaning of section 513), or (B) which is a plan maintained by more than one employer, if one or more of the employers in the plan is not a church (or a convention or association of churches) which is exempt from tax under section 501. (3) Special temporary rule for certain church agen- cies under church plan (A) Notwithstanding the provisions of paragraph (2)(B), a plan in existence on January 1, 1974, shall be treated as a church plan if it is established and main- tained by a church or convention or associ- ation of churches and one or more agencies of such church (or convention or associ- ation) for the employees of such church (or convention or association) and the employ- ees of one or more agencies of such church (or convention or association), and if such church (or convention or association) and each such agency is exempt from tax under section 501. (B) Subparagraph (A) shall not apply to any plan maintained for employees of an agency with respect to which the plan was not maintained on January 1, 1974. (C) Subparagraph (A) shall not apply with respect to any plan for any plan year beginning after December 31, 1982. (f) Multiemployer plan (1) In general For purposes of this part, the term "mul- tiemployer plan" means a plan- (A) to which more than one employer is required to contribute, (B) which is maintained pursuant to a col- lective-bargaining agreement between em- ployee representatives and more than one employer, (C) under which the amount of contribu- tions made under the plan for a plan year by each employer making such contribu- tions is less than 50 percent of the aggre- gate amount of contributions made under the plan for that plan year by all imployers making such contributions, (D) under which benefits are payable with respect to each participant without regard to the cessation of contributions by the em- ployer who employed that participant except to the extent that such benefits ac- crued as a result of service with the employ- er before such employer was required to contribute to such plan, and (E) which satisfies such other require- ments as the Secretary of Labor may by regulations prescribe. (2) Special rules For purposes of this subsection- (A) If a plan is a multiemployer plan within the meaning of paragraph (1) for any plan year, subparagraph (C) of para- graph (1) shall be applied by substituting "75 percent" for "50 percent" for each sub- sequent plan year until the first plan year following a plan year in which the plan had one employer who made contributions of 75 percent or more of the aggregate amount of contributions made under the plan for that plan year by all employers making such contributions. (B) All corporations which are members of a controlled group of corporations (within the meaning of section 1563(a), de- termined without regard to section 1563(e)(3)(C)) shall be deemed to be one employer. (g) Plan administrator For purposes of this part, the term "plan ad- ministrator" means- (1) the person specifically so designated by the terms of the instrument under which the plan is operated; (2) in the absence of a designation referred to in paragraph (1)- (A) in the case of a plan maintained by a single employer, such employer, (B) in the case of a plan maintained by two or more employers or jointly by one or more employers and one or more employee organizations, the association, committee, joint board of trustees, or other similar § 414 Page 338
TITLE 26-INTERNAL REVENUE CODE group of representatives of the parties who maintained the plan, or (C) in any case to which subparagraph (A) or (B) does not apply, such other person as the Secretary may by regulation, prescribe. (h) Tax treatment of certain contributions (I) In general Effective with respect to taxable years be- ginning after December 31, 1973, for purposes of this title, any amount contributed- (A) to an employees' trust described in section 401(a), or (B) under a plan described in section 403(a) or 405(a), shall not be treated as having been made by the employer if it is designated as an employee contribution. (2) Designation by units of government For purposes of paragraph (1), in the case of any plan established by the government of any State or political subdivision thereof, or by any agency or instrumentality of any of the foregoing, where the contributions of em- ploying units are designated as employee con- tributions but where any employing unit picks up the contributions, the contributions so picked up shall be treated as employer con- tributions. (I) Defined contribution plan For purposes of this part, the term "defined contribution plan" means a plan which provides for an individual account for each participant and for benefits based solely on the amount contributed to the participant's account, and any income, expenses, gains and losses, and any forfeitures of accounts of other participants which may be allocated to such participant's ac- count. (j) Defined benefit plan For purposes of this part, the term "defined benefit plan" means any plan which is not a de- fined contribution plan. (k) Certain plans A defined benefit plan which provides a bene- fit derived from employer contributions which is based partly on the balance of the separate account of a participant shall- (1) for purposes of section 410 (relating to minimum participation standards), be treated as a defined contribution plan. (2) for purposes of sections 411(a)(7)(A) (re- lating to minimum vesting standards) and 415 (relating to limitations on benefits and contri- butions under qualified plans), be treated as consisting of a defined contribution plan to the extent benefits are based on the separate account of a participant and as a defined benefit plan with respect to the remaining portion of benefits under the plan, and (3) for purposes of section 4975 (relating to tax on prohibited transactions), be treated as a defined benefit plan. (1) Mergers and consolidations of plans or transfers of plan assets A trust which forms a part of a plan shall not constitute a qualified trust under section 401 and a plan shall be treated as not described in section 403(a) or 405 unless in the case of any merger or consolidation of the plan with, or in the case of any transfer of assets or liabilities of such plan to, any other trust plan after Sep- tember 2, 1974, each participant in the plan would (if the plan then terminated) receive a benefit immediately after the merger, consoli- dation, or transfer which is equal to or greater than the benefit he would have been entitled to receive immediately before the merger, consoli- dation, or transfer (if the plan had then termi- nated). This paragraph shall apply in the case of a multiemployer plan only to the extent de- termined by the Pension Benefit Guaranty Cor- poration. (Added Pub. L. 93-406, title II, § 1015, Sept. 2, 1974, 88 Stat. 925, and amended Pub. L. 94-455, title XIX, §§ 1901(a)(64), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1775, 1834.) REFERENCES IN TEXT The Railroad Retirement Act of 1935 or 1937, re- ferred to in subsec. (d), means act Aug. 29, 1935, ch. 812, 49 Stat. 867. known as the Railroad Retirement Act of 1935. The Railroad Retirement Act of 1935 was amended generally by act June 24, 1937, ch. 382, part I, 50 Stat. 307, and was known as the Railroad Retire- ment Act of 1937. The Railroad Retirement ,ct of 1937 was amended generally and redesignated the Railroad Retirement Act of 1974 by Pub. L. 93-444, title I, Oct. 16, 1974, 88 Stat. 1305 and is classified gen- erally to subchapter IV (§ 231 et seq.) of chapter 9 of Title 45, Railroads. For complete classification of this Act to the Code, see Tables volume. The International Organizations Immunities Act (59 Stat. 669), referred to in subsec. (d), is act Dec. 29, 1945, ch. 652, title I, 59 Stat. 669, as amended, which is classified principally to subchapter XVIII (§ 288 et seq.) of chapter 7 of Title 22, Foreign Relations and Inter- course. The Act also amended several other laws includ- ing the Internal Revenue Code of 1939. For exemp- tion from taxation of income of international organiza- tions and of the compensation of employees thereof, see sections 892 and 893 of this title. For complete classification of this Act to the Code, see Short Title note set out under section 288 of Title 22 and Tables volume. AMENDMENTS 1976-Subsecs. (a) to (c. Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (f). Pub. L. 94-455, § 1901(a)(64)(A), substi- tuted "Plan" for "plan" in the subsection catchline. Subsec. (g)(2)(C). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (1). Pub. L. 94-455, § 1901(a)(64)(B), substi- tuted reference to Sept. 2, 1974, for reference to the date of enactment of the Employee Retirement Income Security Act of 1974. EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (1) by section 1901(a)(64) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE Except as otherwise provided in section 1017(c) through (h) of Pub. L. 93--06, section applicable for plan years beginning after Sept. 2, 1974, and, in the case of plans in existence on Jan. 1. 1974, for plan years beginning after Dec. 31, 1975, see section 1017 of Pub. L. 93-406, set out as an Effective Date; T: .,nsl- tional Rules note under section 410 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 410, 411, 412, 415, 4975, 6057, 6058, 6059, 6692 of this title: title 29 sections 1301, 1321. Page 339 § 414
TITLE 26-INTERNAL REVENUE CODE § 415. Limitations on benefits and contribution under qualified plans (a) General rule (1) Trusts A trust which is a part of a pension, profit- sharing, or stock bonus plan shall not consti- tute a qualified trust under section 401(a) if- (A) in the case of a defined benefit plan, the plan provides for the payment of bene- fits with respect to a participant which exceed the limitation of subsection (b), (D) in the case of a defined contribution plan, contributions and other additions under the plan with respect to any partici- pant for any taxable year exceed the limita- tion of subsection (c), or (C) in any case in which an individual is a participant in both a defined benefit plan and a defined contribution plan maintained by the employer, the trust has been dis- qualified under subsection (g). (2) Section applies to certain annuities and ac- counts Except as provided in paragraph (3), in the case of- (A) an employee annuity plan described in section 403(a), (B) an annuity contract described in sec- tion 403(b), (C) an individual retirement account de- scribed in section 408(a), (D) an individual retirement annuity de- scribed in section 408(b), (E) a plan described in section 405(a), or (F) a retirement bond described in section 409, such contract, annuity plan, account, annuity, plan, or bond shall not be considered to be de- scribed in section 403(a), 403(b), 405(a), 408(a), 408(b), or 409, as the case may be, unless it satisfies the requirements of subpar- agraph (A) or subparagraph (B) of paragraph (1), whichever s appropriate, and has not been disqualified under subsection (g). In the case of an annuity contract described in sec- tion 403(b),' the preceding sentence shall apply only to the portion of the annuity con- tract which exceeds the limitation of subsec- tion (b) or the limitation of subsection (c), whichever is appropriate, and the amount of the contribution for such portion shall reduce the exclusion allowance as provided in section 403(b)(2). (3) Accounts, etc., established for non-employed spouse Paragraph (2) shall not apply for any year to an account, amuity, or bond described in section 408(a), 408(b), or 409, respectively, es- tablished for the benefit of the spouse of the individual contributing to such account, or for such annuity or bond, if a deduction is al- lowed under section 220 to such individual with respect to such contribution for such year. (b) Limitation for defined benefit plans (1) In general Benefits with respect to a participant exceed the limitation of this subsection if, when expressed as an annual benefit (within the meaning of paragraph (2)), such annual benefit Is greater than the lesser of- (A) $75,000, or (B) 100 percent of the participant's aver- age compensation for his high 3 years. (2) Annual benefit (A) In general For purposes of paragraph (1), the term "annual benefit" means a benefit payable annually in the form of a straight life annu- ity (with no ancillary benefits) under a plan to which employees do not contribute and under which no rollover contributions (as defined in sections 402(a)(5), 403(a)(4), 408(d)(3), and 409(b)(3)(C)) are made. (B) Adjustment for certain other forms of benefit If the benefit under the plan is payable in any form other than the form described In subparagraph (A), or if the employees con- tribute to the plan or make rollover contri- butiors (as defined in sections 402(a)(5), 403(a)(4), 408(d)(3) and 409(b)(3)(C)), the determinations as to whether the limitation described in paragraph (1) has been satis- fied shall be made, in accordance with regu- lations prescribed by the Secretary by ad- justing such benefit so that it is equivalent to the benefit described in subparagraph (A). For purposes of this subparagraph, any ancillary benefit which is not directly relat- ed to retirement income benefits shall not be taken into account; and that portion of any Joint and survivor annuity which con- stitutes a qualified joint and survivor annu- ity (as defined in section 401(a)(11)(G)(iii)) shall not be taken into account. (C) Adjustment to $75,000 limit where benefit begins before age 55 If the retirement income benefit under the plan begins before age 55, the determi- nation as to whether the $75,000 limitation set forth in paragraph (1)(A) has been satis- fied shall be made, in accordance with regu- lations prescribed by the Secretary, by ad- Justing such benefit so that it is equivalent to such a benefit beginning at age 55. (3) Average compensation for high 3 years For purposes of paragraph (1), a partici- pant's high 3 years shall be the period of con- secutive calendar years (not more than 3) during which the participant both was an active participant in the plan and had the greatest aggregate compensation from the employer. In the case of an employee within the meaning of section 401(c)(1), the preced- ing sentence shall be applied by substituting for "compensation from the employer" the following: "the participant's earned Income (within the meaning of section 401(c)(2) but determined without regard to any exclusion under section 911)". (4) Total annual benefits not in excess of $10,000 Notwithstanding the preceding provisions of this subsection, the benefits payable with respect to a participant under any defined benefit plan shall be deemed not to exceed the limitation of this subsection if- (A) the retirement benefits payable with respect to such participant under such plan and under all other defined benefit plans of § 415 Page 340
TITLE 26-INTERNAL REVENUE CODE the employer do not exceed $10,000 for the plan year, or for any prior plan year, and (B) the employer has not at any time maintained a defined contribution plan in which the participant participated. (5) Reduction for service less than 10 years In the case of an employee who hts less than 10 years of service with the employer, the limitation referred to In paragraph (1), and the limitation referred to in paragraph (4), shall be the limitation determined under such paragraph (without regard to this para- graph), multiplied by a fraction, the numera- tor of which is the number of years (or part thereof) of service with the employer and the denominator of which is 10. (6) Computation of benefits and contributions The computation of- (A) benefits under a defined contribution plan, for purposes of section 401(a)(4), (B) contributions made on behalf of a par- ticipant in a defined benefit plan, for pur- puses of section 401(a)(4), and (C) contributions and benefits provided for a participant In a plan described in sec- ion 414(k), for purposes of this section shall not be made on a basis inconsistent with regulations prescribed by the Secretary. (c) Limitation for defined contribution plans (1) In general Contributions and other additions with re- spect to a participant exceed the limitation of this subsection if, when expressed as an annual addition (within the meaning of para- graph (2)) to the participant's account, such annual addition is greater than the lesser of- (A) $25,000, or (B) 25 percent of the participant's com- pensation. (2) Annual addition For purposes of paragraph (1), the term "annual addition" means the sum of any year of- (A) employer contributions, (B) the lesser of- (I) the amount of the employee contri- butions in excess of 6 percent of his com- pensation, or (it) one-half of the employee contribu- tions, and (C) forfeitures. For the purposes of this paragraph, employee contributions under subparagraph (B) are de- termined without regard to any rollover con- tributions (as defined in sections 402(a)(5), 403(a)(4), 408(d)(3), and 409(b)(3)(C)). (3) Participant's compensation For purposes of paragraph (1), the term "participant's compensation" means the com- pensation of the participant from the employ- er for the year. In the case of an employee within the meaning of section 401(c)(1), the preceding sentence shall be applied by substi- tuting for "compensation of the participant from the employer" the following: "the par- ticipant's earned income (within the meaning of section 401(c)(2) but determined without regard to any exclusion under section 911)". (4) Special election for section 403(b) contracts purchased by educational organizations, hospi- tals, and home health service agencies (A) In the case of amounts contributed for an annuity contract described in section 403(b) for the year in which occurs a par- ticipant's separation from the service with an educational organization, a hospital, or a home health service agency, at the election of the participant there is substituted for the amount specified in paragraph (1)(B) the amount of the exclusion allowance which would be determined under section 403(b)(2) (without regard to this section) for the participant's taxable year in which such separation occurs if the participant's years of service were computed only by taking into account his service for the em- ployer during the period of years (not ex- ceeding ten) ending on the date of such sep- aration. (B) In the case of amounts contributed for an annuity contract described in section 403(b) for any year in the case of a partici- pant who is an employee of an educational organization, a hospital, or a home health service agency, at the election of the par- ticipant there is substituted for the amount specified in paragraph (1)(B) the least of- (1) 25 percent of the participant's inclu- dible compensation (as defined in section 403(b)(3)) plus $4,000, (i) the amount of the exclusion allowance determined for the year under section 403(b)(2), or (ii) $15,000. (C) In the case of amounts contributed for an annuity contract described in section 403(b) for any year for a participant who is an employee of an educational organization, a hospital, or a home health service agency, at the election of the participant the provi- sions of section 403(b)(2)(A) shall not apply. (D)(i) The provisions of this paragraph apply only if the participant elects its appli- cation at the time and in the manner pro- vided under regulations prescribed by the Secretary. Not more than one election may be made under subparagraph (A) by any participant. A participant who elects to have the provisions of subparagraph (A), (B), or (C) of this paragraph apply to him may not elect to have any other subpara- graph of this paragraph apply to him. Any election made under this paragraph is irrev- ocable. (ii) For purposes of this paragraph the term "educational organization" means an educational organization described in sec- tion 170(b)(1)(A)(ii). (iII) For purposes of this paragraph the term "home health service agency" means an organization described in subsection 501(c)(3) which Is exempt from tax under section 501(a) and which has been deter- mined by the Secretary of Health, Educa- tion, and Welfare to be a home health agency (as defined in section 1861(o) of the Social Security Act). (5) Application with section 404(e)(4) In the case of a plan which provides contri- butions or benefits for employees some or all 71-999 0 - 78 - 24 (Vol. 7) Page 341 § 415
TITLE 26-INTERNAL REVENUE CODE of whom are employees within the meaning of section 401(c)(1), the amount determined under paragraph (1)(B) with respect to any participant shall not be less than the amount deductible under section 404(e) with respect to any individual who is an employee within the meaning of section 401(c)(1). (6) Special limitation for employee stock ownership plan (A) In the case of an employee stock owner- ship plan (as defined in subparagraph (B)), under which no more than one-third of the employer contributions for a year are allocat- ed to the group of employees consisting of of- ficers, shareholders owning more than 10 per- cent of the employer's stock (determined under subparagraph (B)(iv)), or employees described in subparagraph (B)(ii), the amount described in paragraph (c)(1)(A) (as adjusted for such year pursuant to subsection (d)(1)) for a year with respect to any partici- pant shall be equal to the sum of (I) the amount described in paragraph (c)(1)(A) (as so adjusted) determined without regard to this paragraph and (ii) the lesser of the amount determined under clause (I) or the amount of employer securities contributed.to the employee stock ownership plan. (B) For purposes of this paragraph- (i) the term "employee stock ownership plan" means a plan which meets the re- quirements of section 4975(e)(7) or section 301(d) of the Tax Reduction Act of 1975, (i) the term "employer securities" means, in the case of an employee stock ownership plan within the meaning of section 4975(e)(7), qualifying employer securities within the meaning of section 4975(e)(8), but only if they are described in section 301(d)(9)(A) of the Tax Reduction Act of 1975, or, in the case of an employee stock ownership plan described in section 301(d)(2) of the Tax Reduction Act of 1975, employer securities within the meaning of section 301(d)(9)(A) of such Act, (iii) an employee described in this clause is any participant whose compensation for a year exceeds an amount equal to twice the amount described in paragraph (1)(A) for such year (as adjusted for such year pursu- ant to subsection (d)(1)), determined with- out regard to subparagraph (A) of this para- graph, and (iv) an individual shall be considered to own more than 10 percent of the employer's stock if, without regard to stock held under the employee stock ownership plan, he owns (after application of section 1563(e)) more than 10 percent of the total combined voting power of all classes of stock entitled to vote or more than 10 percent of the total value of shares of all classes of stock. (7) Certain level premium annuity contracts under plans benefiting owner-employees Paragraph (1)(B) shall not apply to a con- tribution described in section 401(e) which is made on behalf of a participant for a year to a plan which benefits an owner-employee (within the meaning of section 401(c)(3)), if- (A) the annual addition determined under this section with respect to the participant for such year consists solely of such contri- bution, and (B) the participant is not an active partici- pant at any time during such year in a de- fined benefit plan maintained by the em- ployer. For purposes of this section and section 401(e), in the case of a plan which provides contributions or benefits for employees who are not owner-employees, such plan will not be treated as failing to satisfy section 401(a)(4) merely because contributions made on behalf of employees who are not owner- employees are not permitted to exceed the limitations of paragraph (1)(B). (d) Cost-of-living adjustments (1) In general The Secretary shall adjust annually- (A) the $75,000 amount in subsection (b)(1)(A), (B) the $25,000 amount in subsection (c)(1)(A), and (C) in the case of a participant who is sep- arated from service, the amount taken into account under subsection (b)(1)(B), for increases in the cost of living in accor- dance with regulations prescribed by the Sec- retary. Such regulations shall provide for ad- justment procedures which are similar to th! procedures used to adjust primary insurnnce amounts under section 215(i)(2)(A) of the Social Security Act. (2) Base periods The base period taken into account- (A) for purposes of subparagraphs (A) and (B) of paragraph (1) is the calendar quarter beginning October 1, 1974, and (B) for purposes of subparagraph (C) of paragraph (1) is the last calendar quarter of the calendar year before the calendar year in which the participant is separated from service. (e) Limitation in case of defined benefit plan and de- fined contribution plan for same employee (1) In general In any case in which an individual is a par- ticipant in both a defined benefit plan and a defined contribution plan maintained by the same employer, the sum of the defined bene- fit plan fraction and the defined contribution plan fraction for any year may not exceed 1.4. (2) Defined benefit plan fraction For purposes of this subsection, the defined benefit plan fraction for any year is a frac- tion- (A) the numerator of which is the project- ed annual benefit of the participant under the plan (determined as of the close of the year), and (B) the denominator of which is the pro- jected annual benefit of the participant under the plan (determined as of the close of the year) if the plan provided the maxi- mum benefit allowable under subsection (b). (3) Defined contribution plan fraction For purposes of this subsection, the defined contribution plan fraction for any year is a fraction- § 415 Page 342
TITLE 26-INTERNAL REVENUE CODE (A) the numerator of which is the sum of the annual additions to the participant's ac- count as of the close of the year, and (B) the denominator of which is the sum of the maximum amount of annual addi- tions to such account which could have been made under subsection (c) for such year and for each prior year of service with the employer determined without regard to paragraph (6) of such subsection) 1. (4) Special transition rules for defined contribution fraction In applying paragraph (3) with respect to years beginning before January 1, 1976- (A) the aggregate amount taken into ac- count under paragraph (3)(A) may not exceed the aggregate amount taken into ac- count under paragraph (3)(B), and (B) the amount taken into account under subsection (c)(2)(B)(1) for any year con- cerned is an amount equal to- (i) the excess of the aggregate amount of employee contributions for all years be- ginning before January 1, 1976, during which the employee was an active partici- pant of the plan, over 10 percent of the employee's aggregate compensation for all such years, multiplied by (1i) a fraction the numerator of which is 1 and the denominator of which is the number of years beginning before Janu- ary 1, 1976, during which the employee was an active participant in the plan. Employee contributions made on or after Oc- tober 2, 1973, shall be taken into account under subparagraph (B) of the preceding sen- tence only to the extent that the amount of such contributions does not exceed the maxi- mum amount of contributions permissible under the plan as in effect on October 2, 1973. (5) Special rules for sections 403(b) and 408 For purposes of this section, any annuity contract described in section 403(b) (except in the case of a participant who has elected under subsection (c)(4)(D) to have the provi- sions of subsection (c)(4)(C) apply), any indi- vidual retirement account described in section 408(a), any individual retirement annuity de- scribed in section 408(b), and any retirement bond described in section 409, for the benefit of a participant shall be treated as a defined contribution plan maintained by each em- ployer with respect to which the participant has the control required under subsection (b) or (c) of section 414 (as modified by subsec- tion (h)). In the case of any annuity contract described in section 403(b), the amount of the contribution disqualified by reason of subsec- tion tg) shall reduce the exclusion allowance as provided in section 403(b)(2). (f) Combining of plans (1) In general For purposes of applying the limitations of subsections (b), (c), and (e)- (A) all defined benefit plans (whether or not terminated) of an employer are to be treated as one defined benefit plan, and 'So in original. There is no opening parenthesis. (B) all defined contribution plans (wheth- er or not terminated) of an employer are to be treated as one defined contribution plan. (2) Annual compensation taken into account for defined benefit plans If the employer has more than one defined benefit plan- (A) subsection (b)(1)(B) shall be applied separately with respect to each such plan, but (B) in applying subsection (b)(1)(B) to the aggregate of such defined benefit plans for purposes of this subsection, the high 3 years of compensation taken into account shall be the period of consecutive calendar years (not more than 3) during which the individual had the greatest aggregate com- pensation from the employer. (g) Aggregation of plans The Secretary, in applying the provisions of this section to benefits or contributions under more than one plan maintained by the same employer, and to any trusts, contracts, ac- counts, or bonds referred to in subsection (a)(2), with respect to which the participant has the control required under sectinn 414(b) or (c), as modified by subsection (h), shall, under regulations prescribed by the Secretary, dis- qualify one or more trusts, plans, contracts, ac- counts, or bonds, or any combination thereof until such benefits or contributions do not exceed the limitations contained in this section. In addition to taking into account such other factors as may be necessary to carry out the purposes of subsections (e) and f), the regula- tions prescribed under this paragraph shall pro- vide that no plan which has been terminated shall be disqualified until all other trusts, plans, contracts, accounts, or bonds have been disqualified. (h) 50 percent control For purposes of applying subsections (b) and (M) of section 414 to this section, the phrase "more than 50 percent" shall be substittuted for the phrase "at least 80 percent" each place it appears in section 1563(a)(1). (i) Records not available for rast periods Where for the period before January 1, 1976, or (if later) the first day of the first plan year of the plan, the records necessary for the appli- cation of this section are not available, the Sec- retary may by regulations prescribe alternate methods for determining the amounts to be taken into account for such period. (j) Rgulations; definition of year The Secretary shall prescribe such regula- tions as may be necessary to carry out the pur- poses of this section, including, but not limited to, regulations defining the term "year" for purposes of any provision of this section. (k) Special rules (1) 1 Defined benefit plan and defined contribution plan For purposes of this title, the term "defined contribution plan" or "defined benefit plan" means a defined contribution plan (within the meaning of section 414(i)) or a defined I Section enacted without a subsec. (k)(2). Page 343 § 415
TITLE 26-INTERNAL REVENUE CODE benefit plan (within the meaning of section 414(J)), whichever applies, which is- (A) a plan described in section 401(a) which includes a trust which is exempt from tax under section 501(a), (B) an annuity plan described in section 403(a), (C) a qualified bond purchase plan de- scribed in section 405(a), (D) an anmuity contract described in sec- tion 403(b), (E) an individual retirement account de- scribed in section 408(a), (F) an individual retirement annuity de- scribed in section 408(b), or (G) an individual retirement bond de- scribed in section 409. (Added Pub. L. 93-406, title II, § 2004(a)(2), Sept. 2, 1974, 88 Stat. 979, and amended Pub. L. 94-455, title VIII, § 803(b)(4), (f), title XV, §§ 1501(b)(3), 1502(a)(1), 1511(a), title XIX, §§ 1901(a)(65), (b)(8)(D), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1584, 1589, 1735-1737, 1741, 1775, 1794, 1834.) REFnERsS IN TEXT The Social Security Act, referred w in subsecs. (c)(4)(D)(iii), (d)(1), is act Aug. 14, 1935, ch. 531, 49 Stat. 620, as amended, which is classified generally to chapter 7 (§ 301 et seq.) of Title 42, The Public Health and Welfare. Sections 215(i)(2)(A) and 1861(o) of the Social Security Act enacted sections 415(i)(2)(A) and 1395x(o) of Title 42, respectively. For complete classi- fication of this Act to the Code, see Tables volume. Section 301(d) of the Tax Reduction Act of 1975, re- ferred to in subsec. (c)(6)(B)(1), (ii), is set out as a note under section 46 of this title. AMENDMENTS 1976-Subsec. (a)(2). Pub. L. 94-455, § 1501(b)(3)(A), substituted "Except as provided in paragraph (3), in the case" for "In the case". Subsec. (a)(3). Pub. L. 94-455, § 1501(b)(3)(B), added subsec. (a)(3). Subsec. (b)(2)(A). Pub. L. 94-455, § 1901(a)(65)(A), added closing parenthesis following "409(b)(3)(C)". Subsec. (b)(2)(B). Pub. L. 94-455, §§ 1901(a)(65)(B), 1906(b)(13)(A), struck out "or his delegate" following "Secretary" and substituted "section 401(a)(11)(G)(iii)" for "section 401(a)(11)(H)(iii)". Subsec. (b)(2)(C), (6). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c)(4). Pub. L. 94-455, §§ 1901(b)(8)(D), 1906(b)(13)(A), substituted "educational organiza- tions" for "educational institutions" in the heading and "educational organization" for "educational insti- tution" in subpars. (A), (B), and (C), struck out "or his delegate" following "Secretary" in subpar. (D)(i), and substituted "For purposes of this paragraph the term 'educational organization' means an educational orga- nization described in section 170(b)(1)(A)(li)" for "For purposes of this paragraph the term 'educational insti- tution' means an educational institution as defined in section 151(e)(4)" in subpar. (D)(ii). Subsec. (c)(5). Pub. L. 94-455, § 1502(a)(1), added subsec. (c)(5). Subsec. (c)(6). Pub. L. 94-455, §803(f)(1), added subsec. (c)(). Subsec. (c)(7). Pub. L. 94-455, §1511(a), added subsec. (c)(7). Subsec. (d)(1). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (e)(3)(B). Pub. L. 94-455, §803(f)(2), substi- tuted "with the employer determined without regard to paragraph (6) of such subsection)" for "with the employer". Subsec. (e)(5). Pub. L. 94-455, §803(b)(4), substituted "For purposes of this section" for "For purposes of this subsection". Subsecs. (g), (i), (j). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". EFcTxvz DATE OF 1976 AMENDMENT Amendment of subsee. (a) by section 1501(b)(3) of Pub. L. 94-455 effective for years beginning after Dec. 31. 1976, see section 1501(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 220 of this title. Amendment of subsecs. (b) and (c) by section 1901(a)(65) and 0')(8)(D) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see sec- tion 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Section 1502(b) of Pub. L. 94-455 provided that: "The amendment made by subsection (a)(1) [adding subsec. (c)(5) of this section] shall apply to years be. ginning after December 31, 1975. The amendment made by subsection (a)(2) (amending section 404te)(4) of this title] shall apply to taxable years beginning after December 31, 1975." Section 1511(b) of Pub. L. 94-455 provided that: "The amendment made by this section [adding subsec. (c)(7) of this section] shall apply for years beginning after December 31, 1975." Amendment of subsecs. (c) and (e) by section 803(b)(4), f) of Pub. L. 94-455 effective for years be- ginning after Dec. 31, 1975, see section 803(j) of Pub. L. 94-455, set out as an Effective Date of 1976 Amend- ment note under section 46 of this title. EFFECTIVE DATE; TRANSITION PROVISIONS Section 2004(d) of Pub. L. 93-406 provided that: "(1) General rule.-The amendments made by this section [enacting this section and section 401(a)(16) of this title, amending sections 403(b)(2), 404(a)(2), (3)(A). 405(a)(1), and 805(d)(1)(C) of this title, and enacting provisions set out as notes under this sec- tion] shall apply to years beginning after December 31, 1975. The Secretary of the Treasury shall pre- scribe such regulations as may be necessary to carry out the provisions of this paragraph. "(2) Transition rule for defined benefit plans.-In the case of an individual who was an active partici- pant in a defined benefit plan before October 3, 1973, if- "(A) the annual benefit (within the meaning of section 415(b)(2) of the Internal Revenue Code of 1954) [subsec. (b)(2) of this section] payable to such participant on retirement does not exceed 100 percent of his annual rate of compensation on the earlier of (i) October 2, 1973, or (ii) the date on which he separated from the service of the em. ployer, "(B) such annual benefit is no greater than the annual benefit which would have been payable to such participant on retirement if (i) all the terms and conditions of such plan in existence on such date had remained in existence until such retire- ment, and (ii) his compensation taken into account for any period after October 2, 1973, had not ex- ceeded his annual rate of compensation on such date, and "(C) in the case of a participant who separated from the service of the employer prior to October 2, 1973, such annual benefit is n" greater than his vested accrued benefit as of the date he separated from the service, then such annual benefit shall be treated as not ex- ceeding the limitation of subsection (b) of section 415 of the Internal Revenue Code of 1954 [subsec. (b) of this section]." SPECIAL RuLE FOR CERTAIN PLANS IN EFFECT ON SEPT. 2, 1974 Section 2004(a)(3) of Pub. L. 93-406 provided that: Page 344 § 415
TITLE 26-INTERNAL REVENUE CODE "In any case in which, on the date of enactment of this Act [Sept. 2, 19741, an individual is a participant in both a defined benefit plan and a defined contribu- tion plan maintained by the same employer, and the sum of the defined benefit plan fraction and the de- fined contribution plan fraction for the year during which such date occurs exceeds 1.4, the sum of such fractions may continue to exceed 1.4 If- "(A) the defined benefit plan fraction is not in- creased, by amendment of the plan or otherwise, after "(B) no contributions are made under the defined contribution plan after such date. A trust which is part of a pension, profit-sharing, or stock bonus plan described in the preceding sentence shall not be treated as not constituting a qualified trust under section 401(a) of the Internal Revenue Code of 1954 [section 401(a) of this title] on account of the provisions of section 415(e) of such Code [sec- tion 415(e) of this title], as long as it is described in the preceding sentence of this subsection." SECTION REFERED TO IN OTHER SECTIONS This section is referred to in sections 401, 403, 414, 4973 of this title; title 29 sections 1002, 1321. PART II-CERTAIN STOCK OPTIONS See. 421. General rules. 422. Qualified stock options. 423. Employee stock purchase plans. 424. Restricted stock options. 425. Definitions and special rules. AMENDMENTS 1964-Pub. L. 88-272, title II, § 221(a), Feb. 26, 1964, 78 Stat. 63, substituted "Part II-Certain Stock Op- tions" for "Part II-Miscellaneous Provisions", in the heading to Part II, and "General rules" for "Employee stock options" in item 421, and added items 422-425. § 421. General rules (a) Effect of qualifying transfer If a share of stock is transferred to an individ- ual in a transfer in respect of which the re- quirements of section 422(a), 423(a), or 424(a) are met- (1) except as provided in section 422(c)(1), no income shall result at the time of the transfer of such share 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 allowa- ble at any time to the employer corporation, a parent or subsidiary corporation of such corporation, or a corporation issuing or as- suming a stock option in a transaction to which section 425(a) applies, with respect to the share so transferred; and (3) no amount other than the price paid under the option shall be considered as re- ceived by any of such corporations for the share so transferred. (b) Effect of disqualifying disposition If the transfer of a share of stock to an indi- vidual pursuant to his exercise of an option would otherwise meet the requirements of sec- tion 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 attribut- able 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 corporation in which such dispo- sition occurred. (c) Exercise by estate (1) In general If an option to which this part applies is ex- ercised 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 ac- quired shall be considered a disposition of such stock for purposes of sections 423(c) and 424(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 described in para- graph (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 691(c) as if the option acquired from the deceased employee were an item of gross income in respect of the decedent under section 691 and as if the amount includible in gross income under sec- tion 422(c)(1), 423(c), or 424(c)(1) were an amount included in gross income under sec- tion 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 at- tributable 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 attrib- utable to such share. (Aug. 16, 1954, ch. 736, 68A Stat. 142; Feb. 11, 1958, Pub, L. 85-320, § 1, 72 Stat. 4; Sept. 2, 1958, Pub. L, 85-866, title I, §§ 25, 26(a), 72 Stat. Page 345 § 421
TITLE 26-INTERNAL REVENUE CODE 1623, 1624' Feb. 26, 1964, Pub. L. 88-272, title II, § 221(a), 78 Stat. 63.) AMENDMENTS 1964-Pub. L. 88-272 amended section generally, and among other changes. inserted provisions relating to the effect of a qualifyinv transfer, and to the basis of shares acquired when an option is exercised by an estate, and omitted provisions relating to treatment of restricted stock options, a special rule where option price was between 85 percent and 95 percent of value of stock, acquisition of new stock, definitions, modifi- cation, extension, or renewal of option, and corporate rcorganizations, liquidations, etc. See sections 421 to 425 of this title. 1958-Subsec. ka). Pub. L. 85-866, § 25, added sen- tence authorizing substitution of "grantor corpora- tion" or "corporation issuing or assuming a stock option In a transaction to which subsection (g) is ap- plicable" for the term "employer corporation". Subsec. (d)(6)(C). Pub. L. 85-320 added subsec. (d)(6)(C). Subsec. (d)(1)(A)(ii). Pub. L. 85-866, § 26(a)(1), sub- stituted "in the case of a variable price option" for "in case the purchase price of the stock under the option is fixed or determinable under a formula in which the only variable is the value of the stock at any time during a period of 6 months which includes the time the option is exercised" end inserted "fair" preceding "market value". Subsec. (d)(7). Pub. L. 85-866, § 26(a)(2), added subsec. (d)(7). EFFECTIVE DATE OF 1964 AMENDMENT Section 221(e) of Pub. L. 88-272 providre 'hat: "(1) Except as provided in paragraph. (2) and (3), the amendments made by this section [adding sections 422 to 425, and 6039, amending sections 402, 421, 691, 6652, 6678, and the analysis preceding of sections 401 and 6031, and renumbering section 3039 as 3040 of this title] shall apply to taxable years ending after Decem. ber 31, 1963. "(2) The amendments made by paragraphs (1) and (3) of subsection (b) (adding section 3039, renumber- Ing section 3039 as 3040, and amending section 6678 of this title] and paragraph (2) of section 6652(a) of the Internal Revenue Code of 1954 (as amended by para- graph (2) of subsection (b)) [section 6652(a) of this title], shall apply to stock transferred pursuant to op- tions exercised on or after January 1, 1964. "(3) In 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 subsec. tion (a)) [section 422(b) of this title], shall not apply, and "(B) paragraph (1) of section 425(h) of such Code (as added by subsection (a)) (section 425(h) of this title], 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)." EFFECTIVE DATE OF 1958 AMENDMENT Amendment of subsec (a) of this section by Pub. L. 85-866 applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section l(c) of Pub. L. 85-866, set out as an Effective Date of 1958 Amendment note under section 165 of this title. Section 26(b) of Pub. L. 85-866 provided that: "The amendments made by subsection (a) [amending subsec. (d)(1)(A)(ii) and adding subsec. (d)(7) of this section] shall apply with respect to taxable years ending after September 30, 1958." Section 3 of Pub. L. 85-320 provided that: "The amendments made by this Act [adding subpar. (C) to subsec. (d)(6) of this section and repealing subsec. (d) of section 1014 of this title] shall apply with respect to taxable years ending after December 31, 1956, but only in the case of employees dying after such date." SECTION REFERRED TO IN OTI9R SECTIONS This section is referred to in sections 83, 422, 423, 424, 691 of this title. § 422. Qualified stock options (a) In general Subject to the provisions of subsection (c)(1), section 421(a) shall apply with respect to the transfer of a share of stock 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 be- ginning on the day after the day of the trans- fer of such share, and (2) at all times during the period beginning 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 corpora- tion of such corporation, or a corporation or a parent or subsidiary corporation of such cor- poration issuing or assuming a stock option in a transaction to which section 425(a) applies. (b) Qualified stock option For purposes of this part, the term "qualified stock option" means an option granted to an in- dividual after December 31, 1903 (other than a restricted stock option granted pursuant to a contract described In section 424(c)(3)(A)), and before May 21, 1976 (or, if It meets the require- ments of subsection (c)(7), granted to an indi- vidual after May 20, 1976), for any reason con- nected 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 be issued under options, and the employees (or class of employees) eli- gible to receive options, and which is ap- proved 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 stockhold- ers whichever is earlier; (3) such option by its terms is not exercis- able 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 exercis- able 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 cor- poration which (at the time of the granting of such option) is a parent or subsidiary cor- poration of the employer corporation, or in a predecessor corporation of any of such corpo- rations; (6) such option by its terms is not transfer- able by such individual otherwise than by will § 422 Page 346
TITLE 26-INTERNAL REVENUE CODE or the laws of descent and distribution, and is exercisable, dturing his lifetime, only by him; and (7) such individual, immediately after such option is granted, does not own stock possess- Ing more than 5 percent of the total com- bined 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 option 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 $i,000,000. (c) Special rules (1) Exercise of option when price is less than value of stock If a share of stock is transferred pursuant to the exercise by an individual of an option which fails to qualify as a qualified stock option 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) 150 percent of the difference between the option price and the fair market value of the share at the time the option was granted, or (B) the difference between the option price and the fair market value of the share at the time of such exercise. The basis of the share acquired shall be in- creased by an amount equal to the amount in- cluded in his gross income under this para- graph in the taxable year in which the exer- cise occurred. (2) Certain options treated as outstanding For purposes of subsection (b)(5)- (A) any restricted stock option which is not terminated before January 1, 1965, and (B) any qualified stock option granted after December 31, 1963, shall be treated as outstanding until such option is exercised in full or expires by reason of the lapse of time. For purposes of the pre- ceding 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. (3) Options granted to certain shareholders For purposes of subsection (b)(7)- (A) the term "equity capital" means- (1) in the case of one corporation, the sum of its money and other property (in an amount equal to the adjusted basis of such property for determining gain), less the amount of its indebtedness (other than indebtedness to shareholders), and (i) in the case of a group of corpora- tions consisting of a parent and Its subsid- iary corporations, the sum of the equity capital of each of such corporations ad- justed, under regulations prescribed by the Secretary, to eliminate the effect of intercorporate ownership and transac- tions among such corporations; (B) the rules of section 425(d) shall apply in determining the stock ownership of the individual: and (C) stock which the individual may pur- chase 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) (deter- mined by applying the rules of this para- graph), such option shall be treated as meet- Ing the requirement 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 with- out exceeding such limitation. The portion of such option which is treated as meeting tle requirement of subsection (b)(7) shall be deemed to be that portion of the option which is first exercised. (4) Certain disqualifying dispositions where amount realized is less than value at exercise If-- (A) an individual who has acquired a, share of stock by the exercise of a qualified stock option makes a disposition of such share within the 3-year period described in subsection (a)(1), and (B) such disposition is a sale or exchange with respect to which a loss (if s~istained) would be recognized to such individual, then the amount which is includible in the gross income of such individual, and i.he 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 amount realized on such sale or exchange over the adjusted basis of such share. (5) Certain transiers by insolvent individuals If an insolvent 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 insolven- cy proceeding, neither such transfer, nor any other transfer of such share for the benefit of his creditors in such proceeding, shall consti- tute a "disposition of such share" for pur- poses of subsecion (a)(1). (6) Application of subsection (b)(5) whele 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 Page 347 § 422
TITLE 26-INTERNAL REVENUE CODE (B) the new option by its terms is not ex- ercisable 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 pur- chase 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. (7) Certain options granted after May 20, 1976 For purposes of subsection (b), an option granted after May 20, 1976, meets the re- quirements of this paragraph- (A) if such option is granted to an individ- ual pursuant to a written plan adopted before May 21, 1976, or (B) if such option is a new option substi- tuted, in a transaction to which section 425(a) applies, for an old option which was granted before May 21, 1976, or which met the requirements of subparagraph (A). An option described in the preceding sentence shall be treated as ceasing to meet the re- quirements of this paragraph if it is not exer- cised before May 21, 1981. (Added Pub. L. 88-272, title II, § 221(a), Feb. 26, 1964, 78 Stat. 64, and amended Pub. L. 94-455, title VI, § 603(a), (b), title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1574, 1834.) REFERENCES IN TEXT The Bankruptcy Act, referred to in subsec. (c)(5), is art. July 1. 1898, ch. 541, 30 Stat. 544, as amended, which is classified generally to Title If, Bankruptcy. For complete classification of this Act to the Code, see Tables volume. AMENDMENTS 1976-Subsec. (b). Pub. L. 94-455, §603(a), added "and before May 21, 1976 (or, if it meets the requir- ments of subsection (c)(7), granted to an individual after May 20, 1976)," in the provisions preceding par. (1). Subsec. (c)(3)(A)(i). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c)(7). Pub. L. 94-455, § 603(b), added subsec. (c)(7). EFFECTIVE DATE OF 1976 AMENDMENT Section 603(d) of Pub. L. 94-455 provided that: "The amendments made by this section [amending subsec. (b) and enacting subsec. (c)(7) of this section and amending section 424(c)(3) of this title] shall apply to taxable years ending after December 31, 1975." EFFECTIVE DATE Section applicable to taxable years ending after Dec. 31, 1963, except in cases of options granted after Dec. 31, 1963, and before Jan. 1, 1965, in which case pars. (1) and (2) of subsec. (b) shall not apply, see section 221(e) of Pub. L. 88-272 set out as an Effective Date of 1964 Amendment note under section 421 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 57, 421, 425, 1023, 6039 of this title. § 423. Employee stock purchase plans (a) General 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 31, 1963 (other than a restrict- ed stock option granted pm suant to a plan de- scribed in section 424(c)(3)(B), under an em- ployee stock purchase plan (as defined in sub- section (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 9 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 3 months before the date of such exercise, he is an employee of the corporation granting such option, a parent or subsidiary corporation of such cor- poration, or a corporation or a parent or sub- sidiary corporation of such corporation issu- ing or assuming a stock option in a transac- tion to which section 425(a) applies. (b) Employee stock purchase plan 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 cor- poration to purchase stock in any such corpo- ration; (2) such plan is approved by the stockhold- ers of the granting corporation within 12 months before or after the date such plan is adopted; (3) under the terms of the plan, no employ- ee can be granted an optoin if such employee, immediately after the option is granted, owns stock possessing 5 perient 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 sec- tion 425(d) shall apply in determining the stock ownership of an individual, and stock which the employee may purchase under out- standing 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 corpora- tion 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 employ- ment is 20 hours or less per week, (C) employees whose customary employ- ment 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 employ- ees granted such options shall have the same rights and privileges, except that the amount of stock which may be purchased by any em- ployee under such option may bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of em- ployees, and the plan may provide that no employee may purchase more than a maxi- mum amount of stock fixed under the plan; § 423 Page 348
TITLE 26-INTERNAL REVENUE CODE (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 les than 85 per- cent 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 deter- minable in the manner described in subpar- agraph (A) (8) under the terms of the plan, no employ- ee may be granted an option which permits his rights to purchase stock under all such plans of his employer corporation and its parent and subsidiary corporations to accrue at a rate which exceeds $25,000 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 por- tion thereof) first becomes 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 accured 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 other- wise than by will or the laws of descent and distribution, and is exercisable, during his lifetime, only by him. For purposes of paragraphs (3) to (9), inclusive, where additional terms are contained in an of- fering 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 where option price Is between 85 per- cent and 100 percent of value of stock If the option price of a share of stock ac- quired 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 holding period requirements of subsection (a), or in the event of his death (whenever occurring) while owning such share, there shall be included as compen- sation (and not as gain upon the sale or ex- change 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 pur- poses of this subsection, the option price shall be determined as if the option were exercise( at such time. In 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. (Added Pub. L. 88-272, title II, § 221(a), Feb. 26, 1964, 78 Stat. 67, and amended Pub. L. 94-455, title XIV, § 1402(b)(1)(E), Oct. 4, 1976, 90 Stat. 1732.) TAXABLE YEARS AFTER 1977 Subsec. (a)(1) of this section amended by Pub. L. 94-455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, effective for taxable years beginning after Dec. 31, 1977, by sub- stituting "1 year"for "9 months". AMENDMENTS 1976-Subsec. (a)(1). Pub. L. 94-455 provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977. EmcTivE DATE OF 1976 AMENDMENT Section 1402(b)(1) of Pub. L. 94-455 provided in part that the substitution of "9 months" for "6 months" In subsec. (a)(1) of this section by section 1402(b)(1)(E) of Pub. L. 94-455 is effective with respect to taxable years beginning in 1977. EFFECTIvE DATE Section applicable to taxable years ending after Dec. 31, 1963, see section 221(e) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment not6 under sec- tion 421 of this title. SECTION REFRED TO IN OTm SECTIONS This section Is referred to in sections 421, 424, 425, 1023, 6039 of this title. § 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 restrict- ed 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 9 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 corpo- ration 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 Page 349 § 424
TITLE 26-INTERNAL REVENUE CODE (B) he ceased to be an employee of such corporations within the 3-month period pre- ceding the time of exercise. (b) Restricted stock option For purposes of this part, the term "restrict- ed stock option" means an option granted after February 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 connect- ed 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) 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 (B) in the case of a variable price option, the option price tcomputed 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 transfer- able by such individual otherwise than by will or the laws of descent and distribution, and is exercisable, during his lifetime, only by him; (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 cor- poration. 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 exercis- able 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 exercis- able 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 no disposition of a share of stock ac- quired 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 9 months after the transfer of such share to him, at the time the restricted stock option was granted, the option price (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 but, or in the event of his death (whenever occurring) while owning such share, there shall be included as compensa- tion (and not as gain upon the sale or ex- change 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 clos- ing with his death, whichever applies- (A) in the case of a share of stock ac- quired 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 (i) 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 (i) 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). In 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 option 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 9 months which includes the time the option is exercised; except that in the case of options granted after September 30, 1958, such term does not include any such option in which such formula provides for determining such price by reference to the fair mamKe, value of the stock at any time before the option is exercised if such value may be great- er 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 Janu- ary 1, 1964, and as of the date of the grant- ing 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 of- ficers, persons whose principal duties con- sist of supervising the work of other em- ployees, or highly compensated employ- ees. An option described in the preceding sentence shall be treated as ceasing to meet the re- quirements of this paragraph if it is not exer- cised before May 21, 1981. (Added Pub. L. 88-272, title II, § 221(a), Feb. 26, 1964, 78 Stat. 69, and amended Pub. L. 94-455, title VI, § 603(c), title XIV, § 1402(b)(1)(F), Oct. 4, 1976, 90 Stat. 1574, 1732.) Page 350 § 424
TITLE 26-INTERNAL REVENUE CODE TAXABLE YEARS AFTER 1977 Subsecs. (a)(1) and (c)(1), (2) of this sec- tion amended by Pub. L. 94-455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, effec- tive for taxable years beginning after Dec. 31, 1977, by substituting "1 year" for "9 months". AMENDMENTS 1976-Subsecs. (a)(l), (c)(1), (2). Pub. L. 94-455, § 1402(b)(1)(F), (2), provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977. Subsec. (c)(3). Pub. L. 94-455, § 603(c), added provi- sion following subpar. (B) that options described in the preceding sentence should be treated as ceasing to meet the requirements for options granted after Dec. 31, 1963, if they are not exercised before May 21, 1981. EFFECTIvE DATE OF 1976 AMENDMENT Section 1402(b)(1) of Pub. L. 94-455 provided in part that the substitution of "9 months" for "6 months" in subsecs. (a)(1) and (c)(1) and (2) of this section by sec- tion 1402(b)(1)(F) of Pub. L. 94-455 is effective with respect to taxable years beginning in 1977. Amendment of subsec. (c) by section 603(c) of Pub. L. 94-455 effective for taxable years ending after Dec. 31, 1975, see section 603(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under sec- tion 422 of this title. EFFECTIVE DATE Section applicable to taxable years ending after Dec. 31, 1963, see section 221(e) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under sec- tion 421 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 57, 421, 422, 423, 425, 1023, 6039 of this title. § 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 substitu- tion 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 im- mediatly 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 addi- tional benefits which he did not have under the old option. For purposes of this subsection, the parent-sub- sidiary relationship shall be determined at the time of any such transaction under this subsec- tion. (b) Acquisition of new stock For purposes of this part, if stock is received by an individual in a distribution to which sec- tion 305, 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applies, and such distribution was made with respect to stock transferred to him upon his exercise of the option, such stock 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 pivided in paragraph (2), for purposes of this oart, the term "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 request or inheri- tance; (B) an exchange to which section 354, 355, 356, or 1036 (or so much of section 1031 as relates to section 1036) applies; or (C) a mere pledge or hypothecation. (2) Joint tenancy 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 tenacy (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 per- centage limitations of sections 422(b)(7), 423(b)(3), and 424(b)(3)- (1) the individual with respect to whom such limitation is being determined shall be considered as owning the stock owned, direct- ly or indirectly, by or for his brothers and sis- ters (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 being owned pro- portionately by or for its shareholders, part- ners, 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 "subsid- iary corporation" means any corporation (other than the employer corporation) in an unbroken chain of corporations beginning with the em- ployer corporation if, at the time of the grant- ing of the option, each of the corporations other than the last corporation in the unbro- ken 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. Page 351 § .125
TITLE 26-INTERNAL REVENUE CODE (g) Special rule for applying subsections (e) and (f) In applying subsections (e) and (f) for pur- poses of section 422(a)(2), 423(a)(2), and 424(a)(2), there shall be substituted for the term "employer corporation" wherever it ap- pears in subsection (e) and (f) the term "gran- tor corporation" or the term "corporation issu- ing 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 option (1) In general For purposes of this part, if the terms of any option to purchase stock are modified, extended, or renewed, such modification, ex- tension, or renewal shall be considered as the granting of a new option. (2) Special rules for sections 423 and 424 options (A) In the case of the transfer of stock pur- suant 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 consid- ered 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, (i) the fair market value of such stock on the date of the making of such modifica- tion, extension, or renewal, or (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 renew- al of a restricted stock option before January 1, 1964 (or after December 31, 1963, if made pursuant to a binding written contract en- tered into before January 1, 1964), if the ag- gregate 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 re- newal, 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 renew- al, 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 as- sumption of an option under subsection (a); (B) to permit the option to qualify under sections 422(b)(6), 423(b)(9), and 424(b)(2); or (C) in the case of an option not immedi- ately 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 deter- mined as if the option had not been subject to such approval. (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. (Added Pub. L. 88-272, title II, § 221(a), Feb. 26, 1964, 78 Stat. 71.) Er-rzcrvE DATE Section applicable to taxable years ending after Dec. 31, 1963, except in cases of options granted after Dec. 31, 1963, and before Jan. 1, 1965, in which case par. (1) of subsec. (h) shall not apply to any change in the terms of such option made before Jan. 1, 1965, to permit such option to qulify under pars. (3), (4), and (5) of section 422(b), see section 221(e) of Pub. L. 88- 272, set out as an Effective Date of 1964 Amendment note under section 421 of this title. SECTION REFERRED TO IN OTHER SEcTIONS This section is referred to in sections 402, 421, 422. 423, 424 of this title. Subchapter E-Accounting Periods and Methods of Accounting Part I. Accounting periods. II. Methods of accounting. III. Adjustments. PART I-ACCOUNTING PERIODS Sec. 441. Period for computation of taxable income. 442. Change of annual accounting period 443. Returns for a period of less than 12 months. § 441. Period for computation of taxable Income (a) Computation of taxable income Taxable income shall be computed on the basis of the taxpayer's taxable year. (b) Taxable year For purposes of this subtitle, the term "tax- able year" means- (1) The taxpayer's annual accounting period, if it is a calendar year or a fiscal year; (2) the calendar year, if subsection (g) ap- plies; or (3) the period for which the return is made, If a return is made for a period of less than 12 months. (c) Annual accounting period For purposes of this subtitle, the term "annual accounting period" means the annual period on the basis of which the taxpayer regu- larly computes his income in keeping his books. (d) Calendar year For purposes of this subtitle, the term "calen- dar year" means a period of 12 months ending on December 31. (e) Fiscal year For purposes of this subtitle, the term "fiscal year" means a period of 12 months ending on Page 352
TITLE 26-INTERNAL REVENUE CODE the last day of any month other than Decem- ber. In the case of any taxpayer who has made the election provided by subsection (f) the term means the annual period (varying from 52 to 53 weeks) so elected. (f) Election of year consisting of 52-53 weeks (1) General rule A taxpayer who, in keeping his books, regu- larly computes his Income on the basis of an annual period which varies from 52 to 53 weeks and ends always on the same day of the week and ends always- (A) on whatever date such same day of the week last occurs in a calendar month, or (B) on whatever date such same day of the week falls which is nearest to the last day of a calendar month, may (in accordance with the regulations pre- scribed under paragraph (3)) elect to compute his taxable income for purposes of this subti- tle on the basis of such annual period. This paragraph shall apply to taxable years ending after the date of the enactment of this title. (2) Special rules for 52-53-week year (A) Effective dates In any case in which the effective date or the applicability of any provision of this title is expressed in terms of taxable years beginning, including, or ending with refer- ence to a specified date which is the first or last day of a month, a taxable year de- scribed in paragraph (1) shall (except for purposes of the computation under section 21) be treated- (i) as beginning with the first day of the calendar month beginning nearest to the first day of such taxable year, or (it) as ending with the last day of the calendar month ending nearest to the last day of such taxable year, as the case may be. (B) Change in accounting period In the case of a change from or to a tax- able year described in paragraph (1)- (I) if such change results in a short period (within the meaning of section 443) of 359 days or more, or of less than 7 days, section 443(b) (relating to alternative tax computation) shall not apply; (it) if such change results in a short period of less than 7 days, such short period shall, for purposes of this subtitle, be added to and deemed a part of the fol- lowing taxable year; and (iii) if such change results in a short period to which subsection (b) of section 443 applies, the taxable income for such short period shall be placed on an annual basis for purposes of such subsection by multiplying such income by 365 and divid- ing the result by the number of days in the short period, and the tax shall be the same part of the tax computed on the annual basis as the number of days in the short period is of 365 days. (3) Regulations The Secretary shall prescribe such regula- tions as he deems necessary for the applica- tion of this subsection. (g) No books kept; no accounting period Except as provided in section 443 (relating to returns for periods of less than 12 months), the taxpayer's taxable year shall be the calendar year if- (1) the taxpayer keeps no books; (2) the taxpayer does not have an annual accounting period; or (3) the taxpayer has an annual accounting period, but such period does not qualify as a fiscal year. (Aug. 16, 1954, ch. 736, 68A Stat. 148; Feb. 26, 1964, Pub. L. 88-272, title II, § 235(c)(3), 78 Stat. 127; Oct. 4, 1976, Pub. L. 94-455, Title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMErTs 1976--Subsec. (f)(3). Pub. L. 94-455 struck out "or his delegate" following "Secretary". 1964-Subsec. (f)(2)(A). Pub. L. 88-272 inserted ", in- cluding," preceding "cr ending with reference to". EnrEcivE D,\E or 1964 AMEMirr Amendment of section by Pub. L. 88-272 applicable to taxable years ending after Dec. 31, 1963, see section 235(d) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 1551 of this title. Cnoss REnm=cES Definitions of fiscal year and taxable year, see sec- tion 7701 of this title. General requirement of return, statement, or list, see section 6011 of this title. General rule for methods of accounting, see section 446 of this title. SECTION REFMRED TO IN OTHER SECTIONS This section is referred to in section 442 of this title. § 442. Change of annual accounting period If a taxpayer changes his annual accounting period, the new accounting period shall become the taxpayer's taxable year only if the change is approved by the Secretary. For purposes of this subtitle, if a taxpayer to whom section 441(g) applies adopts an annual accounting period (as defined in section 441(c)) other than a calendar year, the taxpayer shall be treated as having changed his annual accounting period. (Aug. 16, 1954, ch. 736, 68A Stat. 149; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Pub. L. 94-455 struck out "or his delegate" fol- lowing "Secretary". SECTION RMWUsz TO IN OTHER SECTIONS This section is referred to in section 6110 of this title. § 443. Returns for a period of less than 12 months (a) Returns for short period A return for a period of less than 12 months (referred to in this section as "short period") shall be made under any of the following cir- cumstances: (1) Change of annual accounting period When the taxpayer, with the approval of the Secretary, changes his annual accounting Page 353 § 443
TITLE 26-INTERNAL REVENUE CODE period. In such a case, the return shall be made for the short period beginning on the day after the close of the former taxable year and ending at the close of the day before the day designated as the first day of the new taxable year. (2) Taxpayer not in existence for entire taxable year When the taxpayer is in existence during only part of what would otherwise be his tax- able year. (b) Computation of tax on change of annual account. ing period (1) General rule If a return Is made under paragraph (1) of subsection (a), the taxable income for the short period shall be placed on an annual basis by multiplying such income by 12 and dividing the result by the number of months in the short period. The tax shall be the same part of the tax computed on the annual basis as the number of months in the short period is of 12 months. (2) Exception (A) Computation based on 12-month period If the taxpayer applies for the benefits of this paragraph and establishes the amount of his taxable Income for the 12-month period described in subparagraph (B), com- puted as if that period were a taxable year and under the law applicable to that year, then the tax for the short period, computed under paragraph (1), shall be reduced to the greater of the following: (I) an amount which bears the same ratio to the tax computed on the taxable income for the 12-month period as the taxable Income computed on the basis of the short period bears to the taxable income for the 12-month period; or (ii) the tax computed on the taxable income for the short period without plac- ing the taxable Income on an annual basis. The taxpayer (other than a taxpayer to whom subparagraph (B)(il) applies) shall compute the tax and file his return without the application of this paragraph. (B) 12-month period The 12-month period referred to in sub- paragraph (A) shall be- (i) the period of 12 months beginning on the first day of the short period, or (ii) the period of 12 months ending at the close of the last day of the short period, if at the end of the 12 months re- ferred to in clause (I) the taxpayer is not in existence or (if a corporation) has theretofore disposed of substantially all of its assets. (C) Application for benefits Application for the benefits of this para- graph shall be made in such manner and at such time as the regulations prescribed under subparagraph (D) may require; except that the time so prescribed shall not be later than the time (including exten- sions) for filing the return for the first tax- able year which ends on or after the day which is 12 mouths after the first day of the short period. Such application, in case the return was filed without regard to this paragraph, shall be considered a claim for credit or refund with respect to the amount by which the tax Is reduced under this paragraph. (D) Regulations The Secretary shall prescribe such regula- tions as he deems necessary for the applica- tion of this paragraph. (c) Adjustment in deduction for personal exemption In the case of a taxpayer other than a corpo- ration, if a return Is made for a short period by reason of subsection (a)(1) and if the tax is not computed under subsection (b)(2), then the ex- emptions allowed as a deduction under section 151 (and any deduction in lieu thereof) shall be reduced to amounts which bear the same ratio to the full exemptions as the number of months In the short period bears to 12. (d) Adjustment in exclusion for computing minimum tax for tax preferences If a return is made for a short period by reason of subsection (a), then the $10,000 amount specified in section 56 (relating to mini- mum tax for tax preferences), modified as pro- vided by section 58, shall be reduced to the amount which bears the same ratio to such specified amount as the number of days in the short period bears to 365. (e) Cross references For inapplicability of subsection () In computing- (1) Accumulated earnings tax, see section 536. (2) Personal holding company tax, see section 546. (3) Undistributed foreign personal holding company income, see section 557. (4) The taxable income of a regulated investment com- pany, see section 852(b)(2)(E). (5) The taxable income of a real estate Investment trust, see section 857(b)(2)(C). (Aug. 16, 1954, ch. 736, 68A Stat. 149; Sept. 14, 1960, Pub. L. 86-779, § 10(0), 74 Stat. 1009; Dec. 30, 1969, Pub. L. 91-172, title III, § 301(b)(6), 83 Stat. 585; Oct. 4, 1976, Pub.,L. 94-455, title III, § 301(e), title XII, § 1204(c)(2), title XVI, § 1607(b)(1)(C), title XIX, § 1906(b)(13)(A), 90 Stat. 1553, 1697, 1757, 1834.) AMENDMENTS 1976-Subsec. (a)(1). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. !a)(3). Pub. L. 94-455, § 1204(c)(2), struck out subsec. (a3) which made termination of taxpayer's taxable year under section 6851 as one of the circum- stances under which a tax return for a period of less than 12 months shall be made. Subsec. (b)(2)(D). Pub. L. 94-455, § 1906(b)(13)(A), struck out' or his delegate" following "Secretary". Subsec. d). Pub. L. 94-455, §301(e), substituted "10,000" for "$30,000". Subsec. (e,,(5). Pub. L. 94-455, § 1607(b)(1)(C), substi- tuted "section 857(b)(2)(C)" for "section 857(b)(2)(D)". 1969-Subsec. (d). Pub. L. 91-172 added subsec. (d). Former subsec. (d) redesignated (e). Subsec. (e). Pub. L. 91-172 redesignated former subsec. (d) as (e). 1960-Subsec. (d)(5). Pub. L. 86-779 added par. (5). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (a) by section 1204(c)(2) of Pub. L. 94-455 effective with respect to action taken under section 6851, 6861 or 6862 of the Internal Rev- § 443 Page 354
TITLE 26-INTERNAL REVENUE CODE enue Code of 1954 wher the notice and demand takes place after Feb. 28, 1977, see section 1204(d) of Pub. L. 94-455, as amended by Pub. L. 94-528, set out as an Ef- fective Date of 1976 Amendment note under section 6851 of this title. Amendment of subsec. (d) by section 301(e) of Pub. L. 94-455 effective for items of tax preferences for tax- able years beginning after Dec. 31, 1975, with excep- tions, see section 301(g) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 56 of this title. For effective date of amendment of subsec. (e) by section 1607(b)(1)(C) of Pub. L. 94-455, see section 1608(c) of Pub. L..94-455, set out as an Effective Date of 1976 Amendment note under section 857 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Subsec. (d) of this section applicable to taxable years ending after Dec. 31, 1969, see section 301(c) of Pub. L. 91-172, set out as an Effective Date note under section 56 of this title. EFFECTIVE DATE OF 1960 AMENDMENT Amendment by Pub. L. 86-779 applicable with re- spect to taxable years of real estate investment trusts beginning after Dec. 31, 1960, see section 10(k) of Pub. L. 86-779, set out as on Effective Date note under sec- tion 856 of this title. CROSS REFERENCES Joint return not allowed if taxable year of either spouse is fractional part of year, see section 6013 of this title. SECTION R"ERRED TO IN OTHER SECTIONS This section is referred to in sections 142, 441, 536, 546, 557, 818, 852, 857, 6013 of this title. PART II-METHODS OF ACCOUNTING Subpart A. Methods of accounting in general. B. Taxable year for which items of gross income in- cluded. C. Taxable year for which deductions taken. D. Inventories. SUBPART A-METHODS OF AccOUNTIN, IN GENERAL Sec. 446. General rule for methods ol accounting. 447. Method of accounting for corporations engaged in farming AMENDMENTS 1976-Pub. L. 94-455, title II, § 207(c)(1)(B), Oct. 4. 1976, 90 Stat. 1541, added item 447. § 446. General rule for methods of accounting (a) General rule Taxable in-ome shall be computed under the method of accounting on the basis of which the taxpayer regularly computes his income in keeping his books. (b) Exceptions If no method of accounting has been regular- ly used by the taxpay,,-, or if the method used does not clearly reflect income, the computa- tion of taxable income shall be made under such method as, in the opinion of the Secre- tary, does clearly reflect income. (c) Permissible methods Subject to the provisions of subsections (a) and (b), a taxpayer may compute taxable income under any of the following methods of accounting- (1) the cash receipts and disbursements method; (2) an accrual method; (3) any other method permitted by this chapter; or (4) any combination of the foregoing meth- ods permitted under regulations prescribed by the Secretary. (d) Taxpayer engaged in more than one business A taxpayer engaged in more than one trade or business may, in computing taxable income, use a different method of accounting for each trade or business. (e) Requirement respecting change of accounting method Except as otherwise expressly provided in this chapter, a taxpayer who changes the method of accounting on the basis of which he regularly computes his income in keeping his books shall, before computing his taxable income under the new method, secure the con- sent of the Secretary. (Aug. 16, 1954, ch. 736, 68A Stat. 151; Oct. 4. 1976, Pub. L. 94-455, title XIX, § 1906 (b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Subsecs. (b), (c), (W). Pub. L. 94-455 struck out "or his delegate" following "Secretary". CRoss REFERENCES Period for computation of taxable income, see sec- tion 441 of this title. SECTION REFERAED TO IN OTHER SECTIONS This section is referred to in sections 463, 6110 of this title. § 447. Method of accounting for corporations engaged in farming (a) General rule Except as otherwise provided by law, the tax- able income from farming of- (1) a corporation engaged in the trade or business of farming, or" (2) a partnership engaged in the trade or business of farming, if a corporation is a part- ner in such partnership, shall be computed on an accrual method of ac- counting and with the capitalization of prepro- ductive expenses described in subsection (b). This section shall not apply to the trade or business of operating a nursery or to the raising or harvesting of trees (other than fruit and nut trees). (b) Preproductive period expenses (1) In general For purposes of this section, the term "pre- productive period expenses" means any amount which is attributable to crops, ani- mals, or any other property having a crop or yield during the preproductive period of such property. (2) Exceptions Paragraph (1) shall not appiy- (A) to taxes and interest, and Page 355 § 447
TITLE 26-INTERNAL REVENUE CODE (B) to any amount incurred on account of fire, storm, flood, or other casualty or on account of disease or drought. (3) Preproductive period defined For purposes of this subsection, the term "preproductive period" means- (A) in the case of property having a useful life of more than 1 year which will have more than 1 crop or yield, the period before the disposition of the first such marketable crop or yield, or (B) in the case of any other property, the period before such property is disposed of. For purposes of this section, the use by the taxpayer In the trade or business of farming of any supply produced in such trade or busi- ness shall be treated as a disposition. (c) Exception for small business and family corpora. tions For purposes of subsection (a), a corporation shall be treated as not being a corporation if it is- (1) an electing small business corporation (within the meaning of section 1371(b)), (2) a corporation of which at least 50 per- cent of the total combined voting power of all classes of stock entitled to vote, and at least 50 percent of the total number of shares of all other classes of stock of the corporation, are owned by members of the same family, or (3) a corporation the gross receipts of which meet the requirements of subsection (e). (d) Members of the same family For purposes of subsection (c)(2)- (1) the members of the same family are an individual, such individual's brothers and sis- ters, the brothers and sisters of such individ- ual's parents and grandparents, the ancestors and lineal descendants or any of the forego- Ing, a spouse of any of the foregoing, and the estate of any of the foregoing, (2) stock owned, directly or indirectly, by or for a partnership or trust shall be treated as owned proportionately by its partners or beneficiaries, and (3) if 50 percent or more in value of the stock in a corporation (hereinafter in this paragraph referred to as "first corporation") is owned, directly or through paragraph (2), by or for members of the same family, such members shall be considered as owning each class of stock in a second corporation (or a wholly owned subsidiary of such second cor- poration) owned, directly or indirectly, by or for the first corporation, in that proportion which the value of the stock in the first cor- poration which such members so own bears to the value of all the stock in the first corpora- tion. For purposes of paragraph (1), individuals re- lated by the half blood or by legal adoption shall be treated as if they were related by the whole blood. (e) Corporations having gross receipts of $1,000,000 or less A corporation meets the requirements of this subsection if, for each prior taxable year begin- ning after December 31, 1975, such corporation (and any predecessor corporation) did not have gross receipts exceeding $1,000,000. For pur- poses of the preceding sentence, all corpora- tions which are members of a controlled group of corporations (within the meaning of section 1563(a)) shall be treated as one corporation. (f) Coordination with section 481 In the case of any taxpayer required by this section to change its method of accounting for any taxable year- (1) such change shall be treated as having been made with the consent of the Secretary, (2) for purposes of section 481(a)(2), such change shall be treated as a change not initi- ated by the taxpayer, and (3) under regulations prescribed by the Sec- retary, the net amount of adjustments re- quired by section 481(a) to be taken into ac- count by the taxpayer in computing taxable income shall (except as otherwise provided in such regulations) be taken into account in each of the 10 taxable years beginning with the year of change. (g) Certain annual accrual accounting methods (1) In general if- (A) for its 10 taxable years ending with its first taxable year beginning after December 31, 1975, a corporation used an annual ac- crual method of accounting with respect to its trade or business of farming, (B) such corporation raises crops which are harvested not less than 12 months after planting, and (C) such corporation has used such method of accounting for all taxable years intervening between its first taxable year beginning after December 31, 1975, and the taxable year, such corporation may continue to employ such method of accounting for the taxable year with respect to its trade or business of farming. (2) Annual accrual method of accounting defined For purposes of paragraph (1), the term "annual accrual method of accounting" means a method under which revenues, costs, and expenses are computed on an accrual method of accounting and the preproductive expenses incurred during the taxable year are charged to harvested crops or deducted in de- termining the taxable income for such years. (3) Certain reorganizations For purposes of this subsection, if a corpo- ration acquired substantially all the assets of a farming trade or business from another cor. poration in a transaction in which no gain or loss was recognized to the transferor or trans- feree corporation, the transferee corporation shall be deemed to have computed its taxable income on an annual accrual method of ac- counting during the period for which the transferor corporation computed its taxable income from such trade or business on an annual accrual method. (Added Pub. L. 94-455, title II, § 207(c)(1)(A), Oct. 4, 1976, 90 Stat. 1538.) EFFcT IVE DATE Section 207(c)(2) of Pub. L. 94-455 provided that: "The amendments made by paragraph (1) [adding this section and amending analysis preceding section 446 of Page 356
TITLE 26-INTERNAL REVENUE CODE this title] shall apply to taxable years beginning after December 31, 1976." ELECTION TO CHANGE FROM STATIC VALUE METHOD TO ACCRUAL METHOD OF ACCOUNTING Section 207(c)(3) of Pub. L. 94-455 provided that: "(A) In general.-If- "(I) a corporation has computed its taxable income on an annual accrual method of accounting together with a static value method of accounting for deferred costs of growing crops for the 10 tax. able years endIng with its first taxable year begin. ning after Dec mb3r 31, 1975, "(ii) such corporation raises crops which are har- vested not less than 12 months after planting, and "(iiI) such corporation elects, within one year after the date of the enactment of this Act [Oct. 4, 1976] and in such manner as the Secretary of the Treasury or his delegate prescribes, to change to the annual accrual method of accounting (within the meaning of section 447(g)(2) of the Internal Revenue Code of 1954 [subsec. (g)(2) of this sec- tionD for taxable years beginning after December 31,1976, such change shall be treattd as having been made with the consent of the Secretary of the Treasury, and, under regulations prescribed by the Secretary of the Treasury or his delegate, the net amount of the adjustments required by section 481(a) of the In- ternal Revenue Code of 1954 [section 481(a) of this title] to be taken into account by the taxpayer in computing taxable income shall (except as otherwise provided in such regulations) be taken into account in each of the 10 taxable years beginning wit'i the year of change. "(B) Coordination with section 447 of the Code.-A corporation which elects under subparagraph (A) to change to the annual accrual method of accounting shall, for purposes of section 447(g) of the Internal Revenue Code of 1954 [subsec. (g) of this section], be deemed to be a corporation which has computed its taxable income on an annual accrual method of ac- counting for its 10 taxable years ending with its first taxable year beginning after December 31, 1975. "(C) Certain corporate reorganizations. -For pur- poses of this paragraph, if a corporation acquired substantially all the assets of a farming trade or business from another corporation in a transaction in which no gain or loss was recognized to the trans- feror or transferee corporation, the transferee cor- poration shall be deemed to have computed its tax- able income on an annual accrual method of ac- counting together with a static value method of ac- counting for deferred costs of growing crops during the period for which the transferor corporation com- puted its taxable income from such trade or business on such accrual and static value method." SUBPART B-TAXABLE YEAR FOR WHICH ITEMS OF GROSS INCOME INCLUDED Sec. 451. General rule for taxable year of inclusion. [452.Repealed.] 453. Installment method. 454. Obligations issued at discount. 455. Prepaid subscription income. 456. Prepaid dues income of certain membership orga- nizations. AMENDMENTS 1961-Pub. L. 87-109, § 1(b), July 26, 1961, 75 Stat. 224, added item 456. 1958-Pub. L, 85-866, title I, § 28(b), Sept. 2, 1958, 72 Stat. 1626, added item 455. 1955-Act June 15, 1955, ch. 143, § 2(2), 69 Stat. 135, struck out Item 452. EFFECTIVE DATE OF 1958 AMENDMENT Amendment by Pub. L. 85-866 effective with respect to taxable years beginning after Dec. 31, 1957, see sec- tion 28(c) of Pub. L. 85-866 set out as an Effective Date note under section 455 of this title. § 451. General rule for taxable year of inclusion (a) General rule The amount of any item of gross income shall be included in the gross income for the taxable year in which received by the taxpayer, unless, under the method of accounting used in com- puting taxable income, such amount is to be properly accounted for as of a different period. (b) Special rule in case of deala In the case of the death of a taxpayer whose taxable income is computed under an accrual method of accountiig, any amount accrued only by reason of the death of the taxpayer shall not be included in computing taxable income for the period in which falls the date of the taxpayer's death. (c) Special rule for employee tips For purposes of subsection (a), tips included in a written statement furnished an employer by an employee pursuant to section 6053(a) shall be deemed to be received at the time the written statement including such tips is fur- nished to the employer. (d) Special rule for crop insurance proceeds or disas. ter payments In the case of insurance proceeds received as a result of destruction or damage to crops, a taxpayer reporting on the cash receipts and dis- bursements method of accounting may elect to include such proceeds in income for the taxable year following the taxable year of destruction or damage, if he establishes that, under his practice, income from such crops would have been reported in a following taxable year. For purposes of the preceding sentence, payments received under the Agricultural Act of 1949, as amended, as a result of (1) destruction or damage to crops caused by drought, flood, or any other natural disaster, or (2) the inability to plant crops because of such a natural disas- ter shall be treated as insurance proceeds re- ceived as a result of destruction or damage to crops. An election under this subsection for any taxable year shall be made at such time and in such manner as the Scretary prescribes. (e) Special rule for proceeds from livestock sold on account of drought (1) In general In the case of income derived from the sale or exchange of livestock (other than livestock described in section 1231(b)(3)) in excess of the number the taxpayer would sell if he fol- lowed his usual business practices, a taxpayer reporting on the cash receipts and disburse- ments method of accounting may elect to in- clude such income for the taxable year fol- lowing the taxable year in which such sale or exchange occurs if he establishes that, under his usual business practices, the sale or ex- change would not have occurred in the tax- able year in which it occurred if it were not for drought conditions, and that these drought conditions had resulted in the area being designated as eligible for assistance by the Federal Government. 71-990 0 - 78 - 25 (Vol. 7) Page 357/
TITLE 26-INTERNAL REVENUE CODE (2) Limitation Paragraph (1) shall apply only to a taxpay- er whose principal trade or business is farm- ing (within the meaning of section 6420(c)(3)). (Aug. 16, 1954, ch. 736, 68A Stat. 152; July 30, 1965, Pub. L. 89-97, title III, 1 313(b), 79 Stat. 382; Dec. 30, 1969, Pub. L. 91-172, title II, § 215(a), 83 Stat. 573; Oct. 4, 1976, Pub. L. 94- 455, title XIX, § 1906(b)(13)(A), title XXI, §§ 2102(a), (b), 2141(a), 90 Stat. 1834, 1900, 1933.) REFERENCES IN TEXT The Agricultural Act of 1949, as amended, referred to in subsec. (d), is act Oct. 31, 1949, ch. 792. 63 Stat. 1051, as amended, which is classified principally to chapter 35A (§ 1421 et seq.) of Title 7, Agriculture. For complete classification of this Act to the Code, see Short Title note set out under section 1421 of Title 7 and Tables volume. AMENDMENTS 1976-Subsec. d). Pub. L. 94-455, §§ 1906(b)(13)(A), 2102(a), (b), added reference to disaster payments in the subsec. catchline, provided that payments received under the Agricultural Act of 1949, as amended, be treated as insurance proceeds received as a result of destruction or damage to crops if the payments are re- ceived as the result of destruction or damage from drought, flood, or other natural disaster, or as the result of inability to plant crops because of drought, flood, or other natural disaster, and struck out "or his delegate" following "Secretary". Subsec. Ce). Pub. L. 94-455, § 2141(a), added subsec. (e). 1969-Subsec. d). Pub. L. 91-172 added subsec. d). 1965-Subsec. (c). Pub. L 89-97 added subsec. (c). EFFECTIVE DATE OF 1976 AMENDMENT Section 2102(c) of Pub. L. 94-455 provided that: "The amendments made by this section [amending subsec. Cd) of this section] shall apply to payments re- ceived after December 31, 1973, in taxable years ending after such date". Section 2141(b) of Pub. L. 94-455 provided that: "The amendment made by this section (adding subsec. (e) of this section] applies to taxable years beginning after December 31, 1975". EFFECTrV DATE OF 1969 AEmaENTr Section 215(b) of Pub. L. 91-172 provided that: "The amendment made by subsection (a) [adding subsec. (d) of this section] shall apply to taxable years ending after the date of the enactment of this Act [Dec. 30, 19691." EFFECTIVE DATE OF 1965 AmENDMENT Subsec. (c) of this section applicable only with re- spect to tips received by employees after 1965, see sec- tion 313(f) of Pub. L. 89-97, set out as an Effective Date note under section 6053 of this title. CRoss REFERENCES General rule for taxable year of deduction or credit, see section 461 of this title. Items specifically included in gross income, see sec- tion 71 et seq. of this title. Obligations issued at discount, see section 454 of this title. Time for filing returns, see sections 6072, 6081 of this title. Year in which partnership income is includible, see section 706 of this title. SECTION REFERRD TO IN OTHER SECTIONS This section is referred to in sections 455, 456 of this title. [§ 452. Repealed. June 15, 1955, ch. 143, § 1(a), 69 Stat. 1341 Section, act Aug. 16, 1954, ch. 736, 68A Stat. 152, re- lated to prepaid income, EFFECTIVE DATE OF REPEAL Repeal of this section effective with respect to tax- able years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 3 of Act June 15, 1955, set out as an Effective Date of 1955 Amendment note under section 381 of this title. SAVINGS PROVISIONS For provisions concerning increase in tax in any tax- able year ending on or before June 15, 1955 by reason of enactment of act June 15, 1955, see section 4 of act June 15, 1955, set out as a Savings Provisions note under section 381 of this title. § 453. Installment method (a) Dealers in personal property (1) In general Under regulations prescribed by the Secre- tary, a person who regularly sells or other- wise disposes of personal property on the in- stallment plan may return as income there- from in any taxable year that proportion of the installment payments actually received in that year which the gross profit, realized or to be realized when payment is completed, bears to the total contract price. (2) Total contract price For purposes of paragraph (1), the total contract price of all sales of personal property on the installment plan includes the amount of carrying charges or interest which is deter- mined with respect to such sales and is added on the books of account of the seller to the established cash selling price of such proper- ty. This paragraph shall not apply with re- spect to sales of personal property under a re- volving credit type plan or with respect to sales or other dispositions of property the income from which Is, under subsection (b), returned on the basis and in the manner pre- scribed in paragraph (1). (b) Sales of realty and casual sales of personalty (1) General rule Income from- (A) a sale or other disposition of real property, or (B) a casual sale or other casual disposi- tion of personal property (other than prop- erty of a kind which would properly be in- cluded in the inventory of the taxpayer if on hand at the close of the taxable year) for a price exceeding $1,000, may (under regulations prescribed by the Sec- retary) be returned on the basis and in the manner prescribed in subsection (a). (2) Limitation Paragraph (1) shall apply only if in the tax- able year of the sale or other disposition- (A) there are no payments, or (B) the payments (exclusive of evidences of indebtedness of the purchaser) do not exceed 30 percent of the selling price. § 452 Page 358
TITLE 26-INTERNAL REVENUE CODE (3) Purchaser evidences of indebtedness payable on demand or readily tradable. In applying this subsection, a bond or other evidence of indebtedness which is payable on demand, or which is issued by a corporation or a government or political subdivision thereof (A) with Interest coupons attached or in registered form (other than one In regis- tered form which the taxpayer establishes will not be readily tradable in an established securities market), or (B) in any other form designed to render such bond or other evi- dence of indebtedness readily tradable in an established securities market, shall not be treated as an evidence of indebtedness of the purchaser. (c) Change from accrual to installment basis (1) General rule If a taxpayer entitled to the benefits of sub- section (a) elects for any taxable year to report his taxable income on the installment basis, then in computing his taxable income for such year (referred to in this subsection as "year of change") or for any subsequent year- (A) installment payments actually re- ceived during any such year on account of sales or other dispositions of property made in any taxable year before the year of change shall not be excluded; but (B) the tax imposed by this chapter for any taxable year (referred to Ln this subsec- tion as "adjustment year") beginning after December 31, 1953, shall be reduced by the adjustment computed under paragraph (2). (2) Adjustment in tax for amounts previously taxed In determining the adjustment referred to in paragraph (1)(B), first determine, for each taxable year before the year of change, the amount which equals the lesser of- (A) the portion of the tax for such prior taxable year which is attributable to the gross profit which was included in gross income for such prior taxable year, and which by reason of paragraph (1)(A) is in- cludible in gross income for the taxable year, or (B) the portion of the tax for the adjust- ment year which is attributable to the gross profit described in subparagraph (A). The adjustment referred to in paragraph (1)(B) for the adjustment year is the sum of the amounts determined under the preceding sentence. (3) Rule for applying paragraph (2) For purposes of paragraph (2), the portion of the tax for a prior taxable year, or for the adjustment year, which is attributable to the gross profit described in such paragraph is that amount which bears the same ratio to the tax imposed by this chapter (or by the corresponding provisions of prior revenue laws); other than by section 56, for such tax- able year (computed without regard to para- graph (2)) as the gross profit described in such paragraph bears to the gross income for such taxable year. For purposes of the pre- ceding sentence, the provisions of chapter 1 (other than of subchapter D, relating to excess profits tax, and of subchapter E, relat- ing to self-employment income) of -he Inter- nal Revenue Code of 1939 shall be' treated as the corresponding provisions of the Internal Revenue Code of 1954. (4) Revocation of election An election under paragraph (1) to report taxable income on the installment basis may be revoked by filing a notice of revocation, in such manner as the Secretary prescribes by regulations, at any time before the expiration of 3 years following the date of the filing of the tax return for the year of change. If such notice of revocation is timely filed- (A) the provisions of paragraph (1) and subsection (a) shall not apply to the year of change or for any subsequent year; (B) the statutory period for the assess- ment of any deficiency for any taxable year ending before the filing of such notice, which Is attributable to the revocation of the election to use the installment basis, shall not expire before the expiration of 2 years from the date of the filing of such notice, and such deficiency may be assessed before the expiration of such 2-year period notwithstanding the provisions of any law or rule of law which would otherwise pre- vent such assessment; and (C) if refund or credit of any overpay- ment, resulting from the revocation of the election to use the installment basis, for any taxable year ending before the date of the filing of the notice of revocation is pre- vented on the date of such filing, or within one year from such date, by the operation of any law or rule of law (other thin section 7121 or 7122), refund or credit of such over- payment may nevertheless be made or al- lowed if claim therefor is filed within one year from such date. No interest shall be al- lowed on the refund or credit of such over- payment for any period prior to the date of the filing of the notice of revocation. (5) Election after revocation If the taxpayer revokes under paragraph (4) an election under paragraph (1) to report taxable income on the installment basis, no election under paragraph (1) may be made, except with the consent of the Secretary, for any subsequent taxable year before the fifth taxable year following the year of change with respect to which such revocation is made. (d) Gain or loss on disposition of installment obliga- tions (1) General rule If an installment obligation is satisfied at other than its face value or distributed, trans- mitted, sold, or otherwise disposed of, gain or loss shall result to the extent of the differ- ence between the basis of the obligation and- (A) the amount realized, in the case of satisfaction at other than face value or a sale or exchange, or (B) the fair market value of the obligation at the time of distribution, transmission, or disposition, in the case of the distribution, transmission, or disposition otherwise than by sale or exchange. Page 359 § 453
TITLE 26-INTERNAL REVENUE CODE Any gain or loss so resulting shall be consid- ered as resulting from the sale or exchange of the property in respect of which the install- ment obligation was received. (2) Basis of obligation The basis of an installment obligation shall be the excess of the face value of the obliga- tion over an amount equal to the income which would be returnable were the obliga- tion satisfied in full. (3) Special rule for transmission at death Except as provided in section 691 (relating to recipients of income in respect of dece- dents), this subsection shall not apply to the transmission of installment obligations at death. (4) Effect of distribution in certain liquid&tions (A) Liquidations to which section 332 applies If- (I) an Installment obligation is distribut- ed in a liquidation to which section 332 (relating to complete liquidations of sub- sidiaries) applies, and (ii) the basis of such obligations in the hands of the distributee Is determined under section 334(b)(1), then no gain or loss with respect to the dis- tribution of such obligation shall be recog- nized by the distributing corporation. (B) Liquidations to which section 337 applies. If- (i) an installment obligation is distribut- ed by a corporation in the course of a liq- uidation, and (ii) under section 337 (relating to gain or loss on sales or exchanges in connection with certain liquidations) no gain or loss would have been recognized to the corpo- ration if the corporation had sold or ex- changed such installment obligation on the day of such distribution, then no gain or loss shall be recognized to such corporation by reason of such distribu- tion. The preceding sentence shall not apply to the extent that under paragraph (1) gain to the distributing corporation would be considered as a gain to which sec- tion 341(f), 617(d)(1), 1245(a), 1250(a), 1251(c), 1252(a), or 1254(a) applies. (5) Life insurance companies In the case of a disposition of an install- ment obligation by any person other than a life insurance company (as defined in section 801(a)) to such an insurance company or to a partnership of which such an insurance com- pany is a partner, no provision of this subtitle providing for the nonrecognition of gain shall apply with respect to any gain resulting under paragraph (1). If a corporation which is a life insurance company for the taxable year was (for the preceding taxable year) a corpo- ration which was not a life insurance compa- ny, such corporation shall, for purposes of this paragraph and paragraph (1), be treated as having transferred to a life insurance com- pany, on the last day of the preceding taxable year, all installment obligations which it held on such last day. A partnership of which a life insurance company becomes a partner shall, for purposes of this paragraph and paragraph (1), be treated as having trans- ferred to a life insurance company, on the last day of the preceding taxable year of such partnership, all installment obligations which it holds at the time such insurance company becomes a partner. (e) Carrying charges not included in total contract price If the carrying charges or interest with re- spect to sales of personal property, the income frnm which is returned under subsection (a)(1), is not included in the total contract price, pay. ments received with respect to such sales shall be treated as applying first against such carry- ing charges or interest, This subsection shall not apply with respect to sales or other disposi- tions of property the Income from which is, under subsection (b), returned on the basis and in the manner prescribed in subsection (a)(1). (Aug. 16, 1954, ch. 736, 68A Stat. 154; Sept. 2, 1958, Pub. L. 85-866, title I, § 27(a), 72 Stat. 1624; Oct. 16, 1962, Pub. L. 87-834, § 13(f)(5), 76 Stat. 1035; Feb. 26, 1964, Pub. L. 88-272, title II, §§222(a), 231(b)(5), 78 Stat. 75, 105; Aug. 22, 1964, Pub. L. 88-484, § 1(b)(2), 78 Stat. 597; Aug. 31, 1964, Pub. L. 88-539, § 3(a), (b), 78 Stat. 746; Sept. 12, 1966, Pub. L. 89-570, § 1(b)(5), 80 Stat. 762; Nov. 13, 1966, Pub. L. 89-809, title II, § 202(c), 80 Stat. 1576; Dec. 30, 1969, Pub. L. 91- 172, title II, §211(b)(5), title III, §301(b)(7), title IV, § 412(a), title IX, § 916(a), 83 Stat. 570, 585, 608, 723; Oct. 4, 1976, Pub. L. 94-455, title II, § 205(c)(1)(E), title XIX, §§ 1901(a)(66), 1906(b)(13)(A), 1951(b)(7)(A), 90 Stat. 1535, 1775, 1834, 1838.) AMENDMENTS 1976-Subsecs. (a)(1), (b)(1). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (b)(2). Pub. L. 94-455, § 1951(b)(7)(A), struck out provisions which had placed a general limitation on the use of the installment sales method to sales or other dispositions during taxable years beginning after Dec. 31, 1953, but which had provided that the method could be used In the case of sales or other dis- positions during taxable years beginning before Jan. 1, 1954, if the income was (by reason of section 44(b) of the Internal Reve.nue Code of 1939) returnable on the basis and in the manner prescribed in section 44(a) of the Internal Revenue Code of 1939. Subsec. (c)(3). Pub. L. 94-455, § 1901(a)(66)(A), sub- stituted "corresponding provisions of the Internal Revenue Code of 1954" for "corresponding provisions of the Internal Revenue Code of 1939". Subsecs. (c)(4), (5). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (d)(4)(B). Pub. L. 94-455, §§ 205(c)(1)(E), 1901(a)(66)(B), substituted a comma for "or section" preceding "617(d)(1)" and added reference to section 1254(a) in the provisions following cl. (ii). 1969-Subsec. (b). Pub. L. 91-172, § 412(a), added par. (3). Subsec. (c). Pub. L. 91-172, § 916(a), added pars. (4) and (5). Subsec. (c)(3). Pub. L. 91-172, § 301(b)(7), inserted other than by section 56," after "prior revenue laws)". Subsec. (d)(4)(B). Pub. L. 91-172, § 211(b)(5), substi- tuted "1250(a), 1251(c), or 1252(a)", for "or 1250(a)". 1966-Subsec. (d)(4)(A). Pub. L. 89-809 substituted "distributed in a liquidation to which section 332 (re- lating to complete liquidations of subsidiaries) ap- plies" for "distributed by a corporation in the course of a liquidation" In clause (I) and "the basis of such obligation in the hands of the distributee is deter- § 453 Page 360
TITLE 26-INTERNAL REVENUE CODE mined under section 334(b)(1)" for "under section 332 (relating to complete liquidations of subsidiaries) no gain or loss with respect to the receipt of such obliga- tion is recognized in the case of the recipient corpora- tion" in clause 0i), and, in the material following clause (ii), struck out provision requiring special treat- ment if the basis of the property of the liquidating corporation in the hands of the distributee is deter- mined under section 334(b)(2). Subsec. (d)(4)(A), (B). Pub, L. 89-570 included refer- ence to section 617(d)(1). 1964-Subsec. (a). Pub. L. 88-539, § 3(a), designated existing provisions as par. (1) and added par. (2). Subsec. (d)(4). Pub. L. 88-484 inserteA references to section 341(f) in clauses (A) and (B). Pub. L. 88-272, § 231(b)(5), inserted references to sec- tion 1250(a) in pars. (A) and (B). Subsec. (e). Pub. L. 88-539, § 3(b), substituted provi- sions relating to carrying charges or interest with re- spect to sales of personal property for provisions which included revolving credit type loans within the definition of "installment plan". Pub. L. 88-272, § 222(a), added subsec. (e). 1962-Subsec. (d)(4)(A). Pub. L. 87-834, § 13(f)(5)(A), inserted sentence making subpar. (A) inapplicable, if the basis of the property of the liquidating corpora- tion in the hands of the distributee is determined under section 334(b)(2), to the extent that under par. (1) gain to the distributing corporation would be con- sidered as gain to which section 1245(a) applies. Subsec. (d)(4)(B). Pub. L. 87-834, § 13(f)(5)(B), in- serted sentence making subpar. (B) inapplicable to the extent that under par. (1) gain to the distributing cor- poration would be considered as gain to which section 1245(a) applies. 1958-Subsec. (d)(5). Pub. L. 85-866 added subsec. (d)(5). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (b)(2) by section 1951(b)(7)(A) of Pub. L. 94-455 effective, except as otherwise expressly provided [see section 1951(b)(7)(B) of Pub. L. 94-455, set out as a Savings Provision note under this section], for taxable years beginning after Dec. 31, 1976, see section 1951(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 72 of this title. Amendment of subsecs. (c)(3) and (d)(4)(B) by sec- tion 1901(a)(66)(A) and (B), respectively, of Pub. L. 94- 455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1076 Amendment note under sec- tion 2 of this title. Amendment of subsec. (d)(4)(B) by section 205(c)(1)(E) of Pub. L. 94-455 effective for taxable years ending after Dec. 31, 1975, see section 205(e) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 1254 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Section 412(b) of Pub. L. 91-172 provided that: "The amendment made by subsection (a) [adding subsec. (b)(3)] shall apply to sales or other dispositions occur- ring after May 27, 1969, which are not made pursuant to a binding written contract entered into on or before such date." Amendment of subsec. (c)(3) of this section by sec- tion 301(b)(7) of Pub. L. 91-172 applicable to taxable years ending after Dec. 31, 1969, see section 301(c) of Pub. L. 91-172, set out as an Effective Date note under section 56 of this title. Section 916(b) of Pub. L. 91-172 provided that: "The amendment made by subsection (a) [adding pars. (4) and (5) to subsec. (c) of this section] shall apply to an election made for any year of change (as defined in section 453(c)(1) of the Internal Revenue Code of 1954 (subsec. (c)(1) of this section) ending on or after the date of the enactment of this Act [Dec. 30, 1969], and shall also apply to any such year of change which ended before such date if the 3-year statutory period fo' assessment of any deficiency for such year has not expired on the date of the enactment of this Act (Dec. 30, 1969]." Amendment of subsec. (d)(4)(B) by section 211(b)(5) of Pub. L. 91-172 applicable to taxable yearc beginning after Dec. 31, 1969, see section 211(c) of Pub. L. 91-172, set out as an Effective Date note under section 1251 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendment of subsec. (d)(4)(A) of this section by section 202(c) of Pub. L. 89-809 applicable only with respect to distributions made after Nov. 13, 1966, see section 202(d) of Pub. L. 89-809, set out as an Effective Date of 1966 Amendment note under section 334 of this title. Amendment by Pub. L. 89-570 applicable to taxable years ending after Sept. 12, 1966, but only in respect of expenditures paid or incurred after such date, see section 3 of Pub. L. 89-570, set out as an Effective Date note under section 617 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Section 3(c) of Pub. L. 88-539 provided that: "The amendment made by subsection (a) [to subsec. (a) of this section] shall apply in respect to sales made in taxable years beginning on or after January 1, 1960. The amendment made by subsection (b) [to subsec. (e) of this section] shall apply in respect of sales made during taxable years beginning after December 31, 1963." Amendment of section by Pub. L. 88-484 applicable with respect to transactions after Aug. 22, 1964, in tax- able years ending after such date, see section 2 of Pub. L. 88-484, set out as an Effective Date of 1964 Amend- ments note under section 341 of this title. Amendment of subsec. (d)(4) by Pub. L. 88-272 appli- cable to dispositions after Dec. 31, 1963, in taxable years ending after such date, see section 231(c) of Pub. L. 88-272, set out as an Effective Date note under sec- tion 1250 of this title. Section 222(b) of Pub. L. 88-272 provided that: "The amendment made by subsection (a) [to this section] shall apply in respect of vales made during taxable years beginning after December 31, 1963." EFFECTiVE DATE OF 1962 AMENDMENT Amendment of subsec. (d)(4) of this section by Pub. L. 87-834 applicable to taxable years beginning after Dec. 31, 1962, see section 13(g) of Pub. L. 87-834, sef, out as an Effective Date note under section 1245 of this title. EFFECTIVE DATE OF 1958 AMENDMENT Section 27(b) of Pub. L. 85-866 provided that: "The amendment made by subsection (a) [adding subsec. (d)(5) of this section] shall apply to taxable years ending after December 31, 1957, but only as to trans- fers or other dispositions of installment obligations oc- curring after such date." SAVINGS PROVISION Section 1951(b)(7)(B) of Pub. L. 94-455 provided that: "Notwithstanding subparagraph (A) [amending subsec. (b)(2) of this section], in the case of install- ment payments received during taxable years begin- ning after December 31, 1976, on account of a sale or other disposition made during a taxable year begin- ning before January 1, 1954, subsection (b)(1) of sec- tion 453 (relating to sales of realty and casual sales of personality) shall apply only if the income was (by reason of section 44(b) of the Internal Revenue Code of 1939) returnable on the bass and in the manner prescribed in section 44(a) of such Code." TRANSITIONAL RULE FOR CERTAIN INSTALLMENT OBLIGATIONS Section 1402(c) of Pub. L. 94-455 provided that: "In the case of amounts received from sales or other dispo- sitions of capital assets pursuant to binding contracts, including sales or other dispositions the income from Page 361 § 453
TITLE 26-INTERNAL REVENUE CODE which is returned on the basis and in the manner pre- scribed in section 453(a)(1) of the Internal Revenue Code of 1954, If the gain or loss was treated as long- term for the taxable year for which the amount was realized, such gain or loss shall be treated as long-term for the taxable year for which the gain or loss is re- turned or otherwise recognized." CROS REFERENCES Adjustments required by changes in method of ac- counting not to apply to changes under this section, see section 481 of this title. Inclusion in gross income, installment obligations ac- quired from decedent, see section 691 of this title. SECTION REFERRIE TO IN OTHER SECTIONS This section is referred to in sections 311, 336, 381, 481, 644, 679, 691, 6158 of this title. § 454. Obligations issued at discount (a) Non-interest-bearing obligations issued at a dis- count If, in the case of a taxpayer owning any non- interest-bearing obligation issued at a discount and redeemable for fixed amounts increasing at stated intervals or owning an obligation de- scribed in paragraph (2) of subsection (c., the increase in the redemption price of such obliga- tion occurring in the taxable year does not (under the method of accounting used in com- puting his taxable income) constitute income to him in such year, such taxpayer may, at his election made in his return for any taxable year, treat such increase as income received in such taxable year. If any such election is made with respect to any such obligation, it shall apply also to all such obligations owned by the taxpayer at the beginning of the first taxable year to which it applies and to all such obliga- tions thereafter acquired by him and shall be binding for all subsequent taxable years, unless on application by the taxpayer the Secretary permits him, subject to such conditions as the Secretary deems necessary, to change to a dif- ferent method. In the case of any such obliga- tions owned by the taxpayer at the beginning of the first taxable year to which his election applies, the increase in the redemption price of such obligations occurring between the date of acquisition (or, in the case of an obligation de- scribed in paragraph (2) of subsection (c), the date of acquisition of the series E bond in- volved) and the first day of such taxable year shall also be treated as income received in such taxable year. (b) Short-term obligations issued on discount basis In the case of any obligation- (1) of the United States; or (2) of a State or a possession of the United States, or any political subdivision of any of the foregoing, or of the District of Columbia, which is issued on a discount basis and payable without interest at a fixed maturity date not exceeding 1 year from the date of issue, the amount of discount at which such obligation is originally sold shall not be considered to accrue until the date on which such obligation is paid at maturity, sold, or otherwise disposed of. (c) Matured United States savings bonds In the case of a taxpayer who- (1) holds a series E United States savings bond at the date of maturity, and (2) pursuant to regulations prescribed under the Second Liberty Bond Act (A) re- tains his investment in such series E bond in an obligation of the United States, other than a current income ob~ligation, or (B) exchanges such series E bond for another nontransfera- ble obligation of the United States in an ex- change upon which gain or loss is not recog- nized because of section 1037 (or so much of section 1031 as relates to section 1037), the increase in redemption value (to the extent not previously includible in gross income) in excess of the amount paid for such series E bond shall be includible in gross income in the taxable year in which the obligation is finally redeemed or In the taxable year of final maturi- ty, whichever is earlier. This subsection shall not apply to a corporation, and shall not apply in the case of any taxable year for which the taxpayer's taxable income is computed under an ,.ccrual method of accounting or for which an election made by the taxpayer under subsec- tion (a) applies. (Aug. 16, 1954, ch. 736, 68A Stat. 156; Sept. 22, 1959, Pub. L. 86-346, title I, § 102, 73 Stat. 621; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(c)(2), 1906(b)(13)(A), 90 Stat. 1803, 1834.) REFERENCES IN TEXT The Second Liberty Bond Act, referred to in subsec. (c)(2), is act Sept. 24, 1917, ch. 56, 40 Stat. 288, as amended. For classification of this Act to the Code, see References in Text note set out under section 774 of Title 31, Money and Finance, and Tables volume. AMENDMENTS 1976-Subsec. ta). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" in two places. Subsec. (b)(2). Pub. L. 94-455, 1901(c)(2), struck out ", a Territory," following "a State". 1959-Subsec. (c). Pub. L. 86-346 designated existing provisions as par. (2)(A), inserted "of the United States" following "an obligation" and deleted "the ma- turity value of" preceding "such series E bond" and "which matures not more than 10 years from the date of maturity of such series E bond" following "income obligation" in such par. (2)(A), and added par. (2)(B). FREEDOM SHARES AS UNITED STATES SERIES E BONDS For purposes of maturity of United States Savings Bonds, freedom shares issued not later than one year after Dec. 1, 1969 to be treated as United States series E bonds, see section 3 of Pub. L. 91-130, set out as a note under section 757c of Title 31, Money and Fi- nance. SECTION REFECRIE TO IN OTHER SECTIONS This section is referred to in section 1037 of this title. § 455. Prepaid subscription income (a) Year in which included Prepaid subscription income to which this section applies shall be included in gross income for the taxable years during which the liability described in subsection (d)(2) exists. (b) Where taxpayer's liability ceases In the case of any prepaid subscription income to which this section applies- (1) If the liability described in subsection (d)(2) ends, then so much of such income as § 454 Page 362
TITLE 26-INTERNAL REVENUE CODE was not includible in gross income under sub- section (a) for preceding taxable years shall be included in gross income for the taxable year in which the liability ends. (2) If the taxpayer dies or ceases to exist, then so much of such income as was not in- cludible in gross income under subsection (a) for preceding taxable years shall be included in gross income for the taxable year in which such death, or such cessation of existence, occurs. (c) Prepaid subscription income to which this section applies (1) Election of benefits This section shall apply to prepaid subscrip- tion income if and only if the taxpayer makes an election under this section with respect to the trade or business in connection with which such income is received. The election shall be made in such manner as the Secre- tary may by regulations prescribe. No election may be made with respect to a trade or busi- ness if in computing taxable income the cash receipts and disbursements method of ac- counting is used with respect to such trade or business. (2) Scope of election An election made under this section shall apply to all prepaid subscription income re- ceived in connection with the trade or busi- ness with respect to which the taxpayer has made the election; except that the taxpayer may, to the extent permitted under regula- tions prescribed by the Secretary, include in gross income for the taxable year of receipt the entire amount of any prepaid subscrip- tion income if the liability from which it arose is to end within 12 months after the date of receipt. An election made under this section shall not apply to any prepaid sub- scription income received before the first tax- able year for which the election is made. (3) When election may be made (A) With consent A taxpayer may, with the consent of the Secretary, make an election under this sec- tion at any time. (B) Without consent A taxpayer may, without the consent of the Secretary, make an election under this section for his first taxable year in which he receives prepaid subscription income in the trade or business. Such election shall be made not later than the time prescribed by law for filing the return for the taxable year (including extensions thereof) with re- spect to which such election is made. (4) Period to which election applies An election under this section shall be ef- fective for the taxable year with respect to which it is first made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to the revocation of such election. For purposes of this title, the computation of taxable income under an elec- tion made under this section shall be treated as a method of accounting. (d) Definitions For purposes of this section- (1) Prepaid bubscription income The term "prepaid subscription income" means any amount (includible In gross income) which is received in connection with, and is directly attributable to, a liability which extends beyond the close of the tax- able year in which such amount is received, and which is income from a subscription to a newspaper, magazine, or other periodical. (2) Liability The term "liability" means a liability to fur- nish or deliver a newspaper, magazine, or other periodical. (3) Receipt of prepaid subscription income Prepaid :,ubscription income shall be treat- ed as received during the taxable year for which it is includible in gross income under section 451 (without regard to this section). (e) Deferral of income under established accounting procedures Notwithstanding the provisions of this sec- tion, any taxpayer who has, for taxable years prior to the first taxable year to which this sec- tion applies, reported his income under an es- tablished and consistent method or practice of accounting for prepaid subscription income (to which this section would apply if an election were made) may continue to report his income for taxable years to which this title applies in accordance with such method or practice. (Added Pub. L. 85-866, title I, § 28(a), Sept. 2, 1958, 72 Stat. 1625, and amended Pub. L. 94- 455, title XIX, §§1901(a)(67), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1775, 1834.) AMENDMENTS 1976-Subsec. (c). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" wherever appearing. Subsec. (c)(3)(B). Pub. L. 94-455, § 1901(a)(67), sub- stituted "for his first ta,:able year in which he receives prepaid subscription income in the trade or business" for "for his first taxable year (I) which begins after December 31, 1957, and (i) in which he receives pre- paid subscription income in the trade or business". EFrEcTIvE DATE OF 1976 AMENDMENT Amendment of subsec. (c)(3)(B) by section 1901(a)(67) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE Section 28(c) of Pub. L. 85-866 provided that: "The amendments made by subsections (a) and (b) [adding this section and conforming analysis to the addition] shall apply with respect to taxable years beginning after December 31, 1957." § 456. Prepaid dues income of certain membership or. ganizations (a) Year in which included Prepaid dues income to which this section ap- plies shall be included in gross income for the taxable years during which the liability de- scribed in subsection (e)(2) exists. (b) Where taxpayer's liability ceases In the case of any prepaid dues income to which this section applies- (1) If the liability described in subsection (e)(2) ends, then so much of such income as Page 363 § 456
TITLE 26-INTERNAL REVENUE CODE was not includible in gross income under sub- section (a) for preceding taxable years shall be included in gross income for the taxable year in which the liability ends. (2) If the taxpayer ceases to exist, then so much of such income as was not includible In gross income under subsection (a) for preced- ing taxable years shall be included in gross income for the taxable year in which such cessation of existence occurs. (c) Prepaid dues income to which this section applies (1) Election of benefits This section shall apply to prepaid dues income if and only if the taxpayer makes an election under this section with respect to the trade or business in connection with which such income is received. The election shall be made in such manner as the Secretary may by regulations prescribe. No election may be made with respect to a trade or business if in computing taxable income the cash receipts and disbursements method of accounting is used with respect to such trade or business. (2) Scope of election An election made under this section shall apply to all prepaid dues income received in connection with the trade or business with re- spect to which the taxpayer has made the election: except that the taxpayer may, to the extent permitted under regulations pre- scribed by the Secretary, include in gross income for the taxable year of receipt the entire amount of any prepaid dues income if the liability from which it arose is to end within 12 months after the date of receipt. Except as provided in subsection (d), and elec- tion made under this section shall not apply to any prepaid dues income received before the first taxable year for which the election is made. (3) When election may be made (A) With consent A taxpayer may, with the consent of the Secretary, make an election under this sec- tion at any time. (B) Without consent A taxpayer may, without the consent of the Secretary, make an election under this section for its first taxable year in which it receives prepaid dues income in the trade or business. Such election shall be made not later than the time prescribed by law for filing the return for the taxable year (in- clucing extensions thereof) with respect to which such election is made. (4) Period to which election applies An election under this section shall be ef- fective for the taxable year with respect to which it is first made and for all subsequent taxable years, unless the taxpayer secures the consent of the Secretary to the revocation of such election. For purposes of this title, the computation of taxable income under an elec- tion made under this section shall be treated as a method of accounting. (d) Transitional rule (I) Amount includible in gross income for election years If a taxpayer makes an election under this section with respect to prepaid dues incor, e, such taxpayer shall include in gross income, for each taxable year to which such election applies, not only that portion of prepaid dues income received in such year otherwise inclu- dible in gross income for such year under this section, but shall also include In gross income for such year an additional amount equal to the amount of prepaid dues income received in the 3 taxable years preceding the first tax- able year to which such election applies which would have been included in gross income In the taxable year had the election been effective 3 years earlier. (2) Deductions of amounts included in income more than once A taxpayer who makes an election with re- spect to prepaid dues Income, and who in- cludes in gross income for any taxable year to which the election applies an additional amount computed under paragraph (1), shall be permitted to deduct, for such taxable year and for each of the 4 succeeding taxable years, an amount equal to one-fifth of such additional amount, but only to the extent that such additional amount was also includ- ed in the taxpayer's gross income during any of the 3 taxable years preceding the first tax- able year to which such election applies. (e) Definitions For purposes of this section- (1) Prepaid dues income The term "prepaid dues income" means any amount (includible in gross income) which is received by a membership organization in connection with, and is directly attributable to, a liability to render services or make avail- able membership privileges over a period of time which extends beyond the close of the taxable year in which such amount is re- ceived. (2) Liability The term "liability" means a liability to render services or make available membership privileges over a period of time which does not exceed 36 months, which liability shall be deemed to exist ratably over the period of time that such services are required to be ren- dered, or that such membership privileges are required to be made available. (3) Membership organization The term "membership organization" means a corporation, association, federation, or other organization- (A) organized without capital stock of any kind, and (B) no part of the net earnings of which is distributable to any member. (4) Receipt of prepaid dues income Prepaid dues income shall be treated as re- ceived during the taxable year for which it is includible in gross income under section 451 (without regard to this section). (Added Pub. L. 87-109, § l(a), July 26, 1961, 75 Stat. 222, and amended Pub. L. 94-455, title § 456 Page 364
TITLE 28-INTERNAL REVENUE CODE XIX, §§ 1901(a)(68), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1775, 1834.) A MmENTs 1976-Subsec. (c). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" wherever appearing. Subsee. (c)(3)(B). Pub. L. 94-455, § 1901(a)(68). sub- stituted "for its first taxable year" for "for its first taxable year (I) which begins after December 31, 1980, and (ii)". ErFECTIVS DATE OF 1976 AMENDMENT Amendment of subsec. (c)(3)(B) by section 1901(a)(68) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTVE DATE Section 2 of Pub. L. 87-109 provided that: "The amendments made by this Act [adding this section] shall apply with respect to taxable years beginning after December 31, 1960." SECTION REFERRD TO IN OTHER SECTIONS This section is referred to in section 277 of this title. SUBPART C-TAXABLE YEAR FOR WHICH DEDUCTIONS TAKEN Sec. 461. (462. 463. 464. 465. General rule for taxable year of deduction. Repealed.] Accrual of vacation pay. Limitations on deductions in case of farming syndicates. Deductions limited to amount at risk in case of certain activities. AMENDMENTS 1976-Pub. L. 94-455, title II, §§ 204(b), 207(a)(2), Oct. 4, 1976, 90 Stat. 1532, 1537, added items 464 and 465. 1975-Pub. L. 93-625o §4(b). Jan. 3, 1975, 88 Stat. 2111, added item 463. 1955-Act June 15, 1955, ch. 143, § 2(3), 69 Stat. 135, struck out item 462. § 461. General rule for taxable year of deduction (a) General rule The amount of any deduction or credit al- lowed by this subtitle shall be taken for the taxable year which is the proper taxable year under the method of accounting used in com- puting taxable income. (b) Special rule in case of death In the case of the death of a taxpayer whose taxable income is computed under an accrual method of accounting, any amount accrued as a deduction or credit only by reason of the death of the taxpayer shall not be allowed In comput- ing taxable income for the period in which falls the date of the taxpayer's death. (c) Accrual of real property taxes (1) In general If the taxable income is computed under an accrual method of accounting, then, at the election of the taxpayer, any real property tax which is related to a definite period of time shall be accrued ratably over that period. (2) When election may be made (A) Without consent A taxpayer may, without the consent of the Secretary, make an election under this subsection for his first taxable year in which he incurs real property taxes. Such an election shall be made not later than the time prescribed by law for filing the return for such year (including extensions there- of). (B) With consent A taxpayer may, with the consent of the Secretary, make an election under this sub- section at any time. (d) Limitation on acceleration of accrual of taxes (1) General rule In the case of a taxpayer whose taxable income is computed under an accrual method of accounting, to the extent that the time for accruing taxes is earlier than it would be but for any action of any taxing jurisdiction taken after December 31, 1960, then, under regulations prescribed by the Secretary, such taxes shall be treated as accruing at the time they would have accrued but for such action by such taxing Jurisdiction. (2) Limitation Under regulations prescribed by the Secre- tary, paragraph (1) shall be inapplicable to any item of tax to the extent that Its applica- tion would (but for this paragraph) prevent all persons (including successors in interest) from ever taking such item into account. (e) Dividends or Interest paid on certain deposits or withdrawable accounts Except as provided in regulations prescribed by the Secretary, amounts paid to, or credited to the accounts of, depositors or holders of ac- counts as dividends or interest on their deposits or withdrawable accounts (if such amounts paid or credited are withdrawable on demand sub- Ject only to customary notice to withdraw) by a mutual savings bank not having capital stock represented by shares, a domestic building and loan association, or a cooperative bank shall not be allowed as a deduction for the taxable year to the extent such amounts are paid or credited for periods representing more than 12 months. Any such amount not allowed as a deduction as the result of the application of the preceding sentence shall be allowed as a deduction for such other taxable year as the Secretary deter- mines to be consistent with the preceding sen- tence. (f) Contested liabilities If- (1) the taxpayer contests an asserted liabil- ity, (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 liabil- ity is contested, a deduction would be allowed for the taxable year of the transfer (or for an earlier taxable year), Page 365
TITLE 26-INTERNAL REVENUE CODE then the deduction shall be allowed for the tax- able year of the transfer. This subsection shall not apply in respect of the deduction for income, war profits, and excess profits taxes im- posed by the authority of any foreign country or possession of the United States. (g) Prepaid interest (1) In general If the taxable income of the taxpayer is computed under the cash receipts and dis- bursements method of accounting, interest paid by the taxpayer which, under regula- tions prescribed by the Secretary, is properly allocable to any period- (A) with respect to which the interest rep- resents a charge for the use or forbearance of money, and (B) which is after the close of the taxable year in which paid, shall be charged to cap- ital account and shall be treated as paid in the period to which so allocable. (2) Exception This subsection shall not apply to points paid in respect of any indebtedness incurred in connection with the purchase or improve- ment of, and secured by, the principal resi- dence of the taxpayer to the extent that, under regulations prescribed by the Secre- tary, such payment of points is an established business practice in the area in which such in- debtedness is incurred, and the amount of such payment does not exceed the amount generally charged in such area. (Aug. 16, 1954, ch. 736, 68A Stat. 157; Sept. 14, 1960, Pub. L. 86-781, § 6(a), 74 Stat. 1020; Oct. 24, 1962, Pub. L. 87-876, § 3(a), 76 Stat. 1199; Feb. 26, 1964, Pub. L. 88-272, title II, § 223(a)(1), 78 Stat. 76; Oct. 4, 1976, Pub. L. 94-455, title II, § 208(a), title XIX, §§ 1901(a)(69), 1906(b) (13)(A), 90 Stat. 1541, 1776, 1834.) AMENDNuTs 1976-Subsec. (c)(2). Pub. L. 94-455, §§ 1901(a)(69) (A), (B), 1906(b)(13)(A), redesignated former subsec. (c)(3) as (c)(2), and as so redesignated, substituted "in which he" for "which begins after December 31, 1953, and ends after the date of the enactment of this title In which the taxpayer" and struck out "or his dele- gate" following "Secretary" wherever appearing. Former subsee. (c)(2), which related to special limita- tions on the applicability of subsec. (c)(1), was struck out. Subsec. (c)(3). Pub. L. 94-455, § 1901(a)(69)(A), rede- signated (c)(3) as (c)(2). Subsec. d). Pub. L. 94455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" wherever appearing. Subsec. (e. Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" wherever appearing. Subsec. (g). Pub. L. 94-455, § 208(a), added subsec. (g). 1964-Subsec. (fM. Pub. L. 88-272 added subsec (f). 1962-Subsec. (e). Pub. L. 87-876 added subsec. (e). 1960-Subsec. (d). Pub. L. 86-781 added subsec. (d). E' ncTivz DATE oF 1976 AwmsxENT Amendment of subsec. (c)(2), (3) by section 1901(a)(69) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Section 208(b) of Pub. L. 94455 provided that: "(1) In general.-Except as provided In paragraph (2), the amendment made by subsection (a) (enact- ing subsec. (g) of this section] shall apply to amounts paid after December 31, 1975, in taxable years ending after such date. "(2) Certain amounts paid before 1977.-The amendment made by subsection (a) (enacting subsec. (g) of this section] shall not apply to amounts paid before January 1, 1977, pursuant to a binding con- tract or written loan commitment which existed on September 16, 1975 (and at all times thereafter), and which required prepayment of such amounts by the taxpayer." EcrxvEx DATE OF 1964 AMENDMENT Section 223(b) of Pub. L. 88-272 provided that: "Except as provided in subsections (c) and (d) (set out as notes under this section]- "(1) the amendment made by subsection (a)(1) [to this section] shall apply to taxable years beginning nfter December 31, 1953, and ending after August 16, 1054, and '(2) the amendment made by subsection (a)(2) [to sectlan 43, Internal Revenue Code of 1939) shall apply to taxable years to which the Internal Rev- enue Code of 1939 applies." E.%YEcT'vE DATE OF 1962 AMENDMENT Section 3(b) of Pub. L. 87-876 provided that: "The amendment made by subsection (a) [adding subsec. (e) of this section] shall apply only with respect to tax- able years ending after December 31, 1902." EFFECTIVE DATE OF 1960 AMENDMENT Section 8(b) of Pub. L. 86-781 provided that: "The amendment made by subsection (a) [adding subsec. (d) of this section] shall apply to taxable years ending after December 31, 1960." ELECTION AS TO TRANSFERS IN TAXABLE YEARs BEGINNING BEFORE JAN. 1, 1964 Section 223(c) of Pub. L. 88-272 provided that: "(1) The amendments made by subsection (a) [to this section, and section 43, Internal Revenue Code of 1939] shall not apply to any transfer of money or other property described in subsection (a) made in a taxable year beginning before January 1, 1964, If the taxpayer elects, in the manner provided by regulations prescribed by the Secretary of the Treasury or his del- egate, to have this paragraph apply. Such an elec- tion- "(A) must be made within one year after the date of the enactment of this Act [Feb. 26, 1964], "(B) may not be revoked after the expiration of such one-year period, and "(C) shall apply to all transfers described in the first sentence of this paragraph (other than trans- fers described in paragraph (2)). In 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 para- graph (1), prevented by the operation of any law or rule of law. "(3) If the taxpayer makes an election under para- graph (1), and if, on the date of such election, the as- sessment of any deficiency which results from the ap- plication 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 defi- ciency may be made shall not expire earlier than 2 years after the date of the enactment of this Act (Feb. 26, 1964]." Page 366
TITLE 26-INTERNAL REVENUE CODE CERTAIN OTHER TRANSFERS IN TAXABLE YEARS BEGIINNING BEFORE JAN. 1, 1964 Section 223(d) of Pub. L. 88-272 provided that: "The amendments made by subsection (a) [to this section, and section 43, Internal Revenue Code of 19393 shall not apply to any transfer of money or other property described in subsection (a) made in a taxable year beginning before January 1, 1964, If- "(1) no deduction has been allowed in respect of such transfer for any taxable year before the tax- able 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 amend- ments 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 trans- fer is settled." CRoss RmnarEcEs Additional itemized deductions for individuals, see section 211 et seq. of this title. Itemized deductions for individuals and corpora- tions, see section 161 et seq. of this title. Items not paid within 2 months after close of tax- able year as not deductible, see section 267 of this title. Special deductions for corporations, see section 241 et seq. of this title. Time for filing returns, see sections 6072, 6081 of this title. SECTION REFERR TO IN OTHER SECTIONS This section is referred to in section 164 of this title. [§ 462. Repealed. June 15, 1955, ch. 143, § 1(b), 69 Stat. 134] Section, act Aug. 16, 1954, ch. 736 68A Stat. 158, re- lated to reserves for estimated expenses. EFFETIVE DATE OF REPEAL Repeal of this section effective with respect to tax. able years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 3 of Act June 15, 1955 set out as an Effective Date of 1955 Amendment note under section 381 of this title. SAVINGS PROVISIONS For provisions concerning increase in tax in any tax- able year ending on or before June 15, 1955 by reason of enactment of act June 15, 1955, see section 4 of act June 15, 1955, set out as a Savings Provisions note under section 381 of this title. § 463. Accrual of vacation pay (a) Allowance of deduction At the election of a taxpayer whose taxable income is computed under an accrual method of accounting, if the conditions of section 162(a) are otherwise satisfied, the deduction al- lowable under section 162(a) with respect to va- cation pay shall be an amount equal to the sum of- (1) a reasonable addition to an account rep- resenting the taxpayer's liability for vacation pay earned by employees before the close of the taxable year and payable during the tax- able year or within 12 months following the close of the taxable year; plus (2) the amount (if any) of the reduction at the close of the taxable year in the suspense account provided in subsection (c)(2). Such liability for vacation pay earned before the close of the taxable year shall include amounts which, because of contingencies, would not (but for this section) be deductible under section 162(a) as an accrued expense. All payments with respect to vacation pay shall be charged to suc), 'iccount, (b) Opening balance The opening balance of the account described in subsection (a)(1) for its first taxable year shall, under regulations prescribed by the Sec- retary, be- (1) in the case of a taxpayer who main- tained a predecessor account for vacation pay under section 97 of the Technical Amend- ments Act of 1958, as amended, for his last taxable year ending before January 1, 1973, and who makes an election under this section for his first taxable year ending after Decem- ber 31, 1972, the larger of- (A) the balance in such predecessor ac- count at the close of such last taxable year, or (B) the amount determined as if the tax- payer had maintained an account described in subsection (a)(1) for such last taxable year, or (2) in the case of any taxpayer not described in paragraph (1), an amount equt.l to the largest closing balance the tax- payer would have had for any of the tax- payer's 3 taxable years immediately preced- ing such first taxable year if the taxpayer had maintained such account throughout such 3 immediately preceding taxable years. (c) Suspense account for deferred deduction (1) Initial suspense account The amount of the suspense account at the beginning of the first taxable year for which the taxpaye mrm-.tains under this section an account (described in subsection (a)(1)) shall be the amount of the opening balance de- scribed in subsection (b) minus the amount, if any, allowed as deductions for prior taxable years for vacation pay accrued but not paid at the close of the taxable year preceding such first taxable year. (2) Adjustments in suspense account At the close of each taxable year the sus- pense account shall be- (A) reduced by the excess, if any, of the amount in the suspense account at the be- ginning of the taxable year over the amount in the account described in subsec- tion (a)(1) at the close of the taxable year (after making the additions and charges for such taxable year provided in subsection (a)), or (B) increased (but not to an amount greater than the initial balance of the sus- pense account) by the excess, if any of the amount in the account described in subsec- tion (a)(1) at the close of the taxable year (after making the additions and charges for such taxable year provided in subsection (a)) over the amount in the suspense ac- count at the beginning of the taxable year. (3) Section 381 acquisitions The application of this subsection to any acquisition to which section 381(a) applies shall be determined under regulations pre- scribed by the Secretary. Page 367 § 463
TITLE 26-INTERNAL REVENUE CODE (d) Election An election under this section shall be made at such time and in such manner as the Secre- tary may by regulations prescribe. (e) Changes in accounting method (1) Establiphment of account not considered change The establishment of an account described in subsection (a)(1) shall not be considered a change in method of accounting for purposes of section 446(e) (relating to requirement re- specting chtage of accounting method), and no adjustment shall be required under section 481 by reason of the establishment of such ac- count. (2) Certain taxpayers treated as having initiated change If the taxpayer treated vacation pay under section 97 of the Technical Amendments Act of 1958, as amended, for his last taxable year ending before January 1, 1973, and if such taxpayer fails to make an election under this section for his first taxable year ending after December 31, 1972, then, for purposes of sec- tion 481, such taxpayer shall be treated as having initiated a change in method of ac- counting with respect to vacation pay for his first taxable year ending after December 31, 1972. (Added Pub. L. 93-625, § 4(a), Jan. 3, 1974, 88 Stat. 2109, and amended Pub. L. 94-455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) REFERENCES IN TEXT Section 97 of the Technical Amendments Act of 1958, as amended, referred to in subsecs. (b)(1) and (e)(2), is set out as a Deductibility of Accrued Vacation Pay note under section 162 of this title. AMENDmrNTs 1976-Subsecs. (b), (c)(3), (d). Pub. L. 94-455 struch out "or his delegate" following "Secretary". EFCTIVE DATE Section 4(d) of Pub. L. 93-625 provided that: "(1) Except as provided in paragraph (2), the amendments made by this section [enacting this sec- tion and amending section 81 of this title] shall apply to taxable years beginning after December 31, 1973. "(2) If the taxpayer maintained an account for va- cation pay under section 97 of the Technical Amend- ments Act of 1958, as amended [set out as a note under section 162 of this title], for his last taxable year ending before January 1, 1973, the amendments made by this section [enacting this section and amending section 81 of this title] shall apply to tax- able years endhils after December 31, 1972." SECTION REFERIUD TO IN OTHER SECTIONS This section is referred to in section 81 of this title. § 464. Limitations on deductions in case of farming syndicates (a) General rule In the case of any farming syndicate (as de- fined in subsection (c)), a deduction (otherwise allowable under this chapter) for amounts paid for feed, seed, fertilizer, or other similar farm supplies shall only be allowed for the taxable year in which such feed, seed, fertilizer, or other supplies are actually used or consumed, or, if later, for the taxable year for which al- lowable as a deduction (determined without regard to this section). (b) Certain poultry expenses In the case of any farming syndicate (as de- fined in subsection (c))- (1) the cost of poultry (including egg-laying hens and baby chicks) purchased for use in a trade or business (or both for use in a trade or business and for sale) shall be capitalized and deducted ratably over the lesser of 12 months or their useful life in the trade or business, and (2) the cost of poultry purchased for sale shall be deducted for the taxable year in which the poultry is sold or otherwise dis- posed of. () Farming syndicate defined (1) In general For purposes of this section, the term "farming syndicate" means- (A) a partnership or any other enterprise other than a corporation which is not an electing small business corporation (as de- fined in section 1371(b)) engaged in the trade or business of farming, if at any time interests in such partnership or enterprise have been offered for sale in any offering required to be registered with any Federal or State agency having authority to regu- late the offering of securities for sale, or (B) a partnership or any other enterprise other than a corporation which is not an electing small business corporation (as de- fined in section 1371(b)) engaged in the trade or business of farming, if more than 35 percent of the losses during any period are allocable to limited partners or limited entrepreneurs. (2) Holdings attributable to active management For purposes of paragraph (1)(B), the fol- lowing shall be treated as an interest which is not held by a limited partner or a limited en- trepreneur: (A) in the case of any individual who has actively participated (for a period of not less than 5 years) in the management of any trade or business of farming, any inter- est in a partnership or other enterprise which is attributable to such active partici- pation, (B) in the case of any individual whose principal residence is on a farm, any part- nership or other enterprise engaged in the trade or business of farming such farm, (C) in the case of any individual who is ac- tively participating in the management of any trade or business of farming or who is an individual who is described In subpara- graph (A) or (B), any participation in the further processing of livestock which was raised in such trade or business (or in the trade or business referred to in subpara- graph (A) or (B)), (D) in the case of an individual whose principal business activity involves active participation in the management of a trade or business of farming, any interest in any other trade or business of farming, and, (E) any interest held by a member of the family (within the meaning of section 267(c)(4)) of a grandparent of an individual Page 368 § 464
TITLE 26-INTERNAL REVENUE CODE described in subparagraph (A), (B), (C), or (D) if the interest in the partnership or the enterprise is attributable to the active par- ticipation of the individual described in sub- paragraph (A), (B), (C), or (D). For purposes of subparagraph (A), where one farm is substituted for or added to another farm, both farms shall be treated as one farm, (d) Exceptions Subsection (a) shall not apply to- (1) any amount paid for supplies which are on hand at the close of the taxable year on account of fire, storm, flood, or other casualty or on account of disease or drought, or (2) any amount required to be charged to capital account under section 278. (e) Definitions For purposes of this section- (1) Farming The term "farming" means the cultivation of land or the raising or harvesting of any ag- ricultural or horticultural commodity includ- ing the raising, shearing, feeding, caring for, training, and management of animals. For purposes of the preceding sentence, trees (other than trees bearing fruit or nuts) shall not be treated as an agricultural or horticul- tural commodity. (2) Limited entrepreneur The term "limited entrepreneur" means a person who- (A) has an interest in an enterprise other than as a limited partner, and (B) does not actively participate in the management of such enterprise. (Added Pub. L. 94-455, title II, § 207(a)(1), Oct. 4, 1976, 90 Stat. 1536.) EFFECTIvE DATE Section 207(a)(3) of Pub. L. 94-455 provided that: "(A) In general.-Except as provided in subpara- graph (B), the amendments made by this subsection [adding this section and amending analysis preceding section 461 of this title] shall apply to taxable years beginning after December 31, 1975. "(B) Transitional rule.-In the case of a farming syn- dicate in existence on December 31, 1975, and for which there was no change of membership through- out its taxable year beginning in 1976, the amend- ments made by this subsection shall apply to toxable years beginning after December 31, 1976." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 278, 465 of this title. § 465. Deductions limited to amount at risk in case of certain activities (a) General rule In the case of a taxpayer (other than a corpo- ration which is neither an electing small busi- ness corporation (as defined in section 1371(b)) nor a personal holding company (as defined in section 542)) engaged in an activity to which this section applies, any loss from such activity for the taxable year shall be allowed only to the extent of the aggregate amount with re- spect to which the taxpayer is at risk (within the meaning of subsection (b)) for such activity at the close of the taxable year. Any loss from such activity not allowed under this section for the taxable year shall be treated as a deduction allocable to such activity in the first succeeding taxable year. (b) Amounts considered at risk (1) In general For purposes of this section, a taxpayer shall be considered at risk for an activity with respect to amounts including- (A) the amount of money and the adjust. ed basis of other property contributed by the taxpayer to the activity, and (B) amounts borrowed with respect to such activity (as determined under para- graph (2)). (2) Borrowed amounts For purposes of this section, a taxpayer shall be considered at risk with respect to amounts borrowed for use in an activity to the extent that he- (A) is personally liable for the repayment of such amounts, or (B) has pledged property, other than property used in such activity, as security for such borrowed amount (to the extent of the net fair market value of the taxpayer's interest in such property). No property shall be taken into account as se- curity if such property is directly or indirect- ly financed by indebtedness which is secured by property described in paragraph (1). (3) Certain borrowed amounts excluded For purposes of paragraph (1)(B), amounts borrowed shall not be considered to be at risk with respect to an activity if such amounts are borrowed from any person who- (A) has an interest (other than an interest as a creditor) in such activity, or (B) has a relationship to the taxpayer specified within any one of the paragraphs of section 267(b). (4) Exception Notwithstanding any other provision of this section, a taxpayer shall not be considered at risk with respect to amounts protected against loss through nonrecourse financing, guarantees, stop loss agreements, or other similar arrangements. (5) Amounts at risk in subsequent years If in any taxable year the taxpayer has a loss from an activity to which this section ap- plies, the amount with respect to which a tax- payer is considered to be at risk (within the meaning of subsection (b)) in subsequent tax- able years with respect to that activity shall be reduced by that portion of the loss which (after the application of subsection (a)) is al- lowable as a deduction. (c) Activities to which section applies (1) Types of activities This section applies to any taxpayer en- gaged in the activity of- (A) holding, producing, or distributing motion picture films or video tapes, (B) farming (as defined in section 464(e)), (C) leasing any section 1245 property (as defined in section 1245(a)(3)), or Page 369 §4,65
TITLE 26-INTERNAL REVENUE CODE (D) exploring for, or exploiting, oil and gas resources as a trade or business or for the production of income. (2) Separate activities For purposes of this section, a taxpayer's activity with respect to each- (A) film or video tape, (B) section 1245 property which is leased or held for leasing, (C) farm, or (D) oil and gas property (as defined under section 614), shall be treated as a separate activity. A part- ner's interest in a partnership or a sharehold- er's interest in an electing small business cor- poration shall be treated as a single activity to the extent that the partnership or an electing small business corporation is engaged in activities described in any subparagranh of this paragraph. (d) Definition of loss For purposes of this section, the term "loss" means the excess of the deductions allowable under this chapter for the taxable year (deter- mined without regard to this section) and allo- cable to an activity to which this section applies over the income received or accrued by the tax- payer during the taxable year from such activ- ity. (Added Pub. L. 94-455, title II, § 204(a), Oct. 4, 1976, 90 Stat. 1531.) EF-cvEz DATE AND TRANSrrIONAL RuLES Section 204(c) of Pub. L. 94-455 provided that: "(1) In general.-Except as provided in paragraphs (2) and (3), the amendments made by this section [adding this section and amending analysi preced- ing section 461 of this title] shall apply to losses at- tributable to amounts paid or incurred in taxable years beginning after December 31, 1975. For pur- poses of this subsectiorz, any amount allowed or al- lowable for depreciatioin or amortization for any period shall be treated as an amount paid or in- curred in such period. "(2) Special transitional rules for movies and video tapes.- "(A) In general.-In the case of any activity de- scribed in section 465(c)(1)(A) of the Internal Rev- enue Code of 1954 [subsec. (c)(1)(A) of this sec- tion], the amendments made by this section shall not apply to- "(i) deductions for depreciation or amortiza- tion with respect to property the principal pro- duction of which began before September 11, 1975, and for the purchase of which there was on September 11, 1975, and at all times thereafter a binding contract, and "(ii) deductions attributable to producing or distributing property the principal production of which began before September 11, 1975. "(B) Exception for certain agreements where principal photography begin before 1976.-In the case of any activity described in section 465(c)(1)(A) of the Internal Revenue Code of 1954 [subsec. (c)(1)(A) of this section], the amendments made by this section shall not apply to deductions attributable to the producing of a film the princi- pal photography of which began on or before De- cember 31, 1975, if- "(i) on September 10, 1975, there was an agree- ment with the director or a principal motion pic- ture star, or on or before September 10, 1975, there had been expended (or committed to the production) an amount not less than the lower of $100,000 or 10 percent of the estimated costs of producing the film, and "(ii) the production takes place in the United States. Subparagraph (A) shall apply only to taxpayers who held their interests on September 10, 1975. Subpara- graph (B) shall apply only to taxpayers who held their interests on December 31, 1975. "(3) Special transitional rules for leasing activi- ties.- "(A) Rule for leases other than operating leases.-In the case of any activity described in sec- tion 465(c)(1)(B) of the Internal Revenue Code of 1954 (subsec. (c)(1)(B) of this section], the amend- ments made by this section shall not apply with re- spect to- "(i) leases entered into before January 1, 1976, and "(i) leases where the property was ordered by the lessor or lessee before January 1, 1976. "(B) Holding of interests for purposes of subpar- agraph (A)--Subparagraph (A) shall apply only to taxpayers who held their interests in the property on December 31, 1975. "(C) Special rule for operating leases.-In the case of a lease described in section 46(e)(3)(B) of the Internal Revenue Code of 1954 [section 46(e)(3)(B) of this title]- "(i) subparagraph (A) shall be applied by sub- stituting 'May 1. 1976' for 'January 1, 1976' each place it appears therein, and "(if) subparagraph (B) shall be applied by sub. stituting 'April 30, 1976' for 'December 31, 1975'." SECTION REuERRED TO IN OTHER SECTIONS This section is referred to in section 704 of this title. SUBPART D-INVENTORIES Sec. 471. General rule for inventories. 472. Last-in, first-out inventories. § 471. General rule for inventories Whenever in the opinion of the Secretary the use of inventories is necessary in order clearly to determine the income of any taxpayer, in- ventories shall be taken by such taxpayer on such basis as the Secretary may prescribe as conforming as nearly as may be to the best ac- counting practice in the trade or business and as most clearly reflecting the income. (Aug. 16, 1954, ch. 736, 68A Stat. 159; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Pub. L. 94-455 struck out "or his delegate" fol- lowing "Secretary" wherever appearing. CROSS RarEzRNczs Basis of property included in inventory, see section 1013 of this title. LIFO inventory, taxability of corporation on distri- bution, see section 311 of this title. SETION R17EIM TO IN OTHR SECTIONs This section is referred to in sections 311, 472 of this title. § 472. Last-in, first-out inventories (a) Authorization A taxpayer may use the method provided in subsection (b) (whether or not such method has been prescribed under section 471) in inventory- ing goods specified in an application to use such Page 37/0
TITLE 26-INTERNAL REVENUE CODE method flied at such time and in such manner as the Secretary may prescribe. The change to, and the use of, such method shall be in accor- dance with such regulations as the Secretary may prescribe as necessary in order that the use of such method may clearly reflect income. (b) Method applicable In inventorying goods specified in the appli- cation described in subsection (a), the taxpayer shall: (1) Treat those remaining on hand at the close of the taxable year as being: First, those included in the opening inventory of the tax- able year (in the order of acquisition) to the extent thereof; and second, those acquired in the taxable year; (2) Inventory them at cost; and (3) Treat those included in the opening in- ventory of the taxable year in which such method is first used as having been acquired at the same time and determine their cost by the average cost method. () Condition Subsection (a) shall apply only if the taxpay- er establishes to the satisfaction of the Secre- tary that the taxpayer has used no procedure other than that specified in paragraphs (1) and (3) of subsection (b) in inventorying such goods to ascertain the income, profit, or loss of the first taxable year for which the method de- scribed in subsection (b) is to be used, for the purpose of a report or statement covering such taxable year- (1) to shareholders, partners, or other pro- prietors, or to beneficiaries, or (2) for credit purposes. (d) Preceding closing inventory In determining income for the taxable year preceding the taxable year for which the method described in subsection (b) is first used, the closing inventory of such preceding year of the goods specified in the application referred to in subsection (a) shall be at cost. (e) Subsequent inventories If a taxpayer, having complied with subsec- tion (a), uses the method described in subsec- tion (b) for any taxable year, then such method shall be used in all subsequent taxable years unless- (1) with the approval of the Secretary a change to a different method is authorized; or, (2) the Secretary determines that the tax- payer has used for any such subsequent tax- able year some procedure other than that specified in paragraph (1) of subsection (b) in inventorying the goods specified in the appli- cation to ascertain the income, profit, or loss of such subsequent taxable year for the pur- pose of a report or statement covering such taxable year (A) to shareholders, partners, or other proprietors, or beneficiaries, or (B) for credit purposes; and requires a change to a method different from that prescribed in sub- section (b) beginning with such subsequent taxable year or any taxable year thereafter. If paragraph (1) or (2) of this subsection ap-. plies, the change to, and the use of, the differ- ent method shall be in accordance with such regulations as the Secretary may prescribe as necessary in order that the use of such method may clearly reflect income. (Aug. 16, 1954, c. 736, 68A Stat. 159; Oct. 4, 1976, Pub. L. 94-455, title XIX, f§ 1901(b)(36)(A), 1906(b)(13)(A), 90 Stat. 1802, 1834.) AMENDMENTS 1976-Subsecs. (a), (c), (e). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" wherever appearing. Subsec. (M. Pub. L. 94-455, § 1901(b)(48)(A), struck out subsec. (f) which provided for a cross reference re- lating to involuntary liquidation and replacement of LIFO inventories. EFFECTIvE DATE or 1976 AMENDMENT Amendment of subsec. () by section 1901(b)(36)(A) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. CROSS REFERENcES LIFO inventory, taxability of corporations on distri- bution, see section 311 of this title. SECTION REFERED TO IN OTHER SECTIONS This section is referred to in section 311 of this title. PART III-ADJUSTMENTS Sec. 481. Adjustments required by changes in method of accounting. 482. Allocation of income and deductions among tax- payers. 483. Interest on certain deferred payments. AMENDMENTS 1964-Pub. L. 88-272, title II, § 224(b), Feb. 26, 1964, 78 Stat. 79, added item 483. § 481. Adjustments required by changes in method of accounting (a) General rule In computing the taxpayer's taxable income for any taxable year (referred to in this section as the "year of the change")- (1) if such computation is under a method of accounting different from the method under which the taxpayer's taxable income for the preceding taxable year was computed, then (2) there shall be taken into account those adjustments which are determined to be nec- essary solely by reason of the change in order to prevent amounts from being duplicated or omitted, except there shall not be taken into account any adjustment in respect of any tax- able year to which this section does not apply unless the adjustment is attributable to a change in the method of accounting initiated by the taxpayer. (b) Limitation on tax where adjustments are substan- tial (1) Three year allocation If- (A) the method of accounting from which the change is made was used by the taxpay- er in computing his taxable income for the 2 taxable years preceding the year of the change, and Page 371
TITLE 26-INTERNAL REVENUE CODE (B) the increase in taxable income for the year of the change which results solely by reason of the adjustments required by sub- section (a)(2) exceeds $3,000, then the tax under this chapter attributable to such increase in taxable income shall not be greater than the aggregate increase in the taxes under this chapter (or under the corre- sponding provisions of prior revenue laws) which would result if one-third of such in- crease in taxable income were included in tax- able income for the year of the change and one-third of such increase were included for each of the 2 preceding taxable years. (2) Allocation under new method of accounting If- (A) the increase in taxable income for the year of the change which results solely by reason of the adjustments required by sub- section (a)(2) exceeds $3,000, and (B) the taxpayer establishes his taxable income (under the new method of account- ing) for one or more taxable years consecu- tively preceding the taxable year of the change for which the taxpayer in comput- ing taxable income used the method of ac- counting from which the change is made, then the tax under this chapter attributable to such increase in taxable income shall not be greater than the net increase in the taxes under this chapter (or under the correspond- ing provisions of prior revenue laws) which would result if the adjustments required by subsection (a)(2) were allocated to the taxable year or years specified in subparagraph (B) to v hich they are properly allocable under the new method of accounting and the balance of the adjustments required by subsection (a)(2) was allocated to the taxable year of the change. (3) Special rules for computations under para- graphs (1) and (2) For purposes of this subsection- (A) There shall be taken into account the increase or decrease in tax for any taxable year preceding the year of the change to which no adjustment Is allocated under paragraph (1) or (2) but which is affected by a net operating loss (as defined In sec- tion 172) or by a capital loss carryback or carryover (as defined in section 1212), deter- mined with reference to taxable years with respect to which adjustments under para- graph (1) or (2) are allocated. (B) The increase or decrease in the tax for any taxable year for which an assess- ment of any deficiency, or a credit or refund of any overpayment, is prevented ry any law or rule of law, shall be determtted by reference to the tax previously deter- mined (within the meaning of section 1314(a)) for such year. (C) In applying section 7807(b)(1), the provisions of chapter 1 (other than sub- chapter E, relating to self-employment income) and chapter 2 of the Internal Rev- enue Code of 1939 shall be treated as the corresponding provisions of the Internal Revenue Code of 1939. (c) Adjustments under regulations In the case of any change described in subsec- tion (a), the taxpayer may, in such manner and subject to such conditions as the Secretary may by regulations prescribe, take the adjustments required by subsection (a)(2) into account In computing the tax imposed by this chapter for the taxable year or years permitted under such regulations. (d) Exception for change to installment basis This section shall not apply to a change to which section 453 (relating to change to install- ment method) applies. (Aug. 16, 1954, ch. 736, 68A Stat. 160; Sept. 2, 1958, Pub. L. 85-866, title I, § 29(a), (b), 72 Stat. 1626-1628; Dec. 30, 1969, Pub. L. 91-172, title V, § 512(f)(4), 83 Stat. 641; Oct. 4, 1976, Pub. L. 94- 455, title XIX, §§ 1901(a)(70), 1906(b)(13)(A), 90 Stat. 1776, 1834.) REFERENcEs IN TEXT The Internal Revenue Code of 1939, referred to In subsec. (b)(3)(C), is act Feb. 10, 1939, ch. 2, 53 Stat. 1, as amended. Prior to the enactment of the Internal Revenue Code of 1954, the 1939 Code was classified to former Title 26, Internal Revenue Code. Chapters 1 and 2 of the Internal Revenue Code of 1939 were com- prised of sections 1 to 482 and 500 to 784, respectively, of former title 26. Chapters 1 (except sections 143 and 144) and 2 were repealed by section 7851(a)(1) of this title. For table of comparisons of the 1939 Code to the 1954 Code, see Table I preceding section 1 of this title. See, also, section 7851(e) of this title for provision that references in the 1954 Code to a provision of the 1939 Code, not then applicable, shall be deemed a reference to the corresponding provision of the 1954 Code, which is then applicable. AMENDMENTS 1976-Subsecs. (b)(1), (2). Pub, L. 94-455, § 1901(a)(70)(B), struck out ", other than the amount of such adjustments to which paragraph (4) or (5) ap- plies," following "required by subsection (a)(2)". Subsec. (b)(4), (5), (6). Pub. L. 94-455, § 1901(a)(70)(A), struck out subsec. (b)(4) which relat- ed to special rule for pre-1954 general adjustments, subsec. (b)(5) which related to special rule for pre-1954 adjustments in case of certain decedents, and subsec. (b)(6) which related to the application of the special rule for pre-1954 general adjustments. Subsec. (c). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". 1969-Subsec. (b)(3)(A). Pub. L. 91-172 substituted "loss carryback or carryover" for "loss carryover". 1958-Subsec. (a)(2). Pub. L. 85-866, § 29(a)(1), added "unless the adjustment is attributable to a change in the method of accounting initiated by the taxpayer", following "does not apply". Subsec. (b)(1). Pub. L. 85-866, § 29(b)(1)-(3), inserted after "subsection (a)(2)" the words ", other than the amount of such adjustments to which paragraph (4) or (5) applies," and substituted "the aggregate in- crease in the taxes" for "the aggregate of the taxes" and "which would result if one-third of such increase in taxable income" for "which would result if one- third of such increase". Subsec. (b)(2). Pub. L. 85-866, § 29(b)(1), (4), inserted after "subsection (a)(2)", wherever appearing "other than the amount of such adjustments to which para- graph (4) or (5) applies," and "(or under the corre- sponding provisions of prior revenue laws)" after "the net increase in the taxes under this Chapter". Subsec. (b)(3)(A). Pub. L. 85-866, § 29(b)(5), substi- tuted "paragraph (1) or (2)" for "paragraph (2)", wherever appearing. Subsecs. (b)(4) to (6). Pub. L. 85-866, § 29(a)(2), added subsec. (b)(4) to (6). Page 372
TITLE 26-INTERNAL REVENUE CODE EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (b) by section 1901(a)(7O)(A), (B), of Pub. L. 94-455 effective for taxable years begin- ning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amend- ment note under section 2 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Amendment by Pub. L. 91-172 applicable with re- spect to net capital losses sustained in taxable years beginning after Dec. 31, 1969, see section 512(g) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 1212 of this title. EFFECTIVE DATE OF 1958 AMENDMENT Section 29(d) of Pub. L. 85-866 provided that: "(1) In general.-The amendments made by this sec- tion [amending subsec. (a)(2), (b)(1), (2), (3A), (4) to (6) of this section and adding section 381(c)(21) of this title] shall apply with respect to any change in a method of accounting where the year of the change (within the meaning of section 481 of the Internal Revenue Code of 1954 [this section]) is a taxable year beginning after December 31, 1953, and ending after August 16, 1954. "(2) Exception for certain agreements.-The amend- ments made by subsections (a), (b)(I), and (W) [amend- ing subsec. (a)(2) and (b)(4 to 6) of this section and adding section 381(c)(21) of this title] shall not apply if before the date of the enactment of this Act [Sept. 2, 1958]- "(A) the taxpayer applied for a change in the method of accounting in the manner provided by regulations prescribed by the Secretary of the Trea- sury or his delegate, and "(B) the taxpayer and the Secretary of the Trea. sury or his delegate agreed to the terms and condi- tions for making the change." ELECTION To RETUiR TO FORMER METHOD OF ACCOUNTING Section 29(e) of Pub. L. 85-866 authorized an elec- tion by certain taxpayers, who, for any taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, and before Sept. 2, 1958, computed their tax- able incomes using different accounting methods in succeeding taxable years, to return to their first method of accounting, where the election was made within six months after Sept. 2, 1958. Claims for re- funds of overpayments of tax resulting from the elec- tion were to be filed within one year after the date of the election. Such an election was to be considered a consent to an assessment of a deficiency resulting from the election, where the assessment is made within one year after the date of the election. TRANSITIONAL PROVISIONS FOR INCOME TAX TREATMENT OF DEALE REsERVE INCOME Pub. L. 86-459, May 13, 1960, 74 Stat. 124, authorized any person who computed taxable income under the accrual method of accounting for his most recent tax- able year ending on or before June 22, 1959, and who treated dealer reserve income for such taxable year as accruable for a subsequent taxable year, to elect before Sept. 1, 1960, to have section 481 of this title apply to the treatment for income tax purposes of dealer reserve income. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 463, 1251 of this title; title 42 section 401. § 482. Allocation of Income and deductions among taxpayers In any case of two or more organizations, trades, or businesses (whether or not incorpo- rated, whether or not organized in the United States, and whether or not affiliated) owned or controlled directly or indirectly by the same in- terests, the Secretary may distribute, appor- tion, or allocate gross income, deductions, cred- its, or allowances between or among such orga- nizations, trades, or businesses, if he determines that such distribution, apportionment, or allo- cation is necessary In order to prevent evasion of taxes or clearly to reflect the Income of any of such organizations, trades, or businesses. (Aug. 16, 1954, ch. 736, 68A Stat. 162; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Pub. L. 94-455 struck out "or his delegate" fol- lowing "Secretary". SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 994, 1505 of this title. § 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 which 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 pay- ments 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 con- tract for the sale or exchange of property, an amount equal to the excess of- (1) the sum of the payments to which this section applies which are due under the con- tract, over (2) the sum of the present values of such payments and the present values of any inter- est 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 prescribed by the Secre- tary. Such regulations shall provide for dis- counting on the basis of 6-month brackets and shall provide that the present value of any in- terest payment due not more than 6 months after the date of the sale or exchange is an amount equal to 100 percent of such payment. (c) Payments to which section applies (1) In general Except as provided in subsection (f), this section shall apply to any payment on ac- count 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 pay- ments 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 for purposes of this subparagraph, there is total unstated interest. 71-999 0 - 78 - 28 (Vol. 7) Page 373 § 483
TITLE 26-INTERNAL REVENUE CODE Any rate prescribed for determining whether there is total unstated interest for purposes of subparagraph (B) shall be at least one per- centage 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 consid- eration for the sale or exchange of property shall not be considered a payment, and any payment due under such evidence of indebt- edness shall be treated as due under the con- tract for the sale or exchange. (d) Payments that are indefinite as to time, liability, or amount In the case of a contract for the sale or ex- change 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 payment of such portion is made. (e) Change in 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 unstated interest" under the contract shall be recomputed and allocated (with adjustment for prior interest (including unstated interest) payments) under regulations prescribed by the Secretary. (f) Exceptions and limitations (1) Sales price of $3,000 or less This section shall not apply to any payment on account of the sale or exchange of proper- ty 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 treat- ment of amounts paid on account of the sale or exchange of property shall be made with- out regard to this section if any such amounts are treated under section 163(b) as if they in- cluded 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 all of the gain, if any, on such sale or exchange would be considered as ordinary income. (4) Sales or exchanges of patents This section shall not apply to any pay- ments made pursuant to a transfer described in section 1235(a) (relating to sale or ex- change of patents). (5) Annuities This section shall not apply to any amount the liability for which depends in whole or in part on the life expectancy of one or more in- dividuals and which constitutes an amount re- ceived as an annuity to which section '72 ap- plies. (Added Pub. L. 88-272, title II, § 224(a), Feb. 26, 1964, 78 Stat. 77, and amended Pub. L. 94-455, title XIX, §§ 1901(b)(3)(B), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1792, 1834.) AMENDMENTS 1976-Subsec. (b). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c)(1)(B). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. e). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (f)(3). Pub. L. 94-455, § 1901(b)(3)(B). substi- tuted "all of the gain, if any, on such" for "no part of any gain on such" and "ordinary income" for gain from the sale or exchange of property other than a capital asset". EFCTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (f)(3) by section 1901(b)(3)(B) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31. 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFECrIVE DATE Section applicable to payments made after Dec. 31, 1963, on account of sales or exchanges of property after June 30, 1963, other than a sale or exchange pur- suant to written contract, including an Irrevocable written option, entered into before July 1, 1963, see section 224(d) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 163 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 4942 of this title. Subchapter F-Exempt Organizations Part I. General rule. II. Private foundations. III. Taxation of business income of certain exempt organizations. IV. Farmers' cooperatives. V. Shipowners' protection and indemnity associ. ations. VI. Political organizations. VII. Certain homeowners associations. AmENDMENTS 1976-Pub. L. 94-455, title XXI, § 2101(d), Oct. 4, 1976, 90 Stat. 1899. added part VII heading. 1975-Pub. L. 93-625, § 10(d), Jan. 3. 1975, 88 Stat. 2119, added part VI heading. 1969-Pub. L. 91-172, title I, § 101(j)(58). Dec. 30, 1969, 83 Stat. 532, added Part II heading, and redesig- nated former Parts II. III and IV as Parts III, IV and V. respectively. SuncHAPma REFERRED TO IN OTHER SECTIONs This subchapter is referred to in section 532, 542. 552 of this title. PART I-GENERAL RULE Sec. 501. Exemption from tax on corporations, certain trusts, etc. 502. Feeder organizations. 503. Requirements for exemption. 504 Status after organization ceases to qualify for ex- emption under section 501(c)(3) because of sub- stantial lobbying. AMENDMENTS 1976-Pub. L. 94-455, title XIII, § 1307(d)(3)(B), Oct, 4. 1976, 90 Stat. 1728, added item 504. Page 374 t 483
TITLE 26-INTERNAL REVENUE CODE 1969-Pub. L. 91-172, title I, § 101(j)(61), Dec. 30, 1969, 83 Stat. 532, struck out Item 504. PART REFERRED TO IN OTHER SECTIONS This part is referred to in section 1492 of this title. § 501. Exemption from tax on corporations, certain trusts, etc. (a) Exemption from taxation An organization described in subsection (c) or (d) or section 401(a) shall be exempt from tax- ation under this subtitle unless such exemption is denied under section 502 or 503. (b) Tax on unrelated business income and certain other activities An organization exempt from tax:ation under subsection (a) shall be subject to tax to the extent provided in parts II, III, and VI of this subchapter, but (notwithstanding parts II, III, and VI of this subchapter) shall be considered an organization exempt from income taxes for the purpose of any law which refers to organi- zations exempt from income taxes. () List of exempt organizations The following organizations are referred to in subsection (a): (1) Corporations organized under Act of Congress, if such corporations are instrumen- talities of the United States and if, under such Act, as amended and supplemented, such corporations are exempt from Federal income taxes. (2) Corporations organized for the exclusive purpose of holding title to property, collect- ing income therefrom, and turning over the entire amount thereof, less expenses, to an organization which itself is exempt under this section. (3) Corporations, and any community chest, fund, or foundation, organized and operated exclusively for religious, charitable, scientific, testing for public safety, literary, or educa- tional purposes, or to foster national or inter- national amateur sports competition (but only if no part of its activities involve the pro- vision of athletic facilities or equipment), or for the prevention of cruelty to children or animals, no part of the net earnings of which inures to the benefit of any private share- holder or individual, no substantial part of the activities of which is carrying on propa- ganda, or otherwise attempting, to influence legislation (except as otherwise provided in subsection (h)), and which does not partici- pate in, or intervene in (including the pub- lishing or distributing of statements), any po- litical campaign on behalf of any candidate for public office. (4) Civic leagues or organizations not orga- nized for profit but operated exclusively for the promotion of social welfare, or local asso- ciations of employees, the membership of which is limited to the employees of a desig- nated person or persons in a particular mu- nicipality, and the net earnings of which are devoted exclusively to charitable, educational, or recreational purposes. (5) Labor, agricultural, or horticultural or- ganizations. (6) Business leagues, chambers of com- merce, real-estate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players) not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individ- ual. (7) Clubs organized for pleasure, recreation, and other nonprofitable purposes, substan- tially all of the activities of which are for such purposes and no part of the net earnings of which inures to the benefit of any private shareholder, (8) Fraternal beneficiary societies, orders, or associations- (A) operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system, and (B) providing for the payment of life, sick, accident, or other benefits to the members of such society, order, or association or their dependents. (9) Voluntary employees' beneficiary associ- ations providing for the payment of life, sick, accident, or other benefits to the members of such association or their dependents or desig- nated beneficiaries, if no part of the net earn- ings of such association inures (other than through such payments) to the benefit of any private shareholder or individual. (10) Domestic fraternal societies, orders, or associations, operating under the lodge system- (A) the net earnings of which are devoted exclusively to religious, charitable, scientif- ic, literary, educational, and fraternal pur- poses, and (B) which do not provide for the payment of life, sick, accident, or other benefits. (11) Teachers' retirement fund associations of a purely local character, if- (A) no part of their net earnings inures (other than through payment of retirement benefits) to the benefit of any private shar- eholder or individual, and (B) the income consists solely of amounts received from public taxation, amounts re- ceived from assessments on the teaching salaries of members, and income in respect of investments. (12) Benevolent life insurance associations of a purely local character, mutual ditch or ir- rigation companies, mutual or cooperative telephone companies, or like organizations; but only if 85 percent or more of the income consists of amounts collected from members for the sole purpose of meeting losses and ex- penses. (13) Cemetery companies owned and operat- ed exclusively for the benefit of their mem- bers or which are not operated for profit; and any corporation chartered solely for the pur- pose of the disposal of bodies by burial or cre- mation which is not permitted by its charter to engage in any business not necessarily inci- dent to that purpose and no part of the net earnings of which inures to the benefit of any private shareholder or individual. (14)(A) Credit unions without capital stock organized and operated for mutual purposes and without profit. Page 375
TITLE 26-INTERNAL REVENUE CODE (B) Corporations or associations without capital stock organized before September 1, 1957, and operated for mutual purposes and without profit for the purpose of providing reserve funds for, and insurance of shares or deposits in- (I) domestic building and loan associ- ations, (ii) cooperative banks without capital stock organized and operated for mutual purposes and without profit, or (iii) mutual savings banks not having cap- ital stock represented by shares. (C) Corporations or associations organized before September 1, 1957, and operated for mutual purposes and without profit for the purpose of providing reserve funds for associ- ations or banks described in clause (I), (ii), or (iti) of subparagraph (B); but only if 85 per- cent or more of the income is attributable to providing such reserve funds and to invest- ments. This subparagraph shall not apply to any corporation or association entitled to ex- emption under subparagraph (B). (15) Mutual insurance companies or associ- ations other than life or marine (including inter-insurers and reciprocal underwriters) if the gross amount received during the taxable year from the items described in section 822 (b) (other than paragraph (1)(D) thereof) and premiums (including deposits and assess- ments) does not exceed $150,000. (16) Corporations organized by an associ- ation subject to part IV of this subchapter or members thereof, for the purpose of financ- ing the ordinary crop operations of such members or other producers, and operated in conjunction with such association. Exemption shall not be denied any such corporation be- cause It has capital stock, if the dividend rate of such stock is fixed at not to exceed the legal rate of interest in the State of incorpor- ation or 8 percent per annum, whichever is greater, on the value of the consideration for which the stock was issued, and if substantial- ly all such stock (other than nonvoting pre- ferred stock, the owners of which are not en- titled or permitted to participate, directly or indirectly, in the profits of the corporation, on dissolution or otherwise, beyond the fixed dividends) is owned by such association, or members thereof; nor shall exemption be denied any such corporation because there is accumulated and maintained by it a reserve required by State law or a reasonable reserve for any necessary purpose. (17)(A) A trust or trusts forming part of a plan providing for the payment of supple- mental unemployment compensation bene- fits, if- (i) under the plan, it Is impossible, at any time prior to the satisfaction of all liabil- ities, with respect to employees under the plan, for any part of the corpus or income to be (within the taxable year or there- after) used for, or diverted to, any purpose other than the providing of supplemental unemployment compensation benefits, (Ii) such benefits are payable to employ- ees under a classification which is set forth in the plan and which Is found by the Sec- retary not to be discriminatory In favor of employees who are officers, shareholders, persons whose principal duties consist of su- pervising the work of other employees, or highly compensated employees, and (iii) such benefits do not discriminate in favor of employees who are officers, share- holders, persons whose principal duties con- sist of supervising the work of other em- ployees, or highly compensated employees. A plan shall not be considered discrimina- tory within the meaning of this clause merely because the benefits received under the plan bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of the employees cov- ered by the plan. (B) In determining whether a plan meets the requirements of subparagraph (A), any benefits provided under any other plan shall not be taken into consideration, except that a plan shall not be considered discriminatory- (I) merely because the benefits under the plan which are first determined in a nondis- criminatory manner within the meaning of subparagraph (A) are then reduced by any sick, accident, or unemployment compensa- tion benefits received under State or Feder- al law (or reduced by a portion of such benefits if determined in a nondiscrimina- tory manner), or (Ii) merely because the plan provides only for employees who are not eligible to re- ceive sick, accident, or unemployment com- pensation benefits under State or Federal law the same benefits (or a portion of such benefits if determined in a nondiscrimina- tory manner) which such employees would receive under such laws if such employees were eligible for such benefits, or (tli) merely because the plan provides only for employees who are not eligible under another plan (which meets the require- ments of subparagraph (A) of supplemental unemployment compensation benefits pro- vided wholly by the employer the same benefits (or a portion of such benefits if de- termined in a nondiscriminatory manner) which such employees would receive under such other plan if such employees were eli- gible under such other plan, but only if the employees eligible under both plans would make a classification which would be non- discriminatory within the meaning of sub- paragraph (A). (C) A plan shall be considered to meet the requirements of subparagraph (A) during the whole of any year of the plan if on one day in each quarter it satisfies such requirements. (D) The term "supplemental unemploy- ment compensation benefits" means only- (I) benefits which are paid to an employee because of his involuntary separation from the employment of the employer (whether or not such separation is temporary) result- ing directly from a reduction in force, the discontinuance of a plant or operation, or other similar conditions, and (ii) sick and accident benefits subordinate to the benefits described in clause (i). (E) Exemption shall not be denied under subsection (a) to any organization entitled to Page 376
TITLE 26-INTERNAL REVENUE CODE such exemption as an association described in paragraph (9) of this subsection merely be- cause such organization provides for the pay- ment of supplemental unemployment bene- fits (as defined in subparagraph (D)(i)). (18) A trust or trusts created before June 25, 1959, forming part of a plan providing for the payment of benefits under a pension plan funded only by contributions of employees, if- (A) under the plan, it is impossible, at any time prior to the satisfaction of all liabil- ities with respect to employees under the plan, for any part of the corpus or income to be (within the taxable year or there- after) used for, or diverted to, any purpose other than the providing of benefits under the plan, (B) such benefits are payable to employ- ees under a classification which is set forth in the plan and which is found by the Sec- retary not to be discriminatory in favor of employees who are officers, shareholders, persons whose principal duties consist of su- pervising the work of other employees, or highly compensated employees, and (C) such benefits do not discriminate in favor of employees who are officers, share- holders, persons whose principal duties con- sist of supervising the work of other em- ployees, or highly compensated employees. A plan shall not be considered discrimina- tory within the meaning of this subpara- graph merely because the benefits received under the plan bear a uniform relationship to the total compensation, or the basic or regular rate of compensation, of the em- ployees covered by the plan. (19) A post or organizAtion of war veterans, or an auxiliary unit or society of, or a trust or foundation for, any such post or organiza- tion- (A) organized in the United States or any of its possessions, (B) at least 75 percent of the members of which are war veterans and substantially all of the other members of which are individ- uals who are veterans (but not war veter- ans), or are cadets, or are spouses, widows, or widowers of war veterans or such individ- uals, and (C) no part of the net earnings of which inures to the benefit of any private share- holder or individual. (20) an organization or trust created or or- ganized in the United States, the exclusive function of which is to form part of a quali- fied group legal services plan or plans, within the meaning of section 120. An organization or trust which receives contributions because of section 120(c)(5)(C) shall not be prevented from qualifying as an organization described in section 501(c)(20) merely because it pro- vides legal services or indemnification against the cost of legal services unassociated with a qualified group legal services plan. (d) Religious and apostolic organizations The following organizations are referred to in subsection (a): Religious or apostolic associ- ations or corporations, if such associations or corporations have a common treasury or com- munity treasury, even if such associations or corporations engage in business for the common benefit of the members, but only if the members thereof include (at the time of filing their returns) in their gross income their entire pro rata shares, whether distributed or not, of the taxable income of the association or corporation for such year. Any amount so in- cluded in the gross income of a member shall be treated as a dividend received. (e) Cooperative hospital service organizations For purposes of this title, an organization shall be treated as an organization organized and operated exclusively for charitable pur- poses, if- (1) such organization is organized and oper- ated solely- (A) to perform, on a centralized basis, one or more of the following services which, if performed on its own behalf by a hospital which is an organization described in sub- section (c)(3) and exempt from taxation under subsection (a), would constitute ac- tivities in exercising or performing the pur- pose or function constituting the basis for its exemption: data processing, purchasing, warehousing, billing and collection, food, clinical, industrial engineering, laboratory, printing, communications, record center, and personnel (including selection, testing, training, and education of personnel) ser- vices; and (B) to perform such services solely for two or more hospitals each of which is- (i) an organization described in subsec- tion (c)(3) which is exempt from taxation under subsection (a), (it) a constituent part of an organization described in subsection (c)(3) which is exempt from taxation under subsection (a) and which, if organized and operated as a separate entity, would constitute an organization described in subsection (c)(3), or (iII) owned and operated by the United States, a State, the District of Columbia, or a possession of the United States, or a political subdivision or an agency or in- strumentality of any of the foregoing; (2) such organization is organized and oper- ated on a cooperative basis and allocates or pays, within 8 months after the close of its taxable year, all net earnings to patrons on the basis of services performed for them; and (3) if such organization has capital stock, all of such stock outstanding is owned by its pa- trons. For purposes of this title, any organization which, by reason of the preceding sentence, is an organization described in subsection (c)(3) and exempt from taxation under subsection (a), shall be treated as a hospital and as an organi- zation referred to in section 170(b)(1)(A)(iii). (f) Cooperative service organizations of operating educational organizations For purposes of this title, if an organization is- (1) organized and operated solely to hold, commingle, and collectively invest and rein- vest (including arranging for and supervising the performance by independent contractors Page 377 § 501
TITLE 26-INTERNAL REVENUE CODE of investment services related thereto) in stocks and securities, the moneys contributed thereto by each of the members of such orga- nization, and to collect income therefrom and turn over the entire amount thereof, less ex- penses, to such members, (2) organized and controlled by one or more such members, and (3) comprised solely of members that are or- ganizations described in clause (ii) or (iv) of section 170(b)(1)(A)- (A) which are exempt from taxation under subsection (a), or (B) the income of which is excluded from taxation under section 115(a), then such organization shall be treated as an organization organized and operated exclu- sively for charitable purposes. (g) Definition of agricultural For purposes of subsection (c)(5), the term "agricultural" includes the art or science of cul- tivating land, harvesting crops or aquatic re- sources, or raising livestock. (g)I Prohibition of discrimination by certain social clubs Notwithstanding subsection (a), an organiza- tion which is described in subsection (c)M shall not be exempt from taxation under subsection (a) for any taxable year if, at any time during such taxable year, the charter, bylaws, or other governing instrument, of such organization or any written policy statement of such organiza- tion contains a provision which provides for dis- crimination against any person on the basis of race, color, or religion. (h) Expenditures by public charities to influence leg- islation (1) General rule In the case of an organization to which this subsection applies, exemption from taxation under subsection (a) shall be denied because a substantial part of the activities of such orga- nization consists of carrying on propaganda, or otherwise attempting, to influence legisla- tion, but only if such organization normally- (A) makes lobbying expenditures in excess of the lobbying ceiling amount for such or- ganization for each taxable year, or (B) makes grass roots expenditures in excess of the grass roots ceiling amount for such organization for each taxable year. (2) Definitions For purposes of this subsection- (A) Lobbying expenditures The term "lobbying expenditures" means expenditures for the purpose of influencing legislation (as defined in section 4911(d)). (B) Lobbying ceiling amount The lobbying ceiling amount for any orga- nization for any taxable year is 150 percent of the lobbying nontaxable amount for such organization for such taxable year, deter- mined under section 4911. (C) Grass roots expenditures The term "grass roots expenditures" means expenditures for the purpose of in- fluencing legislation (as defined in section 'So in original. Two subsecs. (g) have been enacted. 4911(d) without regard to paragraph (1)(B) thereof). (D) Grass roots ceiling amount The grass roots ceiling amount for any or- ganization for any taxable year is 150 per. cent of the grass roots nontaxable amount for such organization for such taxable year, determined under section 4911. (3) Organizations to which this subsection applies This subsection shall apply to any organiza- tion which has elected (in such manner and at such time as the Secretary may prescribe) to have the provisions of this subsection apply to such organization and which, for the taxable year which includes the date the elec- tion is made, is described In subsection (c)(3) and- (A) Ls described in paragraph (4), and (B) is not a disqualified organization under paragraph (5). (4) Organizations permitted to elect to have this subsection apply An organization is described in this para- graph if it is described in- (A) section 170(b)(1)(A)(i) (relating to educational institutions), (B) section 170(b)(1)(A)(iii) (relating to hospitals and medical research organiza- tions), (C) section 170(b)(1)(A)(iv) (relating to or- ganizations supporting government schools), (D) section 170(b)(1)(A)(vl) (relating to or- ganizations publicly supported by charita- ble contributions), (E) section 509(a)(2) (relating to organiza- tions publicly supported by admissions, sales, etc.), or (F) section 509(a)(3) (relating to organiza- tions supporting certain types of public charities) except that for purposes of this subparagraph, section 509(a)(3) shall be ap- plied without regard to the last sentence of section 509(a). (5) Disqualified organizations For purposes of paragraph (3) an organiza- tion is a disqualified organization if it is- (A) described in section 170(b)(1)(A)(l) (relating to churches), (B) an integrated auxiliary of a church or of a convention or association of churches, or (C) a member of an affiliated group of or- ganizations (within the meaning of section 4911(f)(2)) if one or more members of such group is described in subparagraph (A) or (B). (6) Years for which election is effective An election by an organization under this subsection shall be effective for all taxable years of such organization which- (A) end after the date the election is made, and (B) begin before the date the election is revoked by such organization (under regula- tions prescribed by the Secretary). (7) No effect on certain organizations With re:;pect to any organization for a tax- able year for which- Page 37/8
TITLE 26-INTERNAL REVENUE CODE (A) such organization is a disqualified or- ganization (within the meaning of para- graph (5)), or (B) an election under this subsection is not in effect for such organization, nothing in this subsection or in section 4911 shall be construed to affect the interpretation of the phrase, "no substantial part of the ac- tivities of which is carrying on propaganda, or otherwise attempting, to influence legisla- tion," under subsection (c)(3). (8) Affiliated organizations For rules regarding affiliated organizations, see sec- tion 4911(r). (I) Cross reference For nonexemption of Communist-controlled organiza- tions, see section 11(b) of the Internal Security Act of 1950 (64 Stat. 997; 60 U.S.C. 790(b)). (Aug. 16, 1954, ch. 736, 68A Stat. 163; Mar. 13, 1956, ch. 83, § 5(2), 70 Stat. 49; Apr. 22, 1960, Pub. L. 86-428, § 1, 74 Stat. 54; July 14, 1960, Pub. L. 86-667, § 1, 74 Stat. 534; Oct. 16, 1962, Pub. L. 87-834, § 8(d), 76 Stat. 997; Feb. 2, 1966, Pub. L. 89-352, § 1, 80 Stat. 4; Nov. 8, 1966, Pub. L. 89-800, § 6(a), 80 Stat. 1515; June 28, 1968, Pub. L. 90-364, title I, § 109(a), 82 Stat. 269; Dec. 30, 1969, Pub. L. 91-172, title I, §§ 101(j)(3)- (6), 121(b)(5)(A), (6)(A), 83 Stat. 526, 527, 541; Dec. 31, 1970, Pub. L. 91-618, § 1, 84 Stat. 1855; Aug. 29, 1972, Pub. L. 92-418, § 1(a), 86 Stat. 656; June 8, 1974, Pub. L. 93-310, § 3(a), 88 Stat. 235; Jan. 3, 1975, Pub. L. 93-625, § 10(c), 88 Stat. 2119; Oct. 4, 1976, Pub. L. 94-455, title XIII, §§ 1307(a)(1), (d)(1)(A), 1312(a), 1313(a), title XIX, § 1906(b)(13)(A), title XXI, §§ 2113(a), 2134(b), 90 Stat. 1720, 1727, 1730, 1834, 1907, 1927; Oct. 20, 1976, Pub. L. 94-568, §§ 1(a), 2(a), 90 Stat. 2697.) REERENCEs IN TEXT The provisions of subsec. (a) of section 115, referred to In subsec. (f)(3)(B), now comprise section 115 in its entirety, following the deletion therefrom of the subsec. (a) designation by section 1901(a)(19) of Pub. L. 94-455. A MENDMSwTs 1976-Subsec. (c)(3). Pub. L. 94-455, §§ 1313(a), 1307(d)(1)(A), added "or to foster national or interna- tional amateur sports competition (but only if no part of its activities involve the provision of athletic facili- ties or equipment)" following "educational purposes" and added "(except as otherwise provided in subsec- tion (h))" following "influence legislation". Subsec. (c)(7). Pub. L. 94-568, § l(a), deleted require- ment that clubs be "operated exclusively" for specified purposes but required that substantially all of club ac. tivities be for specified purposes. Subsecs. (c)(17), (18). Pub. L. 94-455 § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c)(20). Pub. L. 94-455, § 2134(b), added par. (20). Subsec. (e)(1)(A). Pub. L. 94-455, § 1312(a), added "clinical" after "food". Subsec. (g). Pub. L. 94-568, § 2(a). notwithstanding provision for insertion after subsec. (g) of a new sub- section, added subsec. "(g) Prohibition of discrimina- tion by certain social clubs". Pub. L. 94-455. § 2113(a), added subsec. (g). Former subsec. (g) redesignated (h). Subsec. (h). Pub. L. 94-568, § 2(a), in providing for in- sertion after subsec. (g) of a new subsection [probably intending subsec. (h) but inserting subsec. "(g) Prohi- bition of discrimination by certain clubs"], redesignat- ed subsec. (h) [probably intending subsec. "(h) Expen- ditures by public charities to influence legislation"], as subsec. (1), notwithstanding another subsec. "(I) Cross reference". Pub. L. 94-455, §§ 1307(a)(1), 2113(a). added subsec. (h). Former subsec. (g), which was redesignated (h), was further redesignated (i). Subsec. (I). Pub. L. 94-568, § 2(a), in providing for in- sertion after subsec. (g) a new subsection [probably in- tending subsec. (h) but inserting subsec. "(g) Prohibi- tion of discrimination by certain clubs"], redesignated subsec. (h) [probably intending subsec. "(h) Expendi- tures by public charities to influence legislation"] as subsec. (l), notwitnstanding another subsec. "(I) Cross reference". Pub. L. 94-455, § 1307(a)(1), redesignated former subsec. (h) as (i). 1975-Subsec. (b). Pub. L. 93-625 inserted references to part VI of this subchapter. 1974-Subsec. (f). Pub. L. 93-310 added subsec. (f) and redesignated former subsec. f) as (g). Subsec. (g). Pub. L. 93-310 designated former subsec. (f) as (g). 1972--Subsec. (c)(19). Pub. L. 92-418 added subsec. (c)(19). 1970--Subsec. (c)(13). Pub. L., 91-618 substituted "corporation chartered solely for the purpose of dis- posal of bodies by burial or cremation which is not permitted" for "corporation chartered solely for burial purposes as a cemetery corporation and is not permit- ted". 1969-Subsec. (a). Pub. L. 91-172, § 101(j)(3), re- moved reference to section 504. Subsee. (b). Pub. L. 91-172, § 101(j)(4), added refer- ence to certain other activities in the heading and to part III in text, and struck out reference to tax on un- related income. Subsec. (c). Pub. L. 91-172, §§ 101(J)(5), 121(b)(6)(A), substituted "part IV" for "part III", following "Corpo- rations organized by an association subject to" and added par. 18. Subsec. (c)(9). Pub. L. 91-172, § 121(b)(5)(A), inserted reference to designated beneficiaries and struck out reference to 85 percent or more income of voluntary employees' beneficiary associations. Subsec. (c)(10). Pub. L. 91-172, § 121(b)(5)(A), substi- tuted provisions concerning domestic fraternal soci- eties, orders, or associations, operating under the lodge system, for provisions covering voluntary em- ployees' beneficiary associations which would pay benefits to designated beneficiaries of members. Subsec. (e). Pub. L. 91-172. § 101(j)(6), substituted "section 170(b)(1(A)(iii)M" for "section 503(b)(5)" in last sentence. 1968-Subsec. (e). Pub. L. 90-364 added subsec. (e). Former subsee. (e) redesignated (f). Subsec. (f). Pub. L. 90-364 redesignated former subpec. (e) as (f). 1966-Subsec. (c)(6). Pub. L. 89-800 Inserted refer- ence to professional football leagues (whether or not administering a pension fund for football players). Subsec. (c)(14). Pub. L. 89-352 denominated as subpar. (A) provisions covering credit unions which were formerly set out preceding subpar. (A), denomi- nated as subpar. (B) and clauses (I), (ii), and (fi) there- under provisions covering corporation or associations without capital stock organized before Sept. 1, 1957, which formerly were set out as provisions preceding subpar. (A) and as subpars. (A). (B), and (C) respec- tively, and added subpar. (C). 1962-Subsec. (c)(15). Pub. L. 87-834 substituted "$150,000" for "$75,000". 1960-Subsec. (c)(14). Pub. L. 86-428 substituted "September 1, 1957" for "September 1, 1951". Subsec. (c)(17). Pub. L. 86-667 added subsec. (c)(17). 1956-Subsec. (c)(15). Act Mar. 13, 1956, substituted "the items described in section 822(b) (other than paragraph (1)(D) thereof)" for "interest, dividends, rents,". Page 379 § 501
TITLE 26-INTERNAL REVENUE CODE EFFECTIVE DATE OF 1976 AMENDMENT Section 1(d) of Pub. L. 94-568 provided that: "The amendments made by this section [amending subsec. (c)(7) of this section and sections 277(a) and 512(9)(3)(A) of this title] shall apply to taxable years beginning after the date of the enactment of this Act [Oct. 20, 1976]." Section 2(b) of Pub. L. 94-568 provided that: "The amendment made by subsection (a) [enacting subsec. (g) of this section] shall apply to taxable years begin- ning after the date of the enactment of this Act [Oct. 20, 1976]," Section 1307(e) of Pub. L. 94-455 provided that: "The amendments made by this section [amending sections 170, 275, 501, 2055, 2106, 2522, 6104, 6161, 6201, 6211, 6212, 6213, 6214, 6344. 6501, 6512, 6601, and 7422 of this title, and enacting sections 504 and 4911 of this title] shall apply- "(1) except as otherwise specified in paragraph (2), in the case of amendments to subtitle A, to taxable years beginning after December 31, 1976; "(2) in the case of the amendments made by sub- section (a)(2) [enacting section 504 of this title], to activities occurring after the date of the enactment of this Act [Oct. 4, 1976]; "(3) in the case of amendments to chapter 11, to the estates of decedents dying after December 31, 1976; "(4) in the case of amendments to chapter 12, to gifts in calendar years beginning after December 31, 1976; "(5) in the case of amendments to subtitle D, to taxable years beginning after December 31, 1976; and '(6) in the case of amendments to subtitle F, on and after the date of the enactment of this Act [Oct. 4, 1976]." Section 1312(b) of Pub. L. 94-455 provided that: "The amendment made by this section [amending subsec. (e)(1)(A) of this section] shall apply to taxable years ending after December 31, 1976." Section 1313(d) of Pub. L. 94-455 provided that: "The amendments made by this section [to sections 170(c)(2)(B), 501(c)(3), 2055(a)(2) and 2522(a)(2) of this title] shall apply on the day following the date of the enactment of this Act (Oct. 4, 1976]." Section 2113(b) of Pub. L. 94-455 provided that: "The amendment made by this section [enacting subsec. (g) of this section] applies to taxable years ending after December 31, 1975." EFFECTIVE DATE OF 1975 AMENDMENT Amendm nt by Pub. L. 93-625 applicable to taxable years beginning after Dec. 31, 1974, see section 10(e) of Pub. L. 93-6251, set out as an Effective Date note under section 527 of this title. EFFECTIVE DATE OF 1974 AIsmMENT Section 3(b) of Pub. L. 93-310 provided that: "The amendments made by this section [adding subsec. (f) and redesignating former subsec. (f) as (g)] shall apply to taxable years ending after December 31, 1973." EFFCTIVE DATE OF 1972 AmEmDMweT Section l(c) of Pub. L. 92-418 provided that: "The amendments made by this section [amending this sec- tion and section 512 of this title] shall apply to tax- able years beginning after December 31, 1969." EFFECTIVE DATE OF 1970 AMENDMENT Section 2 of Pub L. 91-618 provided that: "The amendment made by the first section of this Act E to subsec.(c)(13) of this section] shall apply to taxable years ending after the date of enactment of this Act [Dec. 31, 1970]." EFCTIvE DATE OF 1969 AmNmwMEzr Amendment by section 101(j)(3) of Pub. L. 91-172 to take effect on Jan. 1. 1970, except for the amendment of subsec. (a) of this section by section 101(j)(3) of Pub. L. 91-172, which shall apply to taxable years be. ginning after Dec. 31, 1969, see section 101(k)(1), (2)(B) of Pub. L. 91-172, set out as an Effective Date note under section 4940 of this title. Amendment by section 121(b)(5)(A), (6)(A) of Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1969, see section 121(g) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 511 of this title. EFFECTIVE DATE OF 1968 AMENDMENT Section 109(b) of Pub. L. 90-364 provided that: "The amendments made by subsection (a) [adding subsec. (e) of this section] shall apply to taxable years ending after the date of the enactment of this Act [June 28, 1968]." EFFECTIVE DATE OF 1966 AMENDMENT Section 6(c) of Pub. L. 89-800 provided that: "The amendment made by subsection (a) (amending subsec. (c)(6) of this section] shall apply to taxable years ending after the date of the enactment of this Act [Nov. 8, 1966]," Section 3 of Pub. 89-352 provided in part that: "The amendment made by the first section of this Act (amending subsec. (c)(14) of this section] shall apply to taxable years ending after the date of the enact- ment of this Act [Feb. 2, 1966]." EFFECTIVE DATE OF 1962 AMENDMENT Amendment of subsec. (c)(15) of this section by Pub. L. 87-834 applicable with respect to taxable years be- ginning after Dec. 31, 1962, see section 8(h) of Pub. L. 87-834, set out as an Effective Date of 1962 Amend- ment note under section 821 of this title. EFFECTIVE DATE OF 1960 AMENDMENT Section 2 of Pub. L. 86-428 provided that: "The amendment made by this Act [to subsec. (c)(14) of this section] shall apply only with respect to taxable years beginning after December 31, 1959." Section 6 of Pub. L. 86-667, provided that: "(a) Except as provided in subsection (b), the amend. ments made by this Act [to sections 501, 503, 511, 513 and 514 of this title] shall apply to taxable years be- ginning after December 31, 1959. "(b) In the case of loans, the amendments made by section 2 of this Act [to section 503 of this title] shall apply only to loans made, renewed, or continued after December 31, 1959." EFFECTIVE DATE OF 1956 AMENDMENT Amendment by act Mar. 13, 1956, applicable only to taxable years beginning after Dec. 31, 1954, see Effec- tive Date of 1956 Amendment note set out under sec- tion 821 of this title. APPLICABILITY OF 1976 AMENDMENT TO CERTAIN ORGANIZATIONS Section 1313(c) of Pub. L. 94-455 provided that: "An organization which (without regard to the amend- ments made by this section [to sections 170(c)(2)(B), 501(c)(3), 2055(a)(2) and 2522(a)(2) of this title]) is an organization described in section 170(c)(2)(B), 501(c)(3), 2055(a)(2), or 2522(a)(2) of the Internal Rev- enue Code of 1954 [sections 170(c)(2)(B), 501(c)(3), 2055(a)(2), or 2522(a)(2) of this title] shall not be treated as an organization not so described as a result of the amendments made by this section." TAX EXEMPTION FOR CERTAIN PUERTO RICAN PENSION, ETC., PLANS Section 1022(i) of Pub. L. 93-406, title II, Sept. 2, 1974, 88 Stat. 942, provided that: "(1) General rule. Effective for taxable years begin- ning after December 31, 1973, for purposes of section 501(a) of the Internal Revenue Code of 1954 [subsec. (a) of this section] (relating to exemption from tax), any trust forming part of a pension, profit-sharing, or stock bonus plan all of the participants of which are Page 380
TITLE 26-INTERNAL REVENUE CODE residents of the Commonwealth of Puerto Rico shall be treated as an organization described in section 401(a) of such Code (section 401(a) of this title] if such trust- "(A) forms part of a pension, profit-sharing, or stock bonus plan, and "(B) is exempt from income tax under the laws of the Commonwealth of Puerto Rico. "(2) Election to have provisions of, and amendments made by, Title II of this Act apply. "(A) If the administrator of a pension, profit-shar- ing, or stock bonus plan which is created or orga- nized in Puerto Rico elects, at such time and in such manner as the Secretary of the Treasury may re- quire, to have the provisions of this paragraph apply, for plan years beginning after the date of election any trust forming a part of such plan shall be treated as a trust created or organized in the United States for purposes of sec ion 401(a) of the Internal Revenue Code of 1954 [section 401(a) of this title]. "(B) An election under subparagraph (A), once made, is irrevocable. "(C) This paragraph applies to plan years begin- ning after the date of enactment of this Act [Sept. 2, 1974] "(D) The source of any distributions made under a plan which makes an election under this paragraph to participants and beneficiaries residing outside of the United States shall be determined, for purposes of subchapter N of chapter 1 of the Internal Rev- enue Code of 1954 (this title] by the Secretary of the Treasury in accordance with regulations pre- scribed by him. For purposes of this subparagraph the United States means the United States as de- fined in section 7701(a)(9) of the Internal Revenue Code of 1954 [section 7701(a)(9), of this title]." EXCHANGES FOR SALE OF POULTRY Pub. L. 89-44, title VIII, § 811, June 21, 1965, 79 Stat. 169, provided that certain corporations, associations, or organizations organized and operated exclusively for the purpose of providing an exchange for the sale of poultry growers of a particular locality shall be treated for purposes of this title as an exempt organi- zation and that such exemption shall apply to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, which begin before Jan. 1, 1966. CROSS REFERENCES Business lease indebtedness, see section 514 of this title. Constructive ownership of stock rule inapplicable to tax exempt employees' trust, see section 318 of this title. Corporate deductions for dividends received in appli- cable to dividends from corporation exempt from tax under this section, see section 246 of this title. Deduction for contributions of employer to employ- ees' trust or annuity plan and compensation under a deferred-payment plan, see section 404 of this title. Denial of exemption, see section 504 of this title. Disallowance of losses with respect to transactions between persons and certain tax exempt educational and charitable organizations, see section 267 of this title. Exclusion of services performed in employ of organi- zation exempt from tax under this section- Employment under Federal Unemployment Tax Act, see section 3308 of this title. Employment under title II of the Social Security Act, see section 410 of Title 42, The Public Health and Welfare. Feeder organizations, see section 502 of this title. Imposition of tax on unrelated business income of charitable, etc., organizations, see section 511 of this title. Includible corporation relative to consolidated re- turns as excluding corporation exempt from tax under this section, see section 1504 of this title. Lottery under wagering taxes as excluding drawings conducted by organization exempt from tax under this section, see section 4421 of this title. Nonforfeitable rights relative to employees' death benefits, see section 101 of this title. Partial exclusion of dividends received by individuals inapplicable to dividends from corporation exempt from tax under this section, see section 116 of this title. Prohibition on interests in nonbanking organizations inapplicable to certain bank holding companies exempt under this section, see section 1843 of Title 12, Banks and Banking. Requirements for exemption, see section 503 of this title. Returns by exempt organizations, see section 6033 of this title. Scholarships and fellowship grants to individuals who are not candidates for degrees as excludible from gross income where grantor is an organization de- scribed in this section. see section 117 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 37, 72, 101, 103, 104. 116, 117, 170, 219, 246, 267, 274, 311, 318, 382, 401 to 405, 408 to 412, 414, 415, 502, 504, 507, 508, 509, 511, 512, 513, 514, 527, 542, 642, 681, 805, 821, 871, 911, 992, 1504, 1563, 2039, 2055, 2517, 2522, 3121, 3303, 3306, 3401, 4041, 4221, 4251, 4253, 4294, 4421, 4911, 4940, 4941, 4942, 4945, 4947, 4948, 4975, 5214, 6033, 6043. 6047, 6104, 6110, 6420, 6421, 6424, 6427, 6501, 7428, 7609, 7802, 9012 of this title; title 5 sections 3102, 4111; title 12 section 1843: title 15 sections 77c, 1291; title 18 sections 1511, 195k, title 20 sections 76m, 1681; title 29 sections 169, 303, 706, 1002, 1051, 1052, 1081, 1086, 1321; title 40 sections 483, 484; title 42 sections 300e-9, 409, 410, 1395x, 1760, 1766, 1784, 2000e, 2996b, 3056; title 50 section 790. SECTION REFERRED TO IN D.C. CODE This section is referred to in sections 1-1162, 2-2103, 46-301, 46-303 of the District of Columbia Code. § 502. Feeder organizations (a) General rule An organization operated for the primary purpose of carrying on a trade or business for profit shall not be exempt from taxation under section 501 on the ground that all of its profits are payable to one or more organizations exempt from taxation under section 501. (b) Special rule For purposes of this section, the term "trade or business" shall not include- (1) the deriving of rents which would be ex- cluded under section 512(b)(3), if section 512 applied to the organization, (2) any trade or business in which substan- tially all the work in carrying on such trade or business is performed for the organization without compensation, or (3) any trade or business which is the sell- ing of merchandise, substantially all of which has been received by the organization as gifts or contributions. (Aug. 16, 1954, ch. 736, 68A Stat. 166; Dec. 30, 1969, Pub. L. 91-172, title I, § 121(b)(7), 83 Stat. 542.) AMENDMENTS 1969-Pub. L. 91-172 redesignated first sentence of existing provisions as subsec. (a), and substantial por- tion of second sentence as subsec. (b)(1). and, in subsec. (b)(1) as so redesignated, inserted reference to section 512 of this title, and added pars. (2) and (3). Page 381 § 502
TITLE 26-INTERNAL REVENUE CODE EFFECTIVE DATE OF 1969 AMmE~mrr Amendment by Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1969, see section 121(g) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 511 of this title. SECTION REUERRED TO IN OTHR SECTIONS This section is referred to in section 501 of this title. SECTION REFERRED TO IN D.C. CODE This section is referred to in section 46-301 of the District of Columbia Code. § 503. Requirements for exemption (a) Denial of exemption to organizations engaged in prohibited transactions (I) General rule (A) An organization described in section 501(c)(17) shall not be exempt from taxation under section 501(a) if it has engaged in a prohibited transaction after December 31, 1959. (B) An organization described in section 401(a) which is referred to in section 4975(g) (2) or (3) shall not be exempt from taxation under section 501(a) If it has engaged in a prohibited transaction after March 1, 1954. (C) An organization described in section 501(c)(18) shall not be exempt from taxation under section 501(a) if it has engaged in a prohibited transaction after December 31, 1969. (2) Taxable years affected An organization described in section 501(c) (17) or (18) or paragraph (1)(B) shall be denied exemption from taxation under sec- tion 501(a) by reason of paragraph (1) only for taxable years after the taxable year during which it is notified by the Secretary that it has engaged in a prohibited transac- tion, unless such organization entered into such prohibited transaction with the purpose of diverting corpus or income of the organiza- tion from its exempt purposes, and such transaction involved a substantial part of the corpus or income of such organization. (b) Prohibited transactions For purposes of this section, the term "pro- hibited transaction" means any transaction in which an organization subject to the provisions of thi. section- (1) lends any part of its income or corpus, without the receipt of adequate security and a reasonable rate of interest, to; (2) pays any compensation, in excess of a reasonable allowance for salaries or other compensation for personal services actually rendered, to; (3) makes any part of its services available on a preferential basis to; (4) makes any substantial purchase of secu- rities or any other property, for more than adequate consideration in money or money's worth, from; (5) sells any substantial part of its securities or other property, for less than an adequate consideration in money or money's worth, to; or (6) engages in any other transaction which results in a substantial diversion of its income or corpus to; the creator of such organization (if a trust); a person who has made a substantial contribution to such organization; a member of the family (as defined in section 267(c)(4)) of an individual who is the creator of such trust or who has made a substantial contribution to such organi- zation; or a corporation controlled by such cre- ator or person through the ownership, directly or indirectly, of 50 percent or more of the total combined voting power of all classes of stock entitled to vote or 50 percent or more of the total value of shares of all classes of stock of the corporation. () Future status of organizations denied exemption Any organization described in section 501(c) (17) or (18) or subsection (a)(1)(B) which is denied exemption under section 501(a) by reason of subsection (a) of this section, with re- spect to any taxable year following the taxable year in which notice of denial of exemption was received, may, under regulations prescribed by the Secretary, file claim for exemption, and if the Secretary, pursuant to such regulations, is satisfied that such organization will not know- ingly again engage in a prohibited transaction, such organization shall be exempt with respect to taxable years after the year in which such claim is filed. (d) Special rule for loans For purposes of the application of subsection (b)(1), in the case of a loan by a trust described in section 401(a), the following rules shall apply with respect to a loan made before March 1, 1954, which would constitute a prohibited transaction if made on or after March 1, 1954: (1) If any part of the loan is repayable prior to December 31, 1955, the renewal of such part of the loan for a period not extending beyond December 31, 1955, on the same terms, shall not be considered a prohibited transaction. (2) If the loan is repayable on demand, the continuation of the loan without the receipt of adequate security and a reasonable rate of interest beyond December 31, 1955, shall be considered a prohibited transaction. (e) Special rules For purposes of subsection (b)(1), a bond, de- benture, note, or certificate or other evidence of indebtedness (hereinafter in this subsection referred to as "obligation") shall not be treated as a loan made without the receipt of adequate security if- (1) such obligation is acquired- (A) on the market, either (I) at the price of the obligation prevailing on a national se- curities exchange which is registered with the Securities and Exchange Commission, or (ii) if the obligation is not traded on such a national securities exchange, at a price not less favorable to the trust than the of- fering price for the obligation as established by current bid and asked prices quoted by persons independent of the issuer; (B) from an underwriter, at a price (i) not in excess of the public offering price for the obligation as set forth in a prospectus or of- fering circular filed with the Securities and Exchange Commission, and (ii) at which a substantial portion of the same issue is ac- Page 382 § 503
TITLE 26-INTERNAL REVENUE CODE quired by persons independent of the issuer; or (C) directly from the issuer, at a price not less favorable to the trust than the price paid currently for a substantial portion of the same issue by persons independent of the issuer; (2) immediately following acquisition of such obligation- (A) not more than 25 percent of the ag- gregate amount of obligations issued in such issue and outstanding at the time of acquisition is held by the trust, and (B) at least 50 percent of the aggregate amount referred to in subparagraph (A) i held by persons independent of the issuer; and (3) immediately following acquisition of the obligation, not more than 25 percent of the assets of the trust is invested in obligations of persons described in subsection (b). (f) Loans with respect to which employers are prohib- ited from pledging certain assets Subsection (b)(1) shall not apply to a loan made by a trust described in section 401(a) to the employer (or to a renewal of such a loan or, if the loan is repayable upon demand, to a con- tinuation of such a loan) if the loan bears a rea- sonable rate of interest, and if (in the case of a making or renewal)- (1) the employer is prohibited (at the time of such making or renewal) by any law of the United States or regulation thereunder from directly or indirectly pledging, as security for such a loan, a particular class or classes of his assets the value of which (at such time) rep- resents more than one-half of the value of all his assets; (2) the making or renewal, as the case may be, is approved in writing as an investment which is consistent with the exempt purposes of the trust by a trustee who is independent of the employer, and no other such trustee had previously refused to give such written approval; and (3) immediately following the making or re- newal, as the case may be, the aggregate amount loaned by the trust to the employer, without the receipt of adequate security, does not exceed 25 percent of the value of all the assets of the trust. For purposes of paragraph (2), the term "trust- ee" means, with respect to any trust for which there is more than one trustee who is indepen- dent of the employer, a majority of such inde- pendent trustees. For purposes of paragraph (3), the determination as to whether any amount loaned by the trust to the employer is loaned without the receipt of adequate security shall be made without regard to subsection (e). (Aug. 16, 1954, ch. 736, 68A Stat. 166; Sept. 2, 1958, Pub. L. 85-866, title I, § 30(a), (b), 72 Stat. 1629; July 14, 1960, Pub. L. 86-667, § 2, 74 Stat. 535; Oct. 10, 1962, Pub. L. 87-792, § 6, 76 Stat. 827; Dec. 30, 1969, Pub. L. 91-172, title I, §§ 101(j)(7)-(14), 121(b)(6)(B), 83 Stat. 527, 542; Sept. 2, 1974, Pub. L. 93-406, title II, § 2003(b), 88 Stat. 978; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENnMENrs 1976-Subsecs. (a)(2), (c). Pub. L. 94 -455 struck out "or his delegate" following "Secretary". 1974-Subsec. (a)(1)(A). Pub. L. 93-406, § 2003(b)(1), substituted "section 501(c)(17)" for "section 501(c)(17) or (18)". Subsec. (a)(1)(B). Pub. L. 93-406, § 2003(b)(2), insert- ed "which is referred to _n section 4975(g)(2) or (3)". Subsec. (a)(2). Pub. L. 93-406, § 2003(b)(3), substitut- ed "or paragraph (1)(B)" for "or section 401". Subsec. (c). Pub, L. 93-406, § 2003(b)(4), substituted "or subsection (a)(1)(B)" for "or section 401". Subsec. (g). Pub. L. 9'.-406, § 2003(b)(5), struck out subsec. (g) which covered trusts benefiting certain owner-employees. 1969-Subsec. (a)(1)(A). Pub. L. 91-172, §§ 101J)(7), 121(b)(6)(B)(ii), redesignated former subsec. (a)(1)(B) as subsec. (a)(1)(A), and. in subsec. (a)(1)(A) as so re- designated, inserted reference to section 501(c)(18). Former subsec. (a)(1)(A). referring to organizations de- scribed in section 501(c)(3) and to prohibited transac- tions engaged in after July 1, 1950, was stricken. Subsec. (a)(1)(B). Pub. L. 91-172, § 101(j)(7), redesig- nated former subsec. (a)(1)(C) as subsec. (a)(1)(B). Former subsec. (a)(1)(B). referring to organizations de- scribed in section 501(c)(17) was amended by addition of a reference to section 501(c)(18), and redesignated as subsec. (a)(1)(A). Subsec. (a)(1)(C). Pub. L. 91-172, §§ 101(j)(7), 121(b)(6)(B)(i), added subsec. (a)(1)(C). Former subsec. (a)(1)(C), dealing with organizations described in sec- tion 401(a) and with prohibited transactions engaged In after Mar. 1, 1954, was redesignated as subsec. (a)(1)(B). Subsec. (a)(2). Pub. L. 91-172, §§ 101(j)(8), 121(b)(6)(B)(ii), removed reference to organizations described in section 501(c)(3), and added references to organizations described in section 501(c)(18). Subsec. (b). Pub. L. 91-172, § 101(J)(14), redesignated former subsec. (c) as subsec. (b). Former subsee. (b), setting out the organizations to which section applied, was stricken. Subsec. (c). Pub. L. 91-172, §§ 101(j)(9), (14), 121(b)(6)(B)(ii). redesignated former subsee, (d) as subsec. (c) and, in subsec. Cc) as so redesignated, re- moved reference to organizations described in section 501(c)(3) and added reference to organizations de- scribed in section 501(c)(17). Former subsec. c) was re- designated subsec. b). Subsec. d). Pub. L. 91-172, § 101(J)(10), (14), redesig- nated former subsec. (g) as subsec. (d), and, in subsec. d) as so redesignated, substituted "subsection b)P1) for "subsection (c)(1)." Former subsec. (d) was redesig- nated subsec. c). Subsec. (e). Pub. L. 91-172, § 101(J)(11), (14), redesig- nated former subsec. (h) as subsec. Ce), and, in subsec. (e) as so redesignated, modified section heading to read: "Special rules"; substituted "subsection (b)(1)" for "subsection (c)(1)" in material preceding par. (1) and n par. (3), and in material preceding par. (1) struck out "acquired by a trust described in section 401(a) or section 501(c)(17)". Former subsec, (e), cover- ng the disallowance of certain charitable deductions was stricken. Subsec. f). Pub. L. 91-172, § 101(J)(12), (14), redesig. nated former subsec. (i) as subsec C), and, in subsec. (f) as so redesignated, substituted "Subsection (b)(1)" for "Subsection (c)(1)", and "subsection (e)" for "sub- section (h)". Former subsec. f) defining "gift or be- quest" was stricken. Subsec. (g). Pub. L. 91-172, § 101(J)(13). (14), redesig- nated former subsec. Qi) as subsec. (g), and, in subsee. (g) as so redesignated, substituted "subsection (b)" for "subsection (c)" in par. (1). Former subsec. (g) was re- designated subsec. (d). Subsecs. (h) to (J). Pub. L. 91-172, § 101(J)(14), rede- signated former subsecs. (h), (i) and CQ) us subsecs. (e), (f) and (g). Former subsecs. (e) and (f) were stricken and former subsec. (g) was redesignated subsec. Cd). 1962-Subsec. (J). Pub. L. 87-792 added subsec. (J). Page 383 § 503
TITLE 26-INTERNAL REVENUE CODE 1960-Subsec. (a)(1). Pub. L. 86-667, § 2(a)(1), denied the exemption to an organization described in section 501(c)(17) if it has engaged in a prohibited transaction after Dec. 31, 1959. Subsec. (a)(2). Pub. L. 86-667, § 2(a)(2), included or- ganizations described in section 501(c)(17). Subsec. (b). Pub. L. 86-667, § 2(b), included organiza- tions described in section 501(c)(17). Subsec. d). Pub. L. 86-667, § 2(c), included organiza- tions described in section 501(c)(17). Subsec. (h). Pub. L. 86-667, § 2(d), included trusts de- scribed in section 501(c)(17). 1958-Subsec. (h). Pub. L. 85-866. § 30(a), added subsec. (h). Subsec. (i). Pub. L. 85-866, § 30(b), added subsec. (i). EnCTIVE DATE OF 1974 AMENDMENT Amendment by Pub. L. 93-406 effective on Jan. 1, 1975, but with provision for an election to be exercised by an organization so as to constitute a savings clause with reference to the amendment, see section 2003(c) of Pub. L. 93-406, set out as an Effective Date; Savings Provisions note under section 4975 of this title. EFFECTIvE DATE OF 1969 AMmfDMENT Amendment by section 101(J)(7)-(14) of Pub. L. 91- 172 to take effect on Jan. 1, 1970, see section 101(k)(1) of Pub. L. 91-172, set out as an Effective Date note under section 4940 of this title. Amendment by section 121(b)(6)(B) of Pub. L. 91- 172 applicable to taxable years beginning after Dec. 31, 1969, see section 121(g) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under sec- tion 511 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Amendment by Pub. L. 87-792 applicable to taxable years beginning after Dec. 31, 1962, see section 8 of Pub. L. 87-792, set out as an Effective Date of 1962 Amendments note under section 37 of this title. EFFECTIVE DATE OF 1960 AmENDMENT Amendment by Pub. L. 86-667 applicable to taxable years beginning after Dec. 31, 1959, and in the case of loans, the amendments to this section made by Pub. L. 86-667 are applicable only to loans made, renewed, or continued after Dec. 31, 1959, see section 6 of Pub. L. 86-667, set out as an Effective Date of 1960 Amend- ments note under section 501 of this title. EFFECTIVE DATE OF 1958 AmEDmENT Section 30(c) of Pub. L. 85-866 provided that: "(1) In general.-Except as provided in paragraph (2). the amendment made by subsection (a) [adding subsec. (h) of this section] shall apply with respect to taxable years ending after March 15, 1956. The amendment made by subsection (b) [adding subsec. (I) of this section] shall apply with respect to taxable years ending after the date of the enactment of this Act [Sept. 2, 1958], but only with respect to periods after such date. "(2) Exceptions.-Nothing in subsection (a) [adding subsec. (h) of this section] shall be construed to make any transaction a prohibited transaction which, under announcements of the Internal Revenue Service made with respect to section 503(c)(1) of the Internal Rev- enue Code of 1954 [subsec. (c)(1) of this section] before the date of the enactment of this Act [Sept. 2, 1958], would not constitute a prohibited transaction. In the case of any bond, debenture, note, or certificate or other evidence of indebtedness acquired before the date of the enactment of this Act [Sept. 2, 1958], by a trust described in section 401(a) of such Code (section 401(a) of this title] which is held on such date, para. graphs (2) and (3) of section 503(h) of such Code [subsec. (h) of this title] shall be treated as satisfied if such requirements would have been satisfied if such obligation had been acquired on such date of enact- ment [Sept. 2,1958]." CROSS REFERENCES Denial of exemption, see section 504 of this title. Gifts and inheritances excluded from gross income, see section 102 of this title. Limitation on charitable deduction, see section 681 of this title. Personal holding company definition, organization described in this section as individual for purposes of, see section 542 of this title. Rules and regulations, see section 7805 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 501, 4975 of this title; title 29 section 1114. § 504. Status after organization ceases to qualify for exemption under section 501(c)(3) because of substantial lobbying (a) General rule An organization which- (1) was exempt (or was determined by the Secretary to be exempt) from taxation under section 501(a) by reason of being an organiza- tion described in section 501(c)(3), and (2) is not an organization described in sec- tion 501(c)(3) by reason of carrying on propa- ganda, or otherwise attempting, to influence legislation, shall not at any time thereafter be treated as an organization described in section 501(c)(4). (b) Regulations to prevent avoidance The Secretary shall prescribe such regula- tions as may be necessary or appropriate to pre- vent the avoidance of subsection (a), including regulations relating to a direct or indirect transfer of all or part of the assets of an organi- zation to an organization controlled (directly or indirectly) by the same person or persons who control the transferor organization. (c) Churches, etc. Subsection (a) shall not apply to any organi- zation which is a disqualified organization within the meaning of section 501(h)(5) (relat- ing to churches, etc.) for the taxable year im- mediately preceding the first taxable year for which such organization is described in para- graph (2) of subsection (a). (Added Pub. L. 94-455, title XIII, § 1307(a)(2), Oct. 4, 1976, 90 Stat. 1721.) PRIOR PROVISIONS A prior section 504, acts Aug. 16, 1954. ch. 736, 68A Stat. 168: Oct. 22, 1968, Pub. L. 90-630, § 6(a), 82 Stat. 1330, relating to denial of exemption, was repealed by Pub. L. 91-172, title I, § 101(J)(15), Dec. 30, 1969, 83 Stat. 527. For effective date of repeal, see section 101(k)(2)(B) of Pub. L. 91-172, set out as an Effective Date note under section 4040 of this title. RULES OF INTERPRETATION Section 1307(a)(3) of Pub. L. 94-455 provided that: "It is the intent of Congress that enactment of this section [enacting sections 501(h) and 504 of this title] is not to be regarded in any way as an approval or dis- approval of the decision of the Court of Appeals for the Tenth Circuit in Christian Echoes National Minis- try, Inc. versus United States, 470 F.2d 849 (1972), or of the reasoning in any of the opinions leading to that decision." § 504 Page 384
TITLE 26-INTERNAL REVENUE CODE PART II-PRIVATE FOUNDATIONS Sec. 507. Termination of private foundation status. 508. Special rules with respect to section 501(c)(3) or- ganizations. 509. Private foundation defined. AMENDMENTS 1969-Pub. L. 91-172, title I, § 101(a), Dec. 30, 1969, 83 Stat. 492, added the Part heading and analysis for Part II. PART REFERRED TO IN OTHER SECTIONS This part is referred to in sections 501, 511, 4947 of this title. § 507. Termination of private foundation status (a) General rule Except as provided in subsection (b), the status of any organization as a private founda- tion shall be terminated only if- (1) such organization notifies the Secretary (at such time and in such manner as the Sec- retary may by regulations prescribe) of its intent to accomplish such termination, or (2)(A) with respect to such organization, there have been either willful repeated acts (or failures to act), or a willful and flagrant act (or failure to act), giving rise to liability for tax under chapter 42, and (B) the Secretary notifies such organization that, by reason of subparagraph (A), such or- ganization is liable for the tax imposed by subsection (c), and either such organizaticr pays the tax im- posed by subsection (c) (or any portion not abated under subsection (g)) or the entire amount of such tax is abated under subsection (g). (b) Special rules (1) Transfer to, or operation as, public charity The status as a private foundation of any organization, with respect to which there have not been either willful repeated acts (or failures to act) or a willful and flagrant act (or failure to act) giving rise to liability for tax under chapter 42, shall be terminated if- (A) such organization distributes all of its net assets to one or more organizations de- scribed in section 170(b)(1)(A) (other than in clauses (vii) and (viii)) each of which has been in existence and so described for a con- tinuous period of at least 60 calendar months immediately preceding such distri- bution, or (B)(i) such organization meets the re- quirements of paragraph (1), (2), or (3) of section 509(a) by the end of the 12-month period beginning with its first taxable year which begins after December 31, 1969, or for a continuous period of 60 calendar months beginning with the first day of any taxable year which begins after December 31, 1969, (ii) such organization notifies the Secre- tary (in such manner as the Secretary may by regulations prescribe) before the com- mencement of such 12-month or 60-month period (or before the 90th day after the day on which regulations first prescribed under this subsection become final) that it is ter- minating its private foundation status, and (iii) such organization establishes to the satisfaction of the Secretary (in such manner as the Secretary may by regula- tions prescribe) immediately after the expi- ration of such 12-month or 60-month period that such organizaticn has complied with clause (i). If an organization gives notice under subpara- graph (B)(ii) of the commencement of a 60- month period and such organization fails to meet the requirements of paragraph (1), (2), or (3) of section 509(a) for the entire 60- month period, this part and chapter 42 shall not apply to such organization for any tax- able year within such 60-month period for which it does meet such requirements. (2) Transferee foundations For purposes of this part, in the case of a transfer of assets of any private foundation to another private foundation pursuant to any liquidation, merger, redemption, recapitaliza. tion, or other adjustment, organization, or re- organization, the transferee foundation shall not be treated as a newly created organiza- tion. (c) Imposition of tax There is hereby imposed on each organization which is referred to in subsection (a) a tax equal to the lower of- (1) the amount which the private founda- tion substantiates by adequate records or other corroborating evidence as the aggregate tax benefit resulting from the section 501(c)(3) status of such foundation, or (2) the value of the net assets of such foun- dation. (d) Aggregate tax benefit (I) In general For purposes of subsection (c), the aggre- gate tax benefit resulting from the section 501(c)(3) status of any private foundation is the sum of- (A) the aggregate increases in tax under chapters 1, 11, and 12 (or the corresponding provisions of prior law) which wod]d have been imposed with respect to all substantial contributors to the foundation if deductions for all contributions made by such contribu- tors to the foundation after February 28, 1913, had been disallowed, and (B) the aggregate increases in tax under chapter 1 (or the corresponding provisions of prior law) which would have been im- posed with respect to the income of the pri- vate foundation for taxable years beginning after December 31, 1912, if (i) it had not been exempt from tax under section 501(a) (or the corresponding provisions of prior law), and (ii) in the case of a trust, deduc- tions under section 642(c) (or the corre- sponding provisions of prior law) had been limited to 20 percent of the taxable income of the trust (computed without the benefit of section 642(c) but with the benefit of sec- tion 170(b)(1)(A)), and (C) interest on the increases in tax deter- mined under subparagraphs (A) and (B) from the first date on which each Each in- Page 385
TITLE 26-INTERNAL REVENUE CODE crease would have been due and payable to the date on which the organization ceases to be a private foundation. (2) Substantial contributor (A) Definition For purposes of paragraph (1), the term "substantial contributor" means any person who contributed or bequeathed an aggre- gate amount of more than $5,000 to the pri- vate foundation, if such amount is more than 2 percent of the total contributions and bequests received by the foundation before the close of the taxable year of the foundation in which the contribution or be- quest is received by the foundation from such person. In the case of a trust, the term "substantial contributor" also means the creator of the trust. (B) Special rules For purposes of subparagraph (A)- (i) each contribution or bequest shall be valued at fair market value on the date it was received, (ii) in the case of a foundation which is in existence on October 9, 1969, all contri- butions and bequests received on or before such date shall be treated (except for purposes of clause (I)) as if received on such date, (iII) an individual shall be treated as making all contributions and bequests made by his spouse, and (iv) any person who is a substantial con- tributor on any date shall remain a sub- stantial contributor for all subsequent pe- riods. (3) Regulations For purposes of this section, the determina- tion as to whether and to what extent there would have been any increase in tax shall be made in accordance with regulations pre- scribed by the Secretary. (e) Value of assets For purposes of subsection (c), the value of the net assets shall be determined at whichever time such value is higher: (1) the first day on which action is taken by the organization which culminates in its ceasing to be a private foundation, or (2) the date on which it ceases to be a private foundation. (f) Liability in case of transfers of assets from private foundation For purposes of determining liability for the tax imposed by subsection (c) in the case of assets transferred by the private foundation, such tax shall be deemed to have been imposed on the first day on which action is taken by the organization which culminates in its ceasing to be a private foundation. (g) Abatement of taxes The Secretary may abate the unpaid portion of the assessment of any tax imposed by sub- section (c), or any liability in respect thereof, if- (1) the private foundation distributes all of its net assets to one or more organizations de- scribed in section 170(b)(1)(A) (other than in clauses (vii) and (viii)) each of which has been in existence and so described for a continuous period of at least 60 calendar months, or (2) following the notification prescribed in section 6104(c) to the appropriate State offi- cer, such State officer within one year noti- fies the Secretary, in such manner as the Sec- retary may by regulations prescribe, that cor- rective action has been initiated pursuant to State law to insure that the assets of such pri- vate foundation are preserved for such chari- table or other purposes specified in section 501(c)(3) as may be ordered or approved by a court of competent jurisdiction, and upon completion of the corrective action, the Sec- retary receives certification from the appro- priate State officer that such action has re- sulted in such preservation of assets. (Added Pub. L. 91-172, title I, § 101(a), Dec. 30, 1969, 83 Stat. 492, and amended Pub. L. 94-455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) AMENDMENTS 1976-Pub. L. 94-455 struck out "or his delegate" fol- lowing "Secretary" wherever appearing. EFFECTIVE DATE Section effective Jan. 1, 1970, see section 101(k)(1) of Pub. L. 91-172, set out as an Effective Date note under section 4940 of this title. SECTION REFEUl TO IN OTnER SECTIONS This section is referred to In sections 508, 509, 4946, 4947, 4948, 6056, 6104, 6214, 6501, 6503 of this title. § 508. Special rules with respect to section 501(c)(3) organizations (a) New organizations must notify Secretary that they are applying for recognition of section 501(c)(3) status Except as provided in subsection (c), an orga- nization organized after October 9, 1969, shall not be treated as an organization described in section 501(c)(3)- (1) unless it has given notice to the Secre- tary in such manner as the Secretary may by regulations prescribe, that it is applying for recognition of such status, or (2) for any period before the giving of such notice, if such notice is given after the time prescribed by the Secretary by regulations for giving notice under this subsection. (b) Presumption that organizations are private foun- dations Except as provided in subsection (c), any or- ganization (including an organization in exis- tence on October 9, 1969) which is described in section 501(c)(3) and which does not notify the Secretary, at such time and in such manner as the Secretary may by regulations prescribe, that it is not a private foundation shall be pre- sumed to be a private foundation. (c) Exceptions (1) Mandatory exceptions Subsections (a) and (b) shall not apply to- (A) churches, their integrated auxiliaries, and conventions or associations of churches, or (B) any organization which is not a pri- vate foundation (as defined in section 509(a)) and the gross receipts of which in § 508 Page 386
TITLE 26-INTERNAL REVENUE CODE each taxable year are normally not more than $5,000. (2) Exceptions by regulations The Secretary may by regulations exempt (to the extent and subject to such conditions as may be prescribed in such regulations) from the provisions of subsection (a) or (b) or both- (A) educational organizations described in section 170(b)(1)(A)(ii), and (B) any other class of organizations with respect to which the Secretary determines that full compliance with the provisions of subsections (a) and (b) is not necessary to the efficient administration of the provi- sions of this title relating to private founda- tions. (d) Disallowance of certain charitable, etc., deduc- tions (1) Gift or bequest to organizations subject to sec- tion 507(c) tax No gift or bequest made to an organization upon which the tax provided by section 507(c) has been imposed shall be allowed as a deduc- tion under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such gift or bequest is made- (A) by any person after notification is made under section 507(a), or (B) by a substantial contributor (as de- fined in section 507(d)(2)) in his taxable year which includes the first day on which action is taken by such organization which culminates in the imposition of tax under section 507(c) and any subsequent taxable year. (2) Gift or bequest to taxable private foundation, section 4947 trust, etc. No gift or bequest made to an organization shall be allowed as a deduction under section 170, 545(b)(2), 556(b)(2), 642(c), 2055, 2106(a)(2), or 2522, if such gift or bequest is made- (A) to a private foundation or a trust de- scribed in section 4947 in a taxable year for which it fails to meet the requirements of subsection (e) (determined without regard to subsection (e)(2)), or (B) to any organization in a period for which it is not treated as an organization described in section 501(c)(3) by reason of subsection (a). (3) Exception Paragraph (1) shall not apply if the entire amount of the unpaid portion of the tax im- posed by section 507(c) is abated by the Secre- tary under section 507(g). (e) Governing instruments (1) General rule A private foundation shall not be exempt from taxation under section 501(a) unless its governing instrument includes provisions the effects of which are- (A) to require its income for each taxable year to be distributed at such time and in such manner as not to subject the founda- tion to tax under section 4942, and (B) to prohibit the foundation from en- gaging in any act of self-dealing (as defined in section 4941(d)), from retaining any excess business holdings (as defined in sec- tion 4943(c)), from making any investments in such manner as to subject the foundation to tax under section 4944, and from making any taxable expenditures (as defined in sec- tion 4945(d)). (2) Special rules for existing private foundations In the case of any organization organized before January 1, 1970, paragraph (1) shall not apply- (A) to any period after December 31, 1971, during the pendency of any judicial pro- ceeding begun before January 1, 1972, by the private foundation which is necessary to reform, or to excuse such foundation from compliance with, its governing instru- ment or any other instrument in order to meet the requirements of paragraph (1). and (B) to any period after the termination of any judicial proceeding described in subpar- agraph (A) during which its governing in- strument or any other instrument does not permit it to meet the requirements of para- graph (1). (Added Pub. L. 91-172, title I, § 101(a), Dec. 30, 1969, 83 Stat. 494, and amended Pub. L. 94-455, title XIX, §§ 1901(a)(71), (b)(8)(E), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1776, 1794, 1834.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, § 1901(a)(71)(A), struck out "For purposes of paragraph (2), the time prescribed for giving notice under this subsection shall not expire before the 90th day after the day on which regulations first prescribed under this subsection become final." following "under this subsection". Subsecs. (a)(1), (2). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" in three places following "Secretary". Subsec. (b). Pub. L. 94-455, §§ 190.(a)(71)(A), 1906(b)(13)(A), struck out "or his delegate" in two places following "Secretary" and "The time prescribed for giving notice under this subsection shall not expire before the 90th day after the day on which regula- tions first prescribed under this subsection become final" following "a private foundation". Subsec. (c)(2). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c)(2)(A). Pub. L. 94-455, § 1901(b)(8)(E), sub- stituted "(A) educational organizations described in section 170(b)(1)(A)(ii), and" for "(A) educational or- ganizations which normally maintain a regular faculty and cirriculum and normally have a regularly enrolled body of pupils or students in attendance at the place where their educational activities are regularly carried on; and" following "(b) or both-". Subsee. (c)(2)(B). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (d)(2)(A). Pub. L. 94-455, § 1901(a)(71)(C), substituted "(e)(2)" for "(e)(2)(B) and (C)" following "regard to subsection". Subsec. (d)(3). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (e)(2)(A). Pub. L. 94-455, § 1901(a)(71)(B), struck out subpar. (A) relating to taxable years begin- ning before 1972, and redesignated subpars. (B) and (C) as (A) and (B), respectively. Subsec. (e)(2)(B). Pub. L. 94-455, § 1901(a)(71)(B), re- designated former subpar. (C) as (B) and, as redesig- nated, substituted "(A)" for "(B)" following "described in subparagraph". Subsec. (e)(2)(C). Pub. L. 94-455, § 1901(a)(71)(B), re- designated former subpar. (C) as (B). Page 387 § 508
TITLE 26-INTERNAL REVENUE CODE EFFCTIVE DATE OF 1976 AMENDMEMT Amendment of subsecs. (a) (b). (c)(2)(A), (d)(2)(A), (e)(2)(A) to (C), by section 1901(a)(71)(A) to (C), (b)(8)(E) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFErIvz DATE Section effective Jan. 1, 1970, except that subsecs. (a), (b), and (c) of this section effective Oct. 9, 1969, see section 101(k)(1), (3) of Pub. L. 91-172, set out as an Effective Date note under section 4940 of this title. SAVINGS PROVISION Limits on inclusion of provisions inconsistent with subsec. (e) of this section in governing instruments, see section 101(1)(6) of Pub. L. 91-172, set out as Sav- ings Provisions note under section 4940 of this title. SECTION RmRmRD TO IN OTHER SECTIONS This section is referred to in sections 170, 663, 681, 2055, 2522, 4947, 4948, 6104 of this title. § 509. Private foundation defined (a) General rule For purposes of this title, the term "private foundation" means a domestic or foreign orga- nization described in section 501(c)(3) other than- (1) an organization described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)); (2) an organization which- (A) normally receives more than one-third of its support in each taxable year from any combination of- (i) gifts, grants, contributions, or meni- bership fees, and (Ii) gross receipts from admissions, sales of merchandise, performance of services, or furnishing of facilities, in an activity which is not an unrelated trade or busi- ness (within the meaning of section 513), not including such receipts from any person, or from any bureau or similar agency of a governmental unit (as de- scribed in section 170(c)(1)), in any tax- able year to the extent such receipts exceed the greater of $5,000 or 1 percent of the organization's support in such tax- able year, from persons other than disqualified per- sons (as defined in section 4946) with re- spect to the organization, from governmen- tal units described in section 170(c)(1), or from organizations described in section 170(b)(1)(A) (other than in clauses (vii) and (viii)), and (B) normally receives not more than one- third of its support in each taxable year from the sum of- (i) gross investment income (as defined in subsection (e)) and (i) the excess (if any) of the amount of the unrelated business taxable income (as defined in section 512) over the amount of the tax Imposed by section 511; (3) an organization which- (A) is organized, and at all times there- after is operated, exclusively for the benefit of, to perform the functions of, or to carry out the purposes of one or more specified organizations described in paragraph (1) or (2). (B) Is operated, supervised, or controlled by or in connection with one or more orga- nizations described in paragraph (1) or (2), and (C) is not controlled directly or indirectly by one or more disqualified persons (as de- fined in section 4946) other than founda- tion managers and other than one or more organizations described in paragraph (1) or (2); and (4) an organization which is organized and operated exclusively for testing for public safety. For purposes of paragraph (3), an organization described in paragraph (2) shall be deemed to include an organization described in section 501(c)(4), (5), or (6) which would be described in paragraph (2) if it were an organization de- scribed in section 501(c)(3). (b) Continuation of private foundation status For purposes of this title, if an organization is a private foundation (within the meaning of subsection (a)) on October 9, 1969, or becomes a private foundation on any subsequent date, such organization shall be treated as a private foundation for all periods after October 9, 1969, or after such subsequent date, unless its status as such is terminated under section 507. (c) Status of organization after termination of private foundation status For purposes of this part, an organization the status of which as a private foundation is termi- nated under section 507 shall (except as pro- vided in section 507(b)(2)) be treated as an or- ganization created on the day after the date of such termination. (d) Definition of support For purposes of this part and chapter 42, the term "support" includes (but is not limited to)- (1) gifts, grants, contributions, or member- ship fees, (2) gross receipts from admissions, sales of merchandise, performance of services, or fur- nishing of facilities in any activity which is not an unrelated trade or business (within the meaning of section 513), (3) net incomefrom unrelated business ac- tivities, whether or not such activities are car- ried on regularly as a trade or business, (4) gross investment income (as defined in subsection (e)), (5) tax revenues levied for the benefit of an organization and either paid to or expended on behalf of such organization, and (6) the value of services or facilities (exclu- sive of services or facilities generally fur- nished to the public without charge) fur- nished by a governmental unit referred to in section 170(c)(1) to an organization without charge. Such term does not include any gain from the sale or other disposition of property which would be considered as gain from the sale or ex- change of a capital asset, or the value of ex- emption from any Federal, State, or local tax or any similar benefit. §509 Page 388
TITLE 26-INTERNAL REVENUE CODE (e) Definition of gross investment income For purposes of subsection (d), the term "gross investment income" means the gross amount of income from interest, dividends, rents, and royalties, but not including any such income to the extent included in computing the tax imposed by section 511. (Added Pub. L. 91-172, title I, § 101(a), Dec. 30, 1969, 83 Stat. 496, and amended Pub. L. 94-81, § 3(a), Aug. 9, 1975, 89 Stat. 418.) AMENDMENTS 1975-Subsec. (a)(2)(B). Pub. L. 94-81 designated ex- isting provisions as cl. (i), and added cl. (ii). ErFECTIVE DATE OF 1975 AmzNDms Nr Section 3(b) of Pub. L. 94-81 provided that: "The amendment made by this section [amending subsec- tion (a)(2)(B) of this section] shall apply to unrelated business taxable income derived from trades and busi- nesses which are acquired by the organization after June 30, 1975." EFFECTIVE DATE Section effective Jan. 1, 1970, see section 101(k)(1) of Pub. L. 91-172, set out as an Effective Date note under section 4940 of this title. SAVINGS PROVISION Applicability of subsec. (a) of this section to testa- mentary trusts, see section 101(l)(7) of Pub. L. 91-172, set out as Savings Provisions note under section 4940 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 170, 501, 507, 508, 527, 542, 3121, 4942, 4945, 4947, 6033, 6043, 6056, 6104, 6111 of this title; title 42 sections 3001-1, 410. PART III-TAXATION OF BUSINESS INCOME OF CERTAIN EXEMPT ORGANI- ZATIONS Sec. 511. Imposition of tax on unrelated business income of charitable organizations, etc. 1 512. Unrelated business taxable income. 513. Unrelated trade or business. 514. Unrelated debt-financed income. 515. Taxes of foreign countries and possessions of the United States. AMENDMENTS 1669-Pub. L. 91-172, title I, §§ 101(a), 121(d)(3)(C), Dec. 30, 1969, 83 Stat. 492, 548, substituted "Part III" for "Part II" as the Part designation and substituted "Unrelated debt-financed income" for "Business leases" in item 514, CROSS REFERENCES Organization considered as exempt from income taxes for purpose of any law referring thereto, not- withstanding its taxability under this part, see section 501 of this title. PART REFERREI TO IN OTHER SECTIONS This part is referred to in section 501 of this title. 'So in original. Does not conform to section catch- line. § 511. Imposition of tax on unrelated business income of charitable, etc., organizations (a) Charitable, etc., organizations taxable at corpora. tion rates (1) Imposition of tax There is hereby imposed for each taxable year on the unrelated business taxable income (as defined in section 512) of every or- ganization described in paragraph (2) a normal tax and a surtax computed as pro- vided in section 11. In making such computa- tion for purposes of this section, the term "taxable income" as used in section 11 shall be read as "unrelated business taxable income". (2) Organizations subject to tax (A) Organizations described in sections 401(a) and 501(c) The taxes imposed by paragraph (1) shall apply in the case of any organization (other than a trust described in subsection (b) or an organization described in section 501(c)(1)) which is exempt, except as pro- vided in this part or part II (relating to pri- vate foundations), from taxation under this subtitle by reason of section 501(a). (B) State colleges and universities The taxes imposed by paragraph (1) shall apply in the case of any college or universi- ty which is an agency or instrumentality of any government or any political subdivision thereof, or which is owned or operated by a government or any political subdivision thereof, or by any agency or instrumental- ity of one or more governments or political subdivisions. Such taxes shall also apply in the case of any corporation wholly owned by one or more such colleges or universities. (b) Tax on charitable, etc., trusts (1) Imposition of tax There is hereby imposed for each taxable year on the unrelated business taxable income of every trust described in paragraph (2) a tax computed as provided in section l(d). In making such computation for purposes of this section, the term "taxable income" as used in section 1 shall be read as "unrelated business taxable income" as defined in section 512. (2) Charitable, etc., trusts subject to tax The tax imposed by paragraph (1) shall apply in the case of any trust which is exempt, except as provided in this part or part II (relating to private foundations), from taxation under this subtitle by reason of sec- tion 501(a) and which, if it were not for such exemption, would be subject to subchapter J (sec. 641 and following, relating to estates, trusts, beneficiaries, and decedents). (c) Special rule for section 501(c)(2) corporations If a corporation described in section 501(c)(2)- (1) pays any amount of its net income for a taxable year to an organization exempt from taxation under section 501(a) (or which would pay such an amount but for the fact that the expenses of collecting its income exceed its income), and 71-999 0 - 78 - 27 (Vol. 7) Page 389
TITLE 26-INTERNAL REVENUE CODE (2) such corporation and such organization file a consolidated return for the taxable year, such corporation shall be treated, for purposes of the tax imposed by subsection (a), as being organized and operated for the same purposes as such organization, in addition to the pur- poses described in section 501(c)(2). (d) Tax preferences The tax imposed by section 56 shall apply to an organization subject to tax under this sec- tion with respect to items of tax preference which enter into the computation of unrelated business taxable income. (Aug. 16, 1954, ch. 736, 68A Stat. 169; July 14, 1960, Pub. L. 86-667, § 3, 74 Stat. 535; Feb. 2, 1966, Pub. L. 89-352, § 2, 80 Stat. 4; Dec. 30, 1969, Pub. L. 91-172, title I § 121(a)(1)-(3), title III, § 301(b)(8), title VIII, § 803(d)(2), 83 Stat. 536, 585, 684.) AMENDMENTS 1969-Subsec. (a)(2)(A). Pub. L. 91-172, § 121(a)(1), removed reference, in subpar. catchline, to pars. (2), (3), (5), (6), (14)(B), (C), and (17) of section 501(c) of this title, and, in text, struck out the exemptions to churches, conventions, or associations of churches, from the imposition of tax on their unrelated business income, made corporations organized under section 501(c)(1) of this title (i.e. organized under Acts of Con- gress), exempt from such tax, but made all such ex- emptions subservient to the exceptions in part II and section 501(a) of this title. Subsec. (b)(1). Pub. L. 91-172, § 803(d)(2), substituted section l(d) for section 1 in the reference to the sec- tion under which the computation of the tax dealing with the imposition of tax on the unrelated business taxable income of trusts, is computed. Subsec. (b)(2). Pub. L. 91-172, § 121(a)(2), pluralized the word "trust" in par. catchline, and, in text, made the imposition of tax on the unrelated business income of exempt trusts subject to the provisions of part II, and, for the purposes of determining trusts exempt from taxation, substituted reference to section 501(a) for reference to "section 501(c)(3) or (17) or sec- tion 401(a)". Subsec. (c). Pub. L. 91-172, § 121(a)(3), added subsec. Cc). Former subsec. (c), covering the effective date, was stricken. Subsec. (d). Pub. L. 91-172, § 301(b)(8), added subsec. (d). 1966-Subsec. (a)(2)(A). Pub. L. 89-352 inserted "(14)(B) or (C)," after "(6)," in the heading and in the text. 1960-Subsec. (a)(2). Pub. L. 86-667, § 3(a), included organizations described in section 501(c)(17) within subpar. (A). Subsec. (b). Pub. L. 86-667, § 3(b), inserted a refer- ence to section 501(c)(17). EFFECTIVE DATE OF 1969 AmENDmENT Section 121(g) of Pub. L. 91-172 provided that: "The amendments made by this section [amending sections 48, 501, 502, 503, 511 to 514, 681, 801, 810, 1443, 1504 and 7605 of this title] (other than by subsections (b)(3) and (e) [enacting sections 277 and 6050 of this title]) shall apply to taxable years beginning after De- cember 31, 1969. The amendments made by subsection (b)(3) [enacting section 277 of this title] shall apply to taxable years beginning after December 31, 1970. The amendments made by subsection (e) [enacting section 6050 of this title] shall apply with respect to transfers of property after December 31, 1969. Where an organi- zation makes a bargain purchase of property before October 9, 1969, which is subject to a mortgage which was placed on the property more than 5 years before the purchase, and the organization paid the seller a total amount no greater than the amount of the sell- er's cost (including attorneys' fees) directly related to the transfer of such property to the organization (but in any event no more than 10 percent of the value of the seller's equity in the property), the indebtedness secured by such mortgage shall not be treated, not- withstanding the amendments made by subsection (d)(1) [amending section 514 of this title], as acquisi- tion indebtedness for purposes of section 514(c)(1) of the Internal Revenue Code of 1954 [section 514(c)(i) of this title] during a period of 10 years following the date of the transaction." Amendment of subsec. (b)(1) of this section by sec- tion 803(d)(2) of Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1970, see section 803(f) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 1 of this title. Subsec. (d) of this section applicable to taxable years ending after Dec. 31, 1969, see section 301(c) of Pub. .. 91-172, set out as an Effective Date note under section 56 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Section 3 of Pub. L. 89-352 provided in part that: "The amendment made by section 2 [amending subsec. (a)(2)(A) of this section] shall apply to tax.able years beginning after the date of the enactment of this Act (Feb. 2, 1966]." EFFECTIVE DATE OF 1960 AMENDMENT Amendment by Pub. L. 86-667 applicable to taxable years beginning after Dec. 31, 1959, see section 6 of Pub. L. 86-667, set out as an Effective Date of 1960 Amendments note under section 501 of this title. CRoss REFERENCES Alternative capital gains tax, see section 1201 of this title. Taxes of foreign countries and possessions of United States as credit against tax under this section, see sec- tion 515 of this title. Unrelated trade or business, see section 513 of this title. Withholding of tax on foreign tax-exempt organiza- tions, see section 1443 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 11, 12, 48, 408, 509, 512, 513. 514, 515, 527, 1201, 1245, 1250, 1443, 1563, 2611, 4940, 6050 of this title. SECTION REFERRED TO IN D.C. CODE This section is referred to in section 47-1554 of the District of Columbia Code. § 512. Unrelated business taxable income (a) Definition For purposes of this title- (1) General rule Except as otherwise provided in this subsec- tion, the term "unrelated business taxable income" means the gross income derived by any organization from any unrelated trade or business (as defined in section 513) regularly carried on by it, less the deductions allowed by this chapter which are directly connected with the carrying on of such trade or busi- ness, both computed with the modifications provided in subsection (b). (2) Special rule for foreign organizations In the case of an organization described in section 511 which is a foreign organization, the unrelated business taxable income shall be- (A) Its unrelated business taxable income which is derived from sources within the § 512 Page 390
TITLE 26-INTERNAL REVENUE CODE United States and which is not effectively connected with the conduct of a trade or business within the United States, plus (B) its unrelated business taxable income which is effectively connected with the con- duct of a trade or business within the United States. (3) Special rules applicable to organizations de- scribed in section 501(c)(7) or (9) (A) General rule In the case of an organization described in section 501(c)(7) or (9), the term "unrelated business taxable income" means the gross income (excluding any exempt function income), less the deductions allowed by this chapter which are directly connected with the production of the gross income (exclud- ing exempt function income), both comput- ed with the modifications provided in para- graphs (6), (10), (11), and (12) of subsection (b). For purposes of the preceding sentence, the deductions provided by sections 243, 244, and 245 (relating to dividends received by corporations) shall be treated as not di- rectly connected with the production of gross income. (B) Exempt function income For purposes of subparagraph (A), the term "exempt function income" means the gross income from dues, fees, charges, or similar amounts paid by members of the or- ganization as consideration for providing such members or their dependents or guests goods, facilities, or services in furtherance of the purposes constituting the basis for the exemption of the organization to which such income is paid. Such term also means all income (other than an amount equal to the gross income derived from any unrelat- ed trade or business regularly carried on by such organization computed as if the orga- nization were subject to paragraph (1)), which is set aside- (I) for a purpose specified in section 170(c)(4), or (ii) in the case of an organization de- scribed in section 501(c)(9), to provide for the payment of life, sick, accident, or other benefits, including reasonable costs of administration directly connected with a purpose described in clause (I) or (it). If during the taxable year, an amount which is attributable to income so set aside is used for a purpose other than that described in clause (I) or (ii), such amount shall be included, under subparagraph (A), in unrelated business taxable income for the taxable year. (C) Applicability to certain corporations de- scribed In section 501(c)(2) In the case of a corporation described in section 501(c)(2), the income of which is payable to an organization described in sec- tion 501(c)(7) cr (9), subparagraph (A) shall apply as if such corporation were the orga- nization to which the income is payable. For purposes of the preceding sentence, such corporation shall be treated as having exempt function income for a taxable year only if it files a consolidated return with such organization for such year. (D) Nonrecognition of gain If property used directly in the perfor- mance of the exempt function of an organi- zation described in section 501(c)(7) or (9) is sold by such organization, and within a period beginning 1 year before the date of such sale, and ending 3 years after such date, other property is purchased and used by such organization directly in the perfor- mance of its exmept function, gain (if any) from such sale shall be recognized only to the extent that such organization's sales price of the old property exceeds the orga- nization's cost of purchasing the other property. For purposes of this subpara- graph, the destruction in whole or in part, theft, seizure, requisition, or condemnation of property, shall be treated as the sale of such property, and rules similar to the rules provided by subsections (b), (c), (e), and (j) of section 1034 shall apply. (4) Special rule applicable to organizations de- scribed in section 501(c)(19) In the case of an organization described in section 501(c)(19), the term "unrelated busi- ness taxable income" does not include any amount attributable to payments for life, sick, accident, or health insurance with re- spect to members of such organizations or their dependents which is set aside for the purpose of providing for the payment of in- surance benefits or for a purpose specified in section 170(c)(4). If an amount set aside under the preceding sentence is used during the taxable year for a purpose other than a purpose described in the preceding sentence, such amount shall be included, under para- graph (1), in unrelated business taxable income for the taxable year. (b) Modifications The modifications referred to in subsection (a) are the following: (1) There shall be excluded all dividends, in- terest, and annuities, and all deductions di- rectly connected with such income. (2) There shall be excluded all royalties (in- cluding overriding royalties) whether mea- sured by production or by gross or taxable income from the property, and all deductions directly connected with such income. (3) In the case of rents- (A) Except as provided in subparagraph (B), there shall be excluded- (I) all rents from real property (includ- ing property described in section 1245(a)(3)(C)), and (ii) all rents from personal property (in- cluding for purposes of this paragraph as personal property any property described in section 1245(a)(3)(B)) leased with such real property, if the rents attributable to such personal property are an incidental amount of the total rents received or ac- crued under the lease, determined at the time the personal property is placed in service. (B) Subparagraph (A) shall not apply- (i) if more than 50 percent of the total rent received or accrued under the lease is Page 391 § 512
TITLE 26-INTERNAL REVENUE CODE attributable to personal property de- scribed in subparagraph (A)(i), or (ii) if the determination of the amount of such rent depends in whole or in part on the income or profits derived by any person from the property leased (other than an amount based on a fixed percent- age or percentages of receipts or sales). (C) There shall be excluded all deductions directly connected with rents excluded under subparagraph (A). (4) Notwithstanding paragraph (1), (2), (3), or (5), in the case of debt-financed property (as defined in section 514) there shall be in- cluded, as an item of gross income derived from an unrelated trade or business, the amount ascertained under section 514(a)(1), and there shall be allowed, as a deduction. the amount ascertained under section 514(a)(2). (5) There shall be excluded all gains or losses from the sale, exchange, or other dispo- sition of property other than- (A) stock in trade or other property of a kind which would properly be includible in inventory if on hand at the close of the tax- able year, or (B) property held primarily for sale to customers in the ordinary course of the trade or business. There shall also be excluded all gains on the lapse or termination of options, written by the organization in connection with its invest- ment activities, to buy or sell securities (as de- fined in section 1236(c)). This paragraph shall not apply with respect to the cutting of timber which is considered, on the application of section 631, as a sale or exchange of such timber. (6) The net operating loss deduction pro- vided in section 172 shall be allowed, except that- (A) the net operating loss for any taxable year, the amount of the net operating loss carryback or carryover to any taxable year, and the net operating loss deduction for any taxable year shall be determined under section 172 without taking into account any amount of income or deduction which is ex- cluded under this part in computing the un- related business taxable income; and (B) the terms "preceding taxable year" and "preceding taxable years" as used in section 172 shall not include any taxable year for which the organization was not subject to the provisions of this part. (7) There shall be excluded all income de- rived from research for (A) the United States, or any of its agencies or instrumentalities, or (B) any State or political subdivision thereof; and there shall be excluded all deductions di- rectly connected with such income. (8) In the case of a college, university, or hospital, there shall be excluded all income derived from research performed for any person, and all deductions directly connected with such income. (9) In the case of an organization operated primarily for purposes of carrying on funda- mental research the results of which are freely available to the general public, there shall be excluded all income derived from re- search performed for any person, and all de- ductions directly connected with such income. (10) In the case of any organization de- scribed in section 511(a), the deduction al- lowed by section 170 (relating to charitable etc. contributions and gifts) shall be allowed (whether or not directly connected with the carrying on of the trade or business), but shall not exceed 5 percent of the unrelated business taxable income computed without the benefit of this paragraph. (11) In the case of any trust described in section 511(b), the deduction allowed by se- tion 170 (relating to charitable etc. contribu- tions and gifts) shall be allowed (whether or not directly connected with the carrying on of the trade or business), and for such pur- pose a distribution made by the trust to a beneficiary described in section 170 shall be considered as a gift or contribution. The de- duction allowed by this paragraph shall be al- lowed with the limitations prescribed in sec- tion 170(b)(1)(A) and (B) determined with reference to the unrelated business taxable income computed without the benefit of this paragraph (in lieu of with reference to adjust- ed gross income). (12) Except for purposes of computing the net operating loss under section 172 and para- graph (6), there shall be allowed a specific de- duction of $1,000. In the case of a diocese, province of a religious order, or a convention or association of churches, there shall also be allowed, with respect to each parish, individ- ual church, district, or other local unit, a spe- cific deduction equal to the lower of- (A) $1,000, or (B) the gross income derived from any un- related trade or business regularly carried on by such local unit. (13) Notwithstanding paragraphs (1), (2), or (3), amounts of interest, annuities, royalties, and rents derived from any organization (in this paragraph called the "controlled organi- zation") of which the organization deriving such amounts (in this paragraph called the "controlling organization") has control (as de- fined in section 368(c)) shall be included as an item of gross income (whether or not the ac- tivity from which such amounts are derived represents a trade or business or is regularly carried on) in an amount which bears the same ratio as- (A)(i) in the case of a controlled organiza- tion which is not exempt from taxation under section 501(a), the excess of the amount of taxable income of the controlled organization over the amount of such orga- nization's taxable income which if derived directly by the controlling organization would not be unrelated business taxable income, or (ii) in the case of a controlled organiza- tion which is exempt from taxation under section 501(a), the amount of unrelated business taxable income of the controlled organization, bears to (B) the taxable income of the controlled organization (determined in the case of a controlled organization to which subpara- graph (A)(ii) applies as if It were not an or- §512 Page 392
TITLE 26-INTERNAL REVENUE CODE ganization exempt from taxation under sec- tion 501(a)), but not less than the amount determined in clause (I) or (ii), as the case may be, of subparagraph (A), both amounts computed without regard to amounts paid directly or indirectly to the controlling organization. There shall be al- lowed all deductions directly connected with amounts included in gross income under the preceding sentence. (14) Except as provided in paragraph (4), in the case of a church, or convention or associ- ation of churches, for taxable years beginning before January 1, 1976, there shall be ex- cluded all gross income derived from a trade or business and all deductions directly con- nected with the carrying on of such trade or business if such trade or business was carried on by such organization or its predecessor before May 27, 1969. (15) Except as provided in paragraph (4), in the case of a trade or business- (A) which consists of providing services under license issued by a Federal regulatory agency, (B) which is carried on by a religious order or by an educational organization de- scribed in section 170(b)(l)iA)(ii) main- tained by such religious order, and which was so carried on before May 27, 1959, and (C) less than 10 percent of the net income of which for each taxable year is used for activities which are not related to the pur- pose constituting the basis for the religious order's exemption, there shall be excluded all gross income de- rived from such trade or business and all de- ductions directly connected with the carrying on of such trade or business, so long as it is established to the satisfaction of the Secre- tary that the rates or other charges for such services are competitive with rates or other charges charged for similar services by per- sons not exempt from taxation. (c) Special rules applicable to partnerships If a trade or business regularly carried on by a partnership of which an organization is a member is an unrelated trade or business with respect to such organization, such organization in computing its unrelated business taxable income shall, subject to the exceptions, addi- tions, and limitations contained in subsection (b), include its share (whether or not distribut- ed) of the gross income of the partnership from such unrelated trade or business and its share of the partnership deductions directly connect- ed with such gross income. If the taxable year of the organization is different from that of the partnership, the amounts to be so included or deducted in computing the unrelated business taxable income shall be based upon the income and deductions of the partnership for any tax- able year of the partnership ending within or with the taxable year of the organization. (Aug. 16, 1954, ch. 736, 68A Stat. 170; Apr. 7, 1958, Pub. L. 85-367, § l(a), 72 Stat. 80; July 17, 1964, "ub. L. 88-380, § 1, 78 Stat. 333; Nov. 13, 1966, Pub. L. 89-809, title I, § 104(g), 80 Stat. 1559; Dec. 30, 1969, Pub. L. 91-172, title I, § 121(b)(1), (2), 83 Stat. 537, 538; Aug. 29, 1972, Pub. L. 92-418, § 1(b), 86 Stat. 656; Sept. 3, 1976, Pub. L. 94-396, § l(a), 90 Stat. 1201; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(b)(8)(F), 1906(b)(13)(A), 1951(b)(8)(A), 90 Stat, 1794, 1834, 1839; Oct. 20, 1976, Pub. L. 94-568, § l(b), 90 Stat. 2697.) AMENDMENTS 1976-Subsec. (a)(3)(A). Pub. L. 94-568 provided that for purposes of the general rule, the deductions pro- vided by sections 243, 244, and 245 (relating to divi- dends received by corporations) shall be treated as not directly connected with the production of gross income. Subsec. (b). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (b)(5). Pub. L. 94-396 added provision relat. ing to exclusion of gains on the lapse or termination of options to buy or sell securities. Subsec. (b)(13). Pub. L. 94-455, § 1951(b)(8)(A), struck out pars. (13) and (14) relating to exceptions, additions, and limitations applicable in determining unrelated business taxable income, and redesignated pars. (15), (16), and (17) as pars. (13), (14), and (15), re- spectively. Subsec. (b)(14). Pub. L. 94-455, § 1951(b)(8)(A), struck out par. (14). Former par. (16) redesignated as (14). Subsec. (b)(15). Pub. L. 94-455, §§ 1901(b)(8)(F), 1906(b)(13)(A), 1951(b)(8)(A), redesignated former par. (17) as (15) and, as redesignated, substituted in subpar. (B) "educational organization described in section 170(b)(1)(A)(il)" for "educational institution (as de- fined in section 151(e)(4))" following "order or by an", and struck out "or his delegate" following "Secre- tary". Subsec. (b)(16). Pub. L. 94-455, § 1951(b)(8)(A), rede- signated former par. (16) as (14). Subsec. (b)(17). Pub. L. 94-455, § 1951(b)(8)(A), rede- signated former par. (17) as (15). 1972-Subsec. (a)(4). Pub. L. 92-418 added subsec. (a)(4). 1969-Subsec. (a). Pub. L. 91-172, § 121(b)(1), desig- nated existing provisions as pars. (1) and (2)(B), and added pars. (2)(A) and (3). Subsec. (b). Pub. L. 91-172, § 121(b)(2)(D), substitut- ed "Modifications" for "Exceptions, additions, and limitations", in subsec. catchline, and, in material pre- ceding par. (1) substituted "The modifications referred to in subsection (a)" for "The exceptions, additions, and limitations applicable in determining unrelated business taxable income". Subsec. (b)(3)(A). Pub. L. 91-172, § 121(b)(2)(A), added reference to exceptions set out In subsec. (b)(3)(B) in material preceding cl. (I), substituted "property described in section 1245(a)(3)(C)" for "per- sonal property leased with the real property" in the parenthetical material of cl. (I), and added cl. (ii). Subsec. (b)(3)(B). Pub. L. 91-172, § 121(b)(2)(A), added subsec. (b)(3)(B). Subsec. (b)(3)(C). Pub. L. 91-172, § 121(b)(2)(A), sub- stituted "rents excluded under subparagraph (A)" for "such rents". Subsec. (b)(4). Pub. L. 91-172, § 121(b)(2)(A), inserted reference to pars. (1), (3) and (5) of this subsec., and substituted "debt financed property" for "a business lease". Subsec. (b)(12). Pub. L. 91-172, § 121(b)(2)(B), made the allowance of the specific $1,000 deduction inappli- cable for the purposes of computing the net operating loss under section 172 of this title and par. (6) of this subsec., and provided for the allowance of specific de- ductions equal to the lower of $1,000 or the gross income derived from any unrelated trade or business carried on by a parish, individual church, district, or other local unit. Subsecs. (b)(15) to (17). Pub. L. 91-172, § 121(b)(2)(C) added subsecs. (b)(15) to (17). 1966-Subsec. (a). Pub. L. 89-809 substituted ". the unrelated business taxable income shall be its unrelat- ed business taxable Income which is effectively con- § 512 Page 393
TITLE 26-INTERNAL REVENUE CODE nected with the conduct of a trade or business within the United States" for", the unrelated business tax. able income shall be its unrelated business taxable income derived from sources within the United States determined under subchapter N (sec. 861 and follow- Ing), relating to tax based on income from sources within or without the United States". 1964-Subsec. (b). Pub. L, 88-380 added par. (14). 1958-Subsec. (b)(13). Pub. L. 85-367 added subsec. (b)(13). Erncrvs DATE or 1976 AcmiDimEN Amendment by Pub. L. 94-568 applicable to taxable years beginning after Oct. 20, 1976, see section l(d) of Pub. L. 94-568, set out as an Effective Date of 1976 Amendment note under section 501 of this title. Amendment of subsec. (b)(15) by section 1901(b)(8)(P) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see sec- tion 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Amendment of subsecs. (b)(13) to (17) by section 1951(b)(8)(A) of Pub. L. 94-455, applicable with re- spect to taxable years beginning after Dec. 31, 1976, see section 1951(d) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 72 of this title. Section l(b) of Pub. L. 94-396 provided that: "The amendment made by subsection (a) [amending subsec. (b)(5) of this section] shall apply to gain from options which lapse or terminate on or after January 1, 1976, in taxable years ending on or after such date." EFEcTIV DATE OF 1972 AmENM=T Amendment by Pub. L. 92418 applicable to taxable years beginning after Dec. 31, 1969, see section l(c) of Pub. L. 92-418, set out as an Effective Date of 1972 Amendment note under section 501 of this title. EFFECTIVE DATE OF 1969 AMwxDmrrr Amendment by section 121(b)(1), (2) of Pub. L. 91- 172 applicable to taxable years beginning after Dec. 31, 1969, see section 121(g) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under sec- tion 511 of this title. EmcrIrv DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-809 applicable with re- spect to taxable years beginning after Dec. 31, 1966, see section 104(n) of Pub. L. 89-809, set out as an Ef- fective Date of 1966 Amendment note under section 11 of this title. EFYEnzr DATz OF 1964 AM mmrwrr Section 2 of Pub. L. 88-380 provided that: "The amendment made by the first section of this Act [adding to subsec. (b)(14) of this section] shall apply with respect to taxable years beginning after Decem- ber 31, 1963." EFF EVs DATE OF 1958 AmxNsmrE Section 1(b) of Pub. L. 85-367 provided that: "The amendment made by subsection (a) [adding subsec. (b)(13) of this section] shall apply to taxable years of trusts beginning after December 31, 1955". SAVINGS PROVISION Section 1951(b)(8)(B) of Pub. L. P4-455 provided that: "Notwithstanding subparagraph (A) [repealing subsecs. (b)(13), (14) of this section], income received in a taxable year beginning after December 31, 1975, shall be excluded from gross income in determining unrelated business taxable income, if such Income would have been excluded by paragraph (13) or (14) of section 512(b) [subsec. (b) of this section] if received in a taxable year beginning before such date. Any de- ductions directly connected with income excluded under the preceding sentence in determining unrelat- ed business taxable income shall also be excluded for such purpose." CROSS RzaiuFNcEs Limitation on charitable deduction, see section 681 of this titl;. Nonresident aliens and foreign corporations, income taxes of, see section 871 et seq. of this title. Withholding of tax on foreign tax-exempt organiza. tions, see section 1443 of this title. SECTION REnsui TO IN OTm SECTXONS This section is referred to in sections 502, 509, 511, 513, 514, 664, 681, 1443, 4943 of this title. § 513. Unrelated trade or business (a) General rule The term "unrelated trade or business" means, in the case of any organization subject to the tax imposed by section 511, any trade or business the conduct of which is not substan- tially related (aside from the need of such orga- nization for income or funds or the use it makes of the profits derived) to the exercise or perfor- mance by such organization of its charitable, educational, or other purpose or function con- stituting the basis for its exemption under sec- tion 501 (or, in the case of an organization de- scribed in section 511(a)(2)(B), to the exercise or performance of any purpose or function de- scribed in section 501(c)(3)), except that such term does not include any trade or business- (1) in which substantially all the work in carrying on such trade or business is per- formed for the organization without compen- sation; or (2) which is carried on, in the case of an or- ganization described in section 501(c)(3) or in the case of a college or university described in section 511(a)(2)(B), by the organization pri- marily for the convenience of its members, students, patients, officers, or employees, or, in the case of a local association of employees described in section 501(c)(4) organized before May 27, 1969, which is the selling by the orga- nization of items of work-related clothes and equipment and items normally sold through vending machines, through food dispensing facilities, or by snack bars, for the conve- nience of its members at their usual places of employment; or (3) which is the selling of merchandise, sub- stantially all of which has been received by the organization as gifts or contributions. (b) Special rule for trusts The term "unrelated trade or business" means, in the case of- (1) a trust computing its unrelated business taxable income under section 512 for pur- poses of section 681; or (2) a trust described in tiection 401(a), or section 501(c)(17), which is exempt from tax under section 501(a); any trade or business regularly carried on by such trust or by a partnership of which it is a member. (c) Advertising, etc., activities For purposes of this section, the term "trade or business" includes any activity which Is car- ried on for the production of income from the sale of goods or the performance of services. For purposes of the preceding sentence, an ac- § 513 Page 394
TITLE 26-INTERNAL REVENUE CODE tivity does not lose identity as a trade or busi- ness merely because it is carried on within a larger aggregate of similar activities or within a larger complex of other endeavors which may, or may not, be related to the exempt purposes of the organization. Where an activity carried on for profit constitutes an unrelated trade or business, no part of such trade or business shall be excluded from such classification merely be- cause it does not result in profit. (d) Certain activities of trade shows, state fairs, etc. (1) General rule The term "unrelated trade or business" does not include qualified public entertain- ment activities of an organization described in paragraph (2)(C), or qualified convention and trade show activities of an organization de- scribed in paragraph (3)(C). (2) Qualified public entertainment activities For purposes of this subsection- (A) Public entertainment activity The term "public entertainment activity" means any entertainment or recreational activity of a kind traditionally conducted at fairs or expositions promoting agricultural and educational purposes, including, but not limited to, any activity one of the pur- poses of which is to attract the public to fairs or expositions or to promote the breed. ing of animals or the development of prod- ucts or equipment. (B) Qualified public entertainment activity The term "qualified public entertainment activity" means a public entertainment ac- tivity which is conducted by a qualifying or- ganization described in subparagraph (C) in- (i) conjunction with an international, national, State, regional, or local fair or exposition, (ii) accordance with the provisions of State law which permit the activity to be operated or conducted solely by such an organization, or by an agency, instrumen- tality, or political subdivision of such State, or (iii) accordance with the provisions of State law which permit such an organiza- tion to be granted a license to conduct not more than 20 days of such activity on pay- ment to the State of a lower percentage of the revenue from such licensed activity than the State requires from organiza- tions not described in section 501(c)(3), (4), or (5). (C) Qualifying organization For purposes of this paragraph, the term "qualifying organization" means an organi- zation which is described in section 501(c) (3), (4), or (5) which regularly conducts, as one of its substantial exempt purposes, an agricultural and educational fair or exposi- tion. (3) Qualified convention and trade show activities (A) Convention and trade show activities The term "convention and trade show ac- tivity" means any activity of a kind tradi- tionally conducted at conventions, annual meetings, or trade shows, including, but not limited to, any activity one of the purposes of which is to attract persons in an industry generally (without regard to membership in the sponsoring organization) as well as members of the public to the show for the purpose of displaying industry products or to stimulate interest in, and demand for, in- dustry products or services, or to educate persons engaged in the industry in the de- vclopment of new products and services or new rules and regulations affecting the in- dustry. (B) Qualified convention and trade show activity The term "qualified convention and trade show activity" means a convention and trade show activity carried out by a qualify- .ing organization described in subparagraph (C) in conjunction with an international, national, State, regional, or local conven- tion, annual meeting, or show conducted by an organization described in subparagraph (C) if one of the purposes of such organiza- tion in sponsoring the activity is the promo- tion and stimulation of interest in, and demand for, the products and services of that industry in general, and the show is de- signed to achieve such purpose through the character of the exhibits and the extent of the industry products displayed. (C) Qualifying organization For purposes of this paragraph, the term "qualifying organization" means an organi- zation described in section 501(c)(5) or (6) which regularly conducts as one of its sub- stantial exempt purposes a show which stimulates interest in, and demand for, the products of a particular industry or seg- ment of such industry. (4) Such activities not to affect exempt status An organization described in section 501(c) (3), (4), or (5) shall not be considered as not entitled to the exemption allowed under sec- tion 501(a) solely because of qualified public entertainment activities conducted by It. (e) Certain hospiWi services In the case of a hospital described in section 170(b)(1)(A)(iii), the term "unrelated trade or business" does not include the furnishing of one or more of the services described in section 501(e)(1)(A) to one or more hospitals described in section 170(b)(1)(A)(iii) if- (1) such services are furnished solely to such hospitals which have facilities to serve not more than 100 inpatients; (2) such services, if performed on its own behalf by the recipient hospital, would consti- tute activities in exercising or performing the purpose or function constituting the basis for its exemption; and (3) such services are provided at a fee or cost which does not exceed the actual cost of providing such services, such cost including straight line depreciation and a reasonable amount for return on capital goods used to provide such services. (Aug. 16, 1954, ch. 736, 68A Stat. 172; July 14, 1960, Pub. L. 86-667, § 4, 74 Stat. 536; Dec. 30, 1969, Pub. L. 91-172, title I, § 121(b)(4), (c), 83 Stat. 541, 542; Oct. 4, 1976, Pub. L. 94-455, title XIII, §§ 1305(a), 1311(a), 90 Stat. 1716, 1729.) Page 395 § 513
TITLE 26-INTERNAL REVENUE CODE AMENDMENTS 1976-Subsec. Cd). Pub. L. 94-455, § 1305(a), added subsec. (d). Subsec. (e). Pub. L. 94-455, § 1311(a), added subsec. e). 1969-Subsec. (a)(2). Pub. L. 91-172, § 121(b)(4), added reference to local associations of employees de- scribed in section 501(c)(4) of this title and organized before May 27, 1969. Subsec. (c). Pub. L. 91-172, § 121(c), substituted "Ad- vertising, etc., activities" for "Special rule for certain publishing businesses", in subsec. catchline, and, in text, substituted provisions extending the definition of trade or business to include any activity carried on for the production of income from the sale of goods or the performance of services, for provisions referring to publishing businesses carried on by an organization during a taxable year beginning before Jan. 1. 1953. 1960-Subsec. (b)(2). Pub. L. 86-667 included trusts described in section 501(c)(17). ErncTivE DATE OF 1976 AmENDME1NT Section 1305(b) of Pub. L. 94-455 provided that: "The amendments made by subsection (a) [enacting subsec. (d) of this section] apply to qualified public en- tertainment activities in taxable years beginning after December 31, 1962, and to qualified convention and trade show activities in taxable years beginning after the date of enactment of this Act [Oct. 4, 1976]." Section 1311(b) of Pub. L. 94-455 provided that: "The amendment made by this section [enacting subsec. (e) of this section] shall apply to all taxable years to which the Internal Revenue Code of 1954 (this title] applies." ErncTrE DATE OF 1969 AMENDmENr Amendment by section 121(c) of Pub. L. 91-172 ap- plicable to taxable years beginning after Dec. 31, 1969, see section 121(g) of Pub. L. 91-172, set out as an Ef- fective Date of 1969 Amendment note under section 511 of this title. EFFECTIVE DATE OF 1960 AMENDMENT Amendment by Pub. L. 86-667 applicable to taxable years beginning after Dec. 31, 1959, see section 6 of Pub. L. 86-667, set out as an Effective Date of 1960 Amendments note under section 501 of this title. SECTION REFERIUED TO IN OTHER SECTIONS This section is referred to in sections 103, 414, 509, 512, 514. 1245, 1250, 4942 of this title; title 29 section 1002. § 514. Unrelated debt-financed income (a) Unrelated debt-financed income and deductions In computing under section 512 the unrelated business taxable income for any taxable year- (1) Percentage of income taken into account There shall be included with respect to each debt-financed property as an item of gross income derived from an unrelated trade or business an amount which is the same per- centage (but not in excess of 100 percent) of the total gross income derived during the tax- able year from or on account of such property as CA) the average acquisition indebtedness (as defined in subsection (c)(7)) for the tax- able year with respect to the property is of (B) the average amount (determined under regulations prescribed by the Secretary) of the adjusted basis of such property during the period It Is held by the organization during such taxable year. (2) Percentage of deductions taken Into account There shall be allowed as a deduction with respect to each debt-financed property an amount determined by applying (except as provided in the last sentence of this para. graph) the percentage derived under para- graph (1) to the sum determined under para- graph (3). The percentage derived under this paragraph shall not be applied with respect to the deduction of any capital loss resulting from the carryback or carryover of net capital losses under section 1212. (3) Deductions allowable The sum referred to in paragraph (2) is the sum of the deductions under this chapter which are directly connected with the debt-fi- nanced property or the income thereform, except that if the debt-financed property is of a character which is subject to the allowance for depreciation provided in section 167, the allowance shall be computed only by use of the straight-line method. (b) Definition of debt-financed property (1) In general For purposes of this section, the term "debt-financed property" means any property which is held to produce income and with re- spect to which there is an acquisition indebt- edness (as defined in subsection (0)) at any time during the taxable year (or, if the prop- erty was disposed of during the taxable year, with respect to which there was an acquisi- tion indebtedness at any time during the 12- month period ending with the date of such disposition), except that such term does not include- (A)(i) any property substantially all the use of which is substantially related (aside from the need of the organization for income or funds) to the exercise or perfor- mance by such organization of its charita- ble, educational, or other purpose or func- tion constituting the basis for its exemption under section 501 (or, In the case of an orga- nization described in section 511(a)(2)(B), to the exercise or performance of any purpose or function designated in section 501(c)(3)), or (ii) any property to which clause (1) does not apply, to the extent that its use is so substantially related; (B) except in the case of income excluded under section 512(b)(5), any property to the extent that the income from such property Is taken Into account in computing the gross income of any unrelated trade or busi- ness; (C) any property to the extent that the income from such property is excluded by reason of the provisions of paragraph (7), (8), or (9) of section 512(b) in computing the gross income of any unrelated trade or busi- ness; or (D) any property to the extent that it is used in any trade or business described in paragraph (1), (2), or (3) of section 513(a). For purposes of subparagraph (A), substan- tially all the use of a property shall be consid- ered to be substantially related to the exer- cise or performance by an organization of its charitable, educational, or other purpose or function constituting the basis for its exemp- tion under section 501 if such property is real property subject to a lease to a medical clinic entered into primarily for purposes which are § 514 Page 396
9TILE 26-INTERNAL REVENUE CODE substantially related (aside from the need of such organization for income or funds or the use it makes of the rents derived) to the exer- cise or performance by such organization of its charitable, educational, or other purpose or function constituting the basis for its ex- emption under section 501. (2) Special rule for related uses For purposes of applying paragraphs (1) (A), (C), and (D), the use of any property by an exempt organization which is related to an organization shall be treated as use by such organization. (3) Special rules when land is acquired for exempt use within 10 years (A) Neighborhood land If an organization acquires real property for the principal purpose of using the land (commencing within 10 years of the time of acquisition) in the manner described in paragraph (1)(A) and at the time of acquisi- tion the property is in the neighborhood of other property owned by the organization which is used in such manner, the real property acquired for such future use shall not be treated as debt-financed property so long as the organization does not abandon its intent to so use the land within the 10- year period. The preceding sentence shall not apply for any period after the expira- tion of the 10-year period, and shall apply after the first 5 years of the 10-year period only if the organization establishes to the satisfaction of the Secretary that it is rea- sonably certain that the land will be used in the described manner before the expiration of the 10-year period. (B) Other cases If the first sentence of subparagraph (A) is inapplicable only because- (i) the acquired land is not in the neigh- borhood referred to in subparagraph (A), or (ii) the organization (for the period after the first 5 years of the 10-year period) is unable to establish to the satis- faction of the Secretary that it Is reason- ably certain that the land will be used in the manner described inparagraph (1)(A) before the expiration of the 10-year period, but the land is converted to such use by the organization within the 10-year period, the real property (subject to the provisions of subparagraph (D)) shall not be treated as debt-financed property for any period before such conversion. For purposes of this subparagraph, land shall not be treated as used in the manner described in paragraph (1)(A) by reason of the use made of any structure which was on the land when ac- quired by the organization. (C) Limitations Subparagraphs (A) and (B)- (I) shall apply with respect to any struc- ture on the land when acquired by the or- ganization, or to the land occupied by the structure, only if (and so long as) the in- tended future use of the land in the manner described in paragraph (1)(A) re- quires that the structure be demolished or removed in order to use the land in such manner; (ii) shall not apply to structures erected on the land after the acquisition of the land; and (iit) shall not apply to property subject to a lease which is a business lease (as de- fined in this section immediately before the enactment of the Tax Reform Act of 1976). (D) Refund of taxes when subparagraph (B) ap- plies If an organization for any taxable year has not used land in the manner to satisfy the actual use condition of subparagraph (B) before the time prescribed by law (in- cluding extensions thereof) for filing the return for such taxable year, the tax for such year shall be computed without regard to the application of subparagraph (B), but if and when such use condition is satisfied, the provisions of subparagraph (B) shall then be applied to such taxable year. If the actual use condition of subparagraph (B) is satisfied for any taxable year after such time for filing the return, and if credit or refund of any overpayment for the taxable year resulting from the satisfaction of such use condition is prevented at the close of the taxable year in which the use condition is satisfied, by the operation of any law or rule of law (other than chapter 74, relating to closing agreements and compromises), credit or refund of such overpayment may nevertheless be allowed or made if claim therefor is filed before the expiration of 1 year after the close of the taxable year in which the use condition is satisfied. (E) Special rule for churches In applying this paragraph to a church or convention or association of churches, in lieu of the 10-year period referred to in sub. paragraphs (A) and (B) a 15-year period shall be applied, and subparagraphs (A) and (B)(ii) shall apply whether or not the ac- quired land meets the neighborhood .test. (c) Acquisition indebtedness (1) General rule For purposes of this section, the term "ac- quisition indebtedness" means, with respect to any debt-financed property, the unpaid amount of- (A) the indebtedness incurred by the or- ganization in acquiring or improving such property; (B) the indebtedness incurred before the acquisition or improvement of such proper- ty if such indebtedness would not have been incurred but for such acquisition or im- provement; and (C) the indebtedness incurred after the acquisition or improvement of such proper- ty if such indebtedness would not have been incurred but for such acquisition or im- provement and the incurrence of such in- debtedness was reasonably foreseeable at the time of such acquisition or improve- ment. Page 397
TITLE 26-INTERNAL REVENUE CODE (2) Property acquired subject to mortgage, etc. For purposes of this subsection- (A) General rule Where property (no matter how acquired) is acquired subject to a mortgage or other similar lien, the amount of the indebtedness secured by such mortgage or lien shall be considered as an indebtedness of the organi- zation incurred in acquiring such property even though the organization did not assume or agree to pay such indebtedness. (B) Exceptions Where property subject to a mortgage is acquired by an organization by bequest or devise, the indebtedness secured by the mortgage shall not be treated as acquisition indebtedness during a period of 10 years fol- lowing the date of the acquisition. If an or- ganization acquires property by gift subject to a mortgage which was placed on the property more than 5 years before the gift, which property was held by the donor more than 5 years before the gift, the indebted- ness securea by such mortgage shall not be treated as acquisition indebtedness during a period of 10 years following the date of such gift. This subparagraph shall not apply if the organization, in order to ac- quire the equity in the property by bequest, devise, or gift, assumes and agrees to pay the indebtedness secured by the mortgage, or if the organization makes any payment for the equity in the property owned by the decedent or the donor. (C) Liens for taxes or assessments Where State law provides that- (i) a lien for taxes, or (ii) a lien for assessments, made by a State or a political subdivision thereof attaches to property prior to the time when such taxes or assessments become due and payable, then such lien shall be treated as similar to a mortgage (within the meaning of subparagraph (A)) but only after such taxes or assessments become due and payable and the organiza- tion has had an opportunity to pay such taxes or assessments in accordance with State law. (3) Extension of obligations For purposes of this section, an extension, renewal, or refinancing of an obligation evi- dencing a pre-existing indebtedness shall not be treated as the creation of a new indebted- ness. (4) Indebtedness incurred in performing exempt purpose For purposes of this section, the term "ac- quisition indebtedness" does not include in- debtedness the incurrence of which is inher- ent in the performance or exercise of the pur- pose or function constituting the basis of the organization's exemption, such as the indebt- edness incurred by a credit union described in section 501(c)(14) in accepting deposits from its members. (5) Annuities For purposes of this section, the term "ac- quisition indebtedness" does not include an obligation to pay an annuity which- (A) is the sole consideration (other than a mortgage to which paragraph (2)(B) ap- plies) issued in exchange for property if, at the time of the exchange, the value of the annuity is less than 90 percent of the value of the property received in the exchange, (B) is payable over the life of one individ- ual in being at the time the annuity is issued, or over the lives of two individuals in being at such time, and (C) is payable under a contract which- (I) does not guarantee a minimum amount of payments or specify a maxi- mum amount of payments, and (ii) does not provide for any adjustment of the amount of the annuity payments by reference to the income received from the transferred property or any other property. (6) Certain federal financing For purposes of this section, the term "ac- quisition indebtedness" does not include an obligation, to the extent that it is insured by the Federal Housing Administration, to fi- nance the purchase, rehabilitation, or con- struction of housing for low and moderate income persons. (7) Average acquisition indebtedness For purposes of this section, the term "average acquisition indebtedness" for any taxable year with respect to a debt-financed property means the average amount, deter- mined under regulations prescribed by the Secretary of the acquisition indebtedness during the period the property is held by the organization during the taxable year, except that for the purpose of computing the per- centage of any gain or loss to be taken into account on a sale or other disposition of debt- financed property, such term means the high- est amount of the acquisition indebtedness with respect to such property during the 12- month period ending with the date of the sale or other disposition. (d) Basis of debt-financed property acquired in corpo- rate liquidation For purposes of this subtitle, if the property was acquired in a complete or partial liquida- tion of a corporation in exchange for its stock, the basis of the property shall be the same as it would be in the hands of the transferor corpo- ration, increased by the amount of gain recog- nized to the transferor corporation upon such distribution and by the amount of any gain to the organization which was included, on ac- count of such distribution, in unrelated busi- ness taxable income under subsection (a). (e) Allocation rules Where debt-financed property is held for pur- poses described in subsection (b)(1)(A), (B), (C), or (D) as well as for other purposes, proper allo- cation shall be made with respect to basis, in- debtedness, and income and deductions. The al- locations required by this section shall be made in accordance with regulations prescribed by § 514 Page 398
TITLE 26-INTERNAL REVENUE CODE the Secretary to the extent proper to carry out the purposes of this section. (f) Personal property leased with real property For purposes of this section, the term "real property" includes personal property of the lessor leased by it to a lessee of its real estate if the lease of such personal property is made under, or in connection with, the lease of such real estate. (Aug. 16, 1954, ch. 736, 68A Stat. 172; July 14, 1960, Pub. L. 86-667, § 5, 74 Stat. 436; Dec. 30, 1969, Pub. L. 91-172, title I, § 121(d)(1), (3)(A), (B), 83 Stat. 543, 548; Jan. 3, 1975, Pub. L. 93- 625, § 7(b)(2), 88 Stat. 2115; Oct. 4, 1976, Pub. L. 94-455, title XIII, § 1308(a), title XIX, §§ 1901(a)(72), 1906(b)(13)(A), 90 Stat. 1729, 1776, 1834.) REFERENCES IN TEXT The Tax Reform Act of 1976, referred to in subsec. (b)(3)(C)(ii), is Pub. L. 94-455, Oct. 4, 1976, 90 Stat. 1520, which was enacted Oct. 4, 1976. For complete classification of this Act to the Code, see Tables volume. AMENDMENTS 1976-Subsec. (a)(1). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (b)(3)(A). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (b)(3)(B)(1i). Pub. L. 94-455, § 1906(b)(13)(A). struck out "or his delegate" following "Secretary". Subsec. (b)(3)(C)(iii). Pub. L. 94-455, § 1901(a)(72)(C), substituted "(as defined in this sec- tion immediately before the enactment of the Tax Reform Act of 1976)" for "as (defined in subsection (f))" following "is a business lease". Subsec. (c)(1). Pub. L. 94-455, § 1901(a)(72)(A), struck out exception following subpar. (C) that in any taxable year beginning before January 1. 1972, any ac- quisition indebtedness incurred prior to June 28, 1966, would not be taken into account except for business lease indebtedness of certain organizations. Subsec. (c)(2)(C). Pub. L. 94-455, §1308(a), added subpar.(C). Subsec. (c)(7). Pub. L. 94-455, §1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (e). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (f). Pub. L. 94-455, § 1901(a)(72(B), struck out subsec. (f) relating to definition of business lease, special rules applicable to such leases, and exceptions to the definition and applicable rules, and redesignat- ed former subsec. (h) as (f). Subsec. (g). Pub. L. 94-455, § 1901(a)(72)(B), struck out subsec. (g) relating to definition and special rules applicable to business lease indebtedness. Subsec. (h. Pub. L. 94-455, § 1901(a)(72)(B). redesig- nated former subsec. (h) as (f). 1975-Subsec. (b)(3)(D). Pub. L. 93-625 struck out last sentence provisions for allowance and payment of interest on any overpayment for a taxable year result- ing from application of subpar. (B) after actual use condition was satisfied at rate of 4 in lieu of 6 percent per annum. 1969-Subsec. (a). Pub. L. 91-172, § 121(d)(1), substi- tuted "Unrelated debt-financed income" for "Business leases" in catchline and substituted in the text materi- al covering unrelated debt-financed income and deduc- tions for material covering business lease rents and de- ductions. Subsecs. (b) to (e). Pub. L. 91-172, § 121(d)(1), (3)(A), added subsecs. (b), (c), (d) and (e). Former subsecs. (b), c) and (d) were redesignated as subsecs. (f), (g) and (h), respectively. Subsec. (f). Pub. L. 91-172, § 121(d)(3)(A), (B), rede- signated subsec. (b) as subsec. (f), and, in par. (1) of subsec. (f) as so redesignated, substituted reference to subsec. (g) for reference to subsec. (c). Subsecs. (g), (h). Pub. L. 91-172, § 121(d)(3)(A), rede- signated subsecs. c) and (d) as subsecs. (g) and (h), re- spectively. 1960-Subsec. (c)(8). Pub. L. 86-667 added subsec. (c)(8). EFFECTIVE DATE OF 1976 AMENDMENT Section 1308(b) of Pub. L. 94-455 provided that: "The amendment made by this section [enacting subsec. (c)(2)(C) of this section] shall apply to taxable years ending after December 31, 1969." Amendment of subsecs. (b)(3)(C)(li), (c)(1), (fM to (hi, by section 1901(a)(72) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under sec- tion 2 of this title. EEcTIvE DATE OF 1975 AMENDMENT Amendment by Pub. L. 93-625 effective on July 1, 1975, and applicable to amounts outstanding on such date or arising thereafter, see section 7(e) of Pub. L. 93-625, set out as an Effective Date note under section 6621 of this title. EnECTIVE DATE OF 1969 AMENDMENT Amendment by section 121(d)(1) of Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1969, and to the manner of treatment to be accorded indebtednesses secured by certain mortgages on prop- erties bargain-purchased before Oct. 9, 1969. see sec- tion 121(g) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 511 of this title. EFFECTIVE DATE OF 1960 AMENDMENT Amendment by Pub. L. 86-667 applicable to taxable years beginning after Dec. 31, 1959, see section 6 of Pub. L. 86-667, set out as an Effective Date of 1960 Amendments note under section 501 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 48, 512, 4942 of this title. § 515. Taxes of foreign countries and possessions of the United States The amount of taxes imposed by foreign countries and possessions of the United States shall be allowed as a credit against the tax of an organization subject to the tax imposed by section 511 to the extent provided in section 901; and in the case of the tax imposed by sec- tion 511, the term "taxable income" as used in section 901 shall be read as "unrelated business taxable income". (Aug. 16, 1954, ch. 736, 68A Stat. 176.) PART IV-FARMERS' COOPERATIVES Sec. 521. Exemption of farmers' cooperatives from tax. [522. Revealed.] AMENDMENTS 1969-Pub. L. 91-172, title I, § 101(a), Dec. 30, 1969. 83 Stat. 492, substituted "Part IV" for "Part III" as the Part designation. 1962-Pub. L. 87-834, § 17(b)(5), Oct. 16, 1962, 76 Stat. 1051, struck out item 522. PART REFERRED TO IN OTHER SECTIONS This part Is referred to in section 501 of this title. Page 399
TITLE 26-INTERNAL REVENUE CODE § 521. Exemption of farmers' cooperatives from tax (a) Exemption from tax A farmers' cooperative organization described in subsection (b)(1) shall be exempt from tax- ation under this subtitle except as otherwise provided in part I of subchapter T (sec. 1381 and following). Notwithstanding part I of sub- chapter T (sec. 1381 and following), such an or- ganization shall be considered an organization exempt from income taxes for purposes of any law which refers to organizations exempt from income taxes. (b) Applicable rules (1) Exempt farmers' cooperatives The farmers' cooperatives exempt from tax- ation to the extent provided in subsection (a) are farmers', fruit growers', or like associ- ations organized and operated on a cooperat- ive basis (A) for the porpose of marketing the products of members or other producers, and turning back to them the proceeds of sales, less the necessary marketing expenses, on the basis of either the quantity or the value of the products furnished by them, or (B) for the purpose of purchasing supplies and equip- ment for the use of members or other per- sons, and turning over such supplies and equipment to them at actual cost, plus neces- sary expenses. (2) Organizations having capital stock Exemption shall not be denied any such as- sociation because it has capital stock, if the dividend rate of such stock is fixed at not to exceed the legal rate of interest in the State of incorporation or 8 percent per annum, which- ever is greater, on the value of the consider- ation for which the stock was issued, and if substantially all such stock (other than non- voting preferred stock, the owners of which are not entitled or permltted to participate, directly or indirectly, in the profits of the asso- ciation, upon dissolution or otherwise, beyond the fixed dividends) is owned by producers who market their products or purchase their supplies and equipment through the associ- ation. (3) Organizations maintaining reserve Exemption shall not be denied any such as- sociation because there is accumulated and maintained by it a reserve required by State law or a reasonable reserve for any necessary purpose. (4) Transactions with nonmembers Exemption shall not be denied any such as- sociation which markets the products of non- members in an amount the value of which does not exceed the value of the products marketed for members, or which purchases supplies and equipment for nonmembers in an amount the value of which does not exceed the value of the supplies and equip- ment purchased for members, provided the value of the purchases made for persons who are neither members nor producers does not exceed 15 percent of the value of all its pur- chases. (5) Business for the United States Business done for the United States or any of its agencies shall be disregarded in deter- mining the right to exemption under this sec- tion. (Aug. 16, 1954, ch. 736, 68A Stat. 176; Oct. 16, 1962, Pub. L. 87-834, § 17(b)(1), 76 Stat. 1051.) AMENDMENTS 1962-Subsec. (a). Pub. L. 87-834 substituted "part I of subchapter T (see. 1381 and following)" for "section 522" in two instances. ErFEcrvE DATE OF 1962 AMENDMENT Amendment of subsec. (a) of this section applicable, except as otherwise provided, to taxable years of orga- nizations described in section 1381(a) of this title be- ginning after Dec. 31, 1962, see section 17(c) of Pub. L. 87-834, set out as an Effective Date note under section 1381 of this title. CROSS REFERENcEs Corporate deductions for dividends received inappli- cable to dividends from corporation exempt from tax under this section, see section 246 of this title. Corporations organized for purpose of financing or- dinary crop operations of members of associations sub- ject to this part, exemption of, see section 501 of this title. Employment under Federal Insurance Contributions Act and Federal Unemployment Tax Act as excluding services performed in employ of organization exempt from tax under this section, see sections 3121, 3306 of this title. Lottery under wagering taxes as excluding drawings conducted by organization exempt from tax under this section, see section 4421 of this title. Partial exclusion of dividends received by individuals inapplicable to dividends from corporation exempt from tax under this section, see section 116 of this title. SECTION REFERRED TO IN OTRM SECTIONS This section is referred to in sections 48, 116, 246, 1245, 1250, 1251, 1381, 3121, 3306, 4421, 6044 of this title; title 15 section 77c. SECTION REFERRED TO in D.C. CODE This section is referred to in section 46-301 of the District of Columbia Code. [§ 522. Repealed. Pub. L. 87-834, § 17(b)(2), Oct. 16, 1962, 76 Stat. 10511 Section, act Aug. 16, 1954, ch. 736, 68A Stat. 177, re- lated to tax on farmers' cooperatives. EFFECTIVE DATE OF REPEAL Repeal of section applicable, except as otherwise provided, to taxable years of organizations described in section 1381(a) of this title beginning after Dec. 31, 1962, see section 17(c) of Pub. L. 87-834, set out as an Effective Date note under section 1381 of this title. PART V-SHIPOWNERS' PROTECTION AND INDEMNITY ASSOCIATIONS Sec. 526. Shipowners' protection and indemnity associ- ations. AMENDMENTS 1969-Pub. L. 91-172, title I, § 101(a), Dec. 30, 1969, 83 Stat. 492, substituted "Part V" for "Part IV" as the Part designation. §521 Page 400
TITLE 26-INTERNAL REVENUE CODE § 526. Shipowners' protection and indemnity associ- ations There shall not be included in gross income the receipts of shipowners' mutual protection and indemnity associations not organized for profit, and no part of the net earnings of which inures to the benefit of any private share- holder; but such corporations shall be subject as other persons to the tax on their taxable income from interest, dividends, and rents. (Aug. 16, 1954, ch. 736, 68A Stat. 178.) PART VI-POLITICAL ORGANIZATIONS Sec. 527. Political organizations. PART RFERRED TO IN OTHER SECTIONS This part is referred to in section 501 of this title. § 527. Political organizations (a) General rule A political organization shall be subject to taxation under this subtitle only to the extent provided in this section. A political organization shall be considered an organization exempt from income taxes for the purpose of any law which refers to organizations exempt from income taxes. (b) Tax imposed (1) In general A tax is hereby imposed for each taxable year on the political organization taxable income of every political organization. Such tax shall consist of a normal tax and surtax computed as provided in section 11 as though the political organization were a corporation and as though the political organization tax- able income were the taxable income referred to in section 11. For purposes of this subsec- tion, the surtax exemption provided by sec- tion 11(d) shall not be allowed. (2) Alternative tax in case of capital gains If for any taxable year any political organi- zation has a net capital gain, then, in lieu of the tax imposed by paragraph (1), there is hereby Imposed a tax (If such a tax Is less than the tax imposed by paragraph (1)) which shall consist of the sum of- (A) a partial tax, computed as provided by paragraph (1), on the political organization taxable income determined by reducing such income by the amount of such gain, and (B) an amount determined as provided in section 1201(a) on such gain. (c) Political organization taxable income defined (1) Taxable income defined For purposes of this section, the political organization taxable income of any organiza- tion for any taxable year is an amount equal to the excess (if any) of- (A) the gross income for the taxable year (excluding any exempt function income), over (B) the deductions allowed by this chap- ter which are directly connected with the production of the gross income (excluding exempt function income), computed with the modifications provided in paragraph (2). (2) Modifications For purposes of this subsection- (A) there shall be allowed a specific de- duction of $100, (B) no net operating loss deduction shall be allowed under section 172, and (C) no deduction shall be allowed under part VIII of subchapter B (relating to spe- cial deductions for corporations). (3) Exempt function Income For purposes of this subsection, the term "exempt function income" means any amount received as- (A) a contribution of money or other property, (B) membership dues, a membership fee or assessment from a member of the politi- cal organization, or (C) proceeds from a political fundraising or entertainment event, or proceeds from the sale of political campaign materials, which are not received in the ordinary course of any trade or business, to the extent such amount is segregated for use only for the exempt function of the po- litical organization. (d) Certain uses not treated as income to candidate For purposes of this title, if any political or- ganization- (1) contributes any amount to or for the use of any political organization which is treated as exempt from tax under subsection (a) of this section, (2) contributes any amount to or for the use of any organization described in paragraph (1) or (2) of section 509(a) which is exempt from tax under section 501(a), or (3) deposits any amount in the general fund of the Treasury or in the general fund of any State or local government, such amount shall be treated as an amount not diverted for the personal use of the candidate or any other person. No deduction shall be al- lowed under this title for the contribution or deposit of any amount described in the preced- Ing sentence. (e) Other definitions For purposes of this section- (1) Political organization The term "political organization" means a party, committee, association, fund, or other organization (whether or not incorporated) organized and operated primarily for the pur- pose of directly or indirectly accepting contri- butions or making expenditures, or both, for an exempt function. (2) Exempt function The term "exempt function" means the function of influencing or attempting to in- fluence the selection, nomination, election, or appointment of any individual to any Federal, State, or local public office or office in a po- litical organization, or the election of Presi- dential or Vice-Presidential electors, whether or not such individual or electors are selected, nominated, elected, or appointed. § 527 Page 401
TITLE 26-INTERNAL REVENUE CODE (3) Contributions The term "contributions" has the meaning given to such term by section 271(b)(2). (4) Expenditures The term "expenditures" has the meaning given to such term by section 271(b)(3). (f) Exempt organization, which is not political orga- nization, must include certain amounts in gross income (1) In general If an organization described in section 501(c) which is exempt from tax under sec- tion 501(a) expends any amount during the taxable year directly (or through another or- ganization) for an exempt function (within the meaning of subsection (e)(2)), then, not- withstanding any other provision of law, there shall be included in the gross income of such organization for the taxable year, and shall be subject to tax under subsection (b) as if it constituted political organization taxable income, an amount equal to the lesser of- (A) the net investment income of such or- ganization for the taxable year, or (B) the aggregate amount so expended during the taxable year for such an exempt function. (2) Net invw:stment income For purposes of this subsection, the term "net investment income" means the excess of- (A) the gross amount of income from in- terest, dividends, rents, and royalties, plus the excess (if any) of gains from the sale or exchange of assets over the losses from the sale or exchange of assets, over (B) the deductions allowed by this chap- ter which are directly connected with the production of the income referred to in sub- paragraph (A). For purposes of the preceding sentence, there shall not be taken into account items taken into account for purposes of the tax imposed by section 511 (relating to tax on unrelated business income). (3) Certain separate segregated funds For purposes of this subsection and subsec- tion (e)(1), a separate segregated fund (within the meaning of section 610 of title 18) or of any similar State statute, or within the mean- ing of any State statute which permits the segregation of dues moneys for exempt func- tions (within the meaning of subsection (e)(2)) which is maintained by an organiza- tion described in section 501(c) which is exempt from tax under section 501(a) shall be treated as a separate organization. (g) Treatment of newsletter funds (1) In general For purposes of this section, a fund estab- lished and maintained by an individual who holds, has been elected to, or is a candidate (within the meaning of section 41(c)(2)) for nomination or election to, any Federal, State, or local elective public office, for use by such individual exclusively for the preparation and circulation of such individual's newsletter shall, except as provided in paragraph (2), be treated as if such fund constituted a political organization. (2) Additional modifications In the case of any fund described in para- graph (1)- (A) the exempt function shall be only the preparation and circulation of the newslet- ter, and (B) the specific deduction provided by subsection (c)(2)(A) shall not be allowed. (Added Pub. L. 93-625, § 10(a), Jan. 3, 1975, 88 Stat. 2116, and amended Pub. L. 94-455, title XIX, § 1901(b)(33)(C), Oct. 4, 1976, 90 Stat. 1801.) REFERENCES IN TEXT Section 610 of title 18, referred to in subsec. (f)(3). was repealed by Pub. L. 94-283, title II, § 201(a), May 11. 1976, 90 Stat. 496. See, now, section 441b of Title 2, The Congress. AMENDMENTS 1976-Subsec. (b)(2). Pub. L. 94-455 substituted "net capital gain" for "net section 1201 gain" following "or- ganization has a". EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (b)(2) of this section by sec- tion 1901(b)(33)(C) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31. 1976, see section 1901(d) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE Section 10(e) of Pub. L. 93-625 provided that: "The amendments made by subsections (a), (b), (c), and (d) [enacting this section and amending sections 501 and 6012 of this title] shall apply to taxable years begin- ning after December 31, 1974." SECTION REiUumD TO IN OTHER SECTIONS This section is referred to in sections 84, 2501, 6012 of this title. PART VII-CERTAIN HOMEOWNERS ASSOCIATIONS Sec. 528. Certain homeowners associations. AMENDMENTS 1976-Pub. L. 94-455, title XXI, §2101(a), Oct. 4, 1976, 90 Stat. 1897, added the Part heading and analy- sis for Part VII. § 528. Certain homeowners associations (a) General rule A hcriteowners association (as defined in sub- section (c)) shall be subject to taxation under this subtitle only to the extent provided in this section. A homeowners association shall be con- sidered an organization exempt from income taxes for the purpose of any law which refers to organizations exempt from income taxes. (b) Tax imposed (1) In general A tax is hereby imposed for each taxable year on the homeowners association taxable income of every homeowners association. Such tax shall consist of a normal tax and surtax computed as provided in section 11 as though the homeowners association were a corporation and as though the homeowners Page 402 § 528
TITLE 26-INTERNAL REVENUE CODE association taxable income were the taxable income referred to in section 11. For purposes of this subsection, the surtax exemption pro- vided by section 11(d) shall not be allowed. (2) Alternative tax in case of capital gains If for any taxable year any homeowners as- sociation has a net capital gain, then in lieu of the tax imposed by paragraph (1), there is hereby imposed a tax (if such tax is less that 1 the tax imposed by paragraph (1)) which shall consist of the sum of- (A) a partial tax, computed as provided by paragraph (1), on the homeowners associ- ation taxable income determined by reduc- ing such income by the amount of such gain, and (B) a tax of 30 percent of such gain. (c) Homeowners association defined For purposes of this section- (1) Homeowners association The term "homeowners association" means an organization which is a condominium man- agement association or a residential real estate management association if- (A) such organization is organized and op- erated to provide for the acquisition, con- struction, management, maintenance, and care of association property, (B) 60 percent or more of the gross income of such organization for the taxable year consists solely of amounts received as membership dues, fees, or assessments from- (i) owners of residential units in the case of a condominium management asso- ciation, or (ii) owners of residences or residential lots in the case of a residential real estate management association. (C) 90 percent or more of the expendi- tures of the organization for the taxable year are expenditures for the acquisition, construction, management, maintenance, and care of association property, (D) no part of the net earnings of such or- ganization inures (other than by acquiring, constructing, or providing management, maintenance, and care of association prop- erty, and other than by a rebate of excess membership dues, fees, or assessments) to the benefit of any private shareholder or in- dividual, and E) such organization elects (at such time and in such manner as the Secretary by reg- ulations prescribes) to have this section apply for the taxable year. (2) Condominium management association The term "condominium management asso- ciation" means any organization meeting the requirement of subparagraph (A) of para- graph (1) with respect to a condominium pro- ject substantially all of the units of which are used as residences. (3) Residential real estate management association The term "residential real estate manage- ment association" means any organization meeting the requirements of subparagraph (A) of paragraph (1) with respect to a subdivi- ISo in original. Probably should read "than". sion, development, or similar area substantial- ly all the lots or buildings of which may only be used by individuals for residences. (4) Association property The term "association property" means- (A) property held by the organization, (B) property commonly held by the mem- bers of the organization, (C) property within the organization pri- vately held by the members of the organiza- tion, and (D) property owned by a governmental unit and used for the benefit of residents of such unit. Cd) Homeowners association taxable income defined (1) Taxable income defined For purposes of this section, the ho- meowners association taxable income of any organization for any taxable year is an amount equal to the excess (if any) of-- (A) the gross income for the taxable year (excluding any exempt function income), over (B) the deductions allowed by this chap- ter which are directly connected with the production of the gross income (excluding exempt function income), computed with the modifications provided in paragraph (2). (2) Modifications For purposes of this subsection- (A) there shall be allowed a specific de- duction of $100, (B) no net operating loss deduction shall be allowed under section 172, and (C) no deduction shall be allowed under part VIII of subchapter B (relating to spe- cial deductions for corporations). (3) Exempt function income For purposes of this subsection, the term "exempt function income" means any amount received as membership dues, fees, or assess- ments from- (A) owners of condominium housing units in the case of a condominium management association, or (B) owners of real property in the case of a residential real estate management associ- ation. (Added Pub. L. 94-455, title XXI, § 2101(a), Oct. 4, 1976, 90 Stat. 1897.) ErFEcTIvE DATE Section 2101(e) of Pub. L. 94-455 provided that: "Except as provided in subsection (f)(2) [set out as a note under section 216 of this title], the amendments made by this section [enacting this section and section 6012(a)(7) of this title and amending section 216(c) of this title] shall apply to taxable years beginning after December 31, 1973." SECTION REFERE TO IN OTHER SECTIONS This section is referred to in section 6012 of this title. Subchapter G-Corporations Used to Avoid Income Tax on Shareholders Part I. Corporations improperly accumulating surplus. II. Personal holding companies. III. Foreign personal holding companies. IV. Deduction for dividends paid. Page 403 § 528
TITLE 26-INTERNAL REVENUE CODE PART I-CORPORATIONS IMPROPERLY ACCUMULATING SURPLUS Sec. 531. Imposition of accumulated earnings tax. 532. Corporations subject to accumulated earnings tax. 533. Evidence of purpose to avoid income tax. 534. Burden of proof. 535. Accumulated taxable income. 536. Income not placed on annual basis. 537. Reasonable needs of the business. PART REFERuE TO IN OTHE SECTIONS This part is referred to in section 12 of this title. § 531. Imposition of accumulated earnings tax In addition to other taxes imposed by this chapter, there is hereby imposed for each tax- able year on the accumulated taxable income (as defined in section 535) of every corporation described in section 532, an accumulated earn- ings tax equal to the sum of- (1) 27V2 percent of the accumulated taxable income not in excess of $100,000, plus (2) 38V2 percent of the accumulated taxable income in excess of $100,000. (Aug. 16, 1954, ch. 736, 68A Stat. 179.) CROSS REFERENCES Adjustments for- Accumulated taxable income as excluding deduc- tion for tax imposed by this section, see section 535 of this title. Undistributed foreign personal holding company income as excluding deduction for tax imposed by this section, see section 556 of this title. Undistributed personal holding company income as excluding deduction for tax imposed by this section, see section 545 of this tit~e. Foreign tax credit disallowed for tax imposed by this section, see section 901 of this title. Notification by Secretary informing taxpayer that proposed notice of deficiency includes an amount with respect to tax imposed by this section, see section 534 of this title. Provisions for computation of tax on change of annual accounting period upon making returns for period less than 12 months as inapplicable in computa- tion of tax imposed by this section, see section 536 of this title. Recovery exclusion with respect to recovery of bad debts, prior taxes, and delinquency amounts, see sec- tion 111 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 12, 46, 50A, 56, 111, 532, 534, 535, 536, 545, 556, 563, 901 of this title; title 46 section 1177. § 532. Corporations subject to accumulated earnings tax (a) General rule The accumulated earnings tax imposed by section 531 shall apply to every corporation (other than those described in subsection (b)) formed or availed of for the purpose of avoiding the income tax with respect to its shareholders or the shareholders of any other corporation, by permitting earnings and profits to accumu- late instead of being divided or distributed. (b) Exceptions The accumulated earnings tax imposed by section 531 shall not apply to- (1) a personal holding company (as defined in section 542), (2) a foreign personal holding company (as defined in section 552), or (3) a corporation exempt from tax under subchapter F (section 501 and following). (Aug. 16, 1954, ch. 736, 68A Stat. 179.) CRoss REFERENCES Construction reserve fund deposits under Merchant Marine Act of 1936 as not constituting accumulation of earnings or profits, see section 1161 of Title 46, Shipping. Evidence of purpose to avoid income tax, see section 533 of this title. SECTION REFERUEM TO IN OTHER SECTIONS This section is referred to in sections 531, 533 of this title. § 533. Evidence of purpose to avoid income tax (a) Unreasonable accumulation determinative of pur- pose For purposes of section 532, the fact that the earnings and profits of a corporation are per- mitted to accumulate beyond the reasonable needs of the business shall be determinative of the purpose to avoid the income tax with re- spect to shareholders, unless the corporation by the preponderance of the evidence shall prove to the contrary. (b) Holding or investment company The fact that any corporation is a mere hold- ing or investment company shall be prima facie evidence of the purpose to avoid the income tax with respect to shareholders. (Aug. 16, 1954, ch. 736, 68A Stat. 179.) CROSS REFERENCEs Reasonable needs of the business, see section 537 of this title. § 534. Burden of proof (a) General rule In any proceeding before the Tax Court in- volving a notice of deficiency based in whole or in part on the allegation that all or any part of the earnings and profits have been permitted to accumulate beyond the reasonable needs of the business, the burden of proof* with respect to such allegation shall- (1) if notification has not been sent in ac- cordance with subsection (b), be on the Secre- tary, or (2) if the taxpayer has submitted the state- ment described in subsection (c), be on the Secretary with respect to the grounds set forth in such statement in accordance with the provisions of such subsection. (b) Notification by Secretary Before mailing the notice of deficiency re- ferred to in subsection (a), the Secretary may send by certified mail or registered mail a noti- fication informing the taxpayer that the pro- posed notice of deficiency includes an amount with respect to the accumulated earnings tax imposed by section 531. (c) Statement by taxpayer Within such time (but not less than 30 days) after the mailing of the notification described in subsection (b) as the Secretary may prescribe by regulations, the taxpayer may submit a § 531 Page 404
TITLE 26-INTERNAL REVENUE CODE statement on the grounds (together with facts sufficient to show the basis thereof) on which the taxpayer relies to establish that all or any part of the earnings and profits have not been permitted to accumulate beyond the reasonable needs of the business. (d) Jeopardy assessment If pursuant to section 6861(a) a Jeopardy as- sessment is made before the mailing of the notice of deficiency referred to in subsection (a), for purposes of this section such notice of deficiency shall, to the extent that it informs the taxpayer that such deficiency includes the accumulated earnings tax imposed by section 531, constitute the notification described in subsection (b), and in that event the statement described in subsection (c) may be included in the taxpayer's petition to the Tax Court. (Aug. 16, 1954, ch. 736, 68A Stat. 180; Aug. 11, 1955, ch. 805, §§ 4, 5, 69 Stat. 690, 691; Sept. 2, 1958, Pub. L. 85-866, title I, §89(b), 72 Stat. 1665; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(a)(73), 1906(b)(13)(A), 90 Stat. 1776, 1834.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" in pars. (I) and (2). Subsec. (b). Pub. L. 94-455, §§ 1901(a)(73)(A), 1906(b)(13)(A), struck out "In the case of a notice of deficiency to which subsection (e)(2) applies and which is mailed on or before the 30th day after the date of enactment of this sentence, the notification re- ferred to in the preceding sentence may be mailed at any time on or before such 30th day" following "sec- tion 531", and "or his delegate" following "Secretary". Subsec. (c). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (e). Pub. L. 94-455, § 1901(a)(73)(B), struck out subsec. (e) relating to application of provisions of section. 1958-Subsec. (b). Pub. L. 85-866 inserted "certified mail or" preceding "registered mail". 1955-Subsec. (b). Act Aug. 11, 1955, §5, added second sentence relating to notice of deficiency to which subsec. (e)(2) applies. Subsec. (e). Act Aug. 11, 1955, § 4, permitted, in cer- tain instances, application of this section to cases in- volving taxable years to which prior revenue laws apply. EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (b), (e) by section 1901(a)(73) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out a3 an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1958 AMENDMENT Amendment of subsec. (b) by Pub. L. 85-866 applica- ble only if mailing occurred after Sept. 2. 1958, see sec- tion 89(d) of Pub. L. 85-866, set out as an Effective Date of 1958 Amendment note under section 7502 of this title. § 535. Accumulated taxable income (a) Definition For purposes of this subtitle, the term "accu- mulated taxable income" means the taxable income, adjusted in the manner provided in subsection (b). minus the sum of the dividends paid deduction (as defined in section 561) and the accumulated earnings credit (as defined in subsection (c)). (b) Adjustments to taxable income For purposes of subsection (a), taxable income shall be adjusted as follows: (1) Taxes There shall be allowed as a deduction Fed- eral income and excess profits taxes and income, war profits, and excess profits taxes of foreign countries and possessions of the United States (to the extent not allowable as a deduction under section 275(a)(4)), accrued during the taxable year or deemed to be paid by a domestic corporation under section 902(a) or 960(a)(1) for the taxable year, but not including the accumulated earnings tax imposed by section 531, the personal holding company tax imposed by section 541, or the taxes imposed by corresponding sections of a prior income tax law. (2) Charitable contributions The deduction for charitable contributions provided under section 170 shall be allowed without regard to section 170(b)(2). (3) Special deductions disallowed The special deductions for corporations pro- vided in part VIII (except section 248) of sub- chapter B (section 241 and following, relating to the deduction for dividends received by corporations, etc.) shall not be allowed. (4) Net operating loss The net operating loss deduction provided in section 172 shall not be allowed. (5) Capital losses There shall be allowed as deductions losses from sales or exchanges of capital assets during the taxable year which are disallowed as deductions under section 1211(a). (6) Net capital gains There shall be allowed as a deduction the net capital gain for the taxable year (deter- mined without regard to the capital loss car- ryback or carryover provided in section 1212) minus the taxes imposed by this subtitle at- tributable to such net capital gain. The taxes attributable to such net capital gain shall be an amount equal to the difference between- (A) the taxes imposed by this subtitle (except the tax imposed by this part) for such year, and (B) such taxes computed for such year without including in taxable income the net capital gain for the taxable year (deter- mined with regard to the capital loss carry- back and carryover provided in section 1212). (7) Capital loss No allowance shall be made for the capital loss carryback or carryover provided in sec- tion 1212. (c) Accumulated earnings credit (I) General rule For purposes of subsection (a), in the case of a corporation other than a mere holding or investment company the accumulated earn- ings credit is (A) an amount equal to such part of the earnings and profits for the tax- able year as are retained for the reasonable needs of the business, minus (B) the deduc- tion allowed by subsection (b)(6). For pur- 71-999 0 - 78 - 28 (Vol. 7) Page 405 § 535
TITLE 26-INTERNAL REVENUE CODE poses of this paragraph, the amount of the earnings and profits for the taxable year which are retained is the amount by which the earnings and profits for the taxable year exceed the dividends paid deduction (as de- fined in section 561) for such year. (2) Minimum credit The credit allowable under paragraph (1) shall in no case be less than the amount by which $150,000 exceeds the accumulated earnings and profits of the corporation at the close of the preceding taxable year. (3) Holding and investment companies In the case of a corporation which is a mere holding or investment company, the accumu- lated earnings credit is the amount (if any) by which $150,000 exceeds the accumulated earnings and profits of the corporation at the close of the preceding taxable year. (4) Accumulated earnings and profits For purposes of paragraphs (2) and (3), the accumulated earnings and profits at the close of the preceding taxable year shall be re- duced by the dividends which under section 563(a) (relating to dividends paid after the close of the taxable year) are considered as paid during such taxable year. (5) Cross reference For denial of credit provided in paragraph (2) or (3) where multiple corporations are formed to avoid tax, see section 1551, and for limitation on such credit in the case of certain controlled corporations, see sections 1561 and 1564. (Aug. 16, 1954, ch. 736, 68A Stat. 180; Sept. 2, 1958, Pub. L. 85-866, title I, § 31, title II, § 205(a), 72 Stat. 1631, 1680; Feb. 2, 1962, Pub. L. 87-403, § 3(b), 76 Stat. 6; Oct. 16, 1962, Pub. L. 87-834, § 9(d)(2), 76 Stat. 1001; Feb. 26, 1964, Pub. L. 88-272, title II, § 207(b)(4), 78 Stat. 42; Dec. 30, 1969, Pub. L. 91-172, title IV, § 401(b)(2)(C), title V, § 512(f)(5), (6), 83 Stat. 602, 641; Mar. 29, 1975, Pub. L. 94-12, title III, § 304(a), 89 Stat. 45; Oct. 4, 1976, Pub. L. 94-455, title X, § 1033(b)(3), title XIX, §§ 1901(a)(74), (b)(20)(A), (32)(C), (33)(D), 1906(b)(13)(A), 90 Stat. 1628, 1777, 1797, 1800, 1801, 1834.) AMENDmExTS 1976--Subsec. (b)(1). Pub. L. 94-455. §§ 1033(b)(3), 1901(a)(74), struck out "(other than the excess profits tax imposed by subehapter E of chapter 2 of the Inter- nal Revenue Code of 1939 for taxable years beginning after December 31, 1940)" following "income and excess profits taxes", and substituted "section 902(a) or 960(a)(1)" for "section 902(a)(1) or 960(a)(1)(C)" following "domestic corporation under". Subsec. (b)(6). Pub. L. 94-455, § 1901(b)(33)(D), sub- stituted "Net" for "Long-term" following "(6)". Subsec. (b)(8). Pub. L. 94-455, § 1901(b)(20)(A), struck out par. (8) which related to allowance of de- duction by bank affiliates. Subsec. (b)(9). Pub. L. 94-455, § 1901(b)(32)(C), struck out subsec. (b)(9) relating to allowance of de- duction for distributions of divested stock. Subsec. (b)(10). Pub. L. 94-455, § 1901(b)(32)(C), struck out subsec. (b)(10) relating to special adjust- ment on disposition of antitrust stock received as a dividend. 1975-Subsecs. (c)(2), (3). Pub. L. 94-12 substituted "$150,000" for "$100,000" in pars. (2) and (3). 1969-Subsec. (b)(6). Pub. L. 91-172, § 512(f)(5), sub- stituted "capital loss carryback or carryover" for "cap- ital loss carryover" and "capital loss carryback and carryover" for "capital loss carryover" in subpar. (B). Subsec. (b)(7). Pub. L. 91-172, § 512(f)(6), substituted "Capital loss" for "Capital loss carryover" in par. catchllne and "capital loss carryback or carryover" for "capital loss carryover" in text. Subsec. (c)(5). Pub. L. 91-172, 1 401(b)(2)(C), substi- tuted "section' 1551, and for limitation on such credit in the case of certain controlled corporations, see sec. tions 1561 and 1564" for "section 1551". 1964-Subsec. (b)(1). Pub. L. 88-272 substituted "sec- tion 275(a)(4)" for "section 164(b)(6)". 1962-Subsec. (b)(1). Pub. L. 87-834 substituted "ac- crued during the taxable year or deemed to be paid by a domestic corporation under section 902(a)(1) or 960(a)(1)(C) for the taxable year" for "accrued during the taxable year". Subsecs. (b)(9), (10). Pub. L. 87-403 added subsec. (b) (9), (10). 1958-Subsec. (b)(2). Pub. .. 85-866, § 31(a), deleted following "without regard to" the words "the limita- tion in". Subsec. (b)(6)(B). Pub. L. 85-866, § 31(a), substituted "in taxable income the excess of the net long-term capital gain for the taxable year over the net short- term capital loss for such year (determined without regard to the capital loss carryover provided in section 1212)" for "such excess in taxable income". Subsec. (c). Pub. L. 85-866, § 205(a), substituted "$100,000" for "$60,000" in pars. (2) and (3). EnrcTivE DATE OF 1976 AMnMmErT Effective date of amendment of subsec. (b)(1) by Pub. L. 94-455, §1033(b)(3), see section 1033(c) of Pub. L. 94-455, set out as an Effective Date of 1976 Amend- ment note under section 902 of this title. Amendment of subsec. (b) by section 1901(a)(74), (b)(20)(A), (b)(32)(C), (b)(33)(D), of Pub. L. 94-455, ap- plicable with respect to taxable years beginning after Dec. 31, 1976. see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. E cTxvz DATE OF 1975 AMENDMENT Section 305(c) of Pub. L. 94-12 provided that: "The amendments made by section 304 [amending sections 243, 535, 1551, and 1561(a)(2) of this title] apply to taxable years beginning after December 31, 1974." ErFECTIVE DATE or 1969 AMENDMEN Amendment of subsec. (b)(6), (7) by section 512(f) (5), (6) of Pub. L. 91-172 applicable with respect to net capital losses sustained in taxable years beginning after Dec. 31, 1969, see section 512(g) of Pub. L. 91- 172, set out as an Effective Date of 1969 Amendment note under section 1212 of this title. Amendment of subsec. (c)(5) by section 401(b)(2)(C) of Pub. L. 91-172 applicable with respect to taxable years beginning after Dec. 31, 1969, see section 401(h)(2) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 1561 of this title. EmECTivE DATE OF 1964 AmENDMmcr Amendment by Pub. L. 88-272 applicable to taxable years beginning after Dec. 31, 1963, see section 207(c) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 164 of this title. EFrr vE DATE OF 1962 ANDMENT Amendment of subsec. (b)(1) by Pub. L. 87-834 appli. cable in respect of any distribution received by a do. mestic corporation after Dec. 31, 1964, and in respect of any distribution received by a domestic corporation before Jan. 1, 1965, in a taxable year of such corpora- tion beginning after Dec. 31, 1962, but only to the extent that such distribution is made out of the accu- mulated profits of a foreign corporation for a taxable year (of such foreign corporation) beginning after Dec. 31, 1962, see section 9(e) of Pub. L. 87-834, set out § 535 Page 406
TITLE 26-INTERNAL REVENUE CODE as an Effective Date of 1962 Amendment note under section 902 of this title. Amendment by Pub. L. 87-403 applicable only with respect to distributions made after Feb. 2, 1962, see section 3(g) of Pub. L. 87-403, set out as an Effective Date of 1962 Amendment note under section 312 of this title. E _ nrxvz DATE or 1958 AMmmrawrr Amendment of subsecs. (b)(2) and (b)(6)(B) of this section by Pub. L. 85-866 applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 1(c) of Pub. L. 85-866, set out as an Effective Date of 1958 Amendment note under sec- tion 165 of this title. Section 205(b) of Pub. L. 85-866 provided that: "The amendments made by subsection (a) [to subsec. (c)(2), (3) of this section and section 1551 of this title] shall apply with respect to taxable years beginning after December 31, 1957." CROSS REnamczs Provisions respecting disposal of coal with retained economic interest as inapplicable in determining amount of deduction under subsection (b)(6) of this section, see section 631 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 243, 531, 631, 1551, 1561, 1564 of this title. § 536. Income not placed on annual basis Section 443(b) (relating to computation of tax on change of annual accounting period) shall not apply in the computation of the accumulat- ed earnings tax imposed by section 531. (Aug. 16, 1954, ch. 736, 68A Stat. 182.) CRoss REFERENCES Personal holding company tax computation as not subject to section 443(b), see section 546 of this title. Regulated investment company taxable income com- putation as not subject to section 443(b), see section 852 of this title. Undistributed foreign personal holding company income computation as not subject to section 443(b), see section 557 of this title. SECTION REFERM TO IN OTHER SECTIONS This section is referred to in sections 443, 512 of this title. § 537, Reasonable needs of the business (a) General rule For purposes of this part, the term "reason- able needs of the business" Includes- (1) the reasonably anticipated needs of the business, (2) the section 303 redemption needs of the business, and (3) the excess business holdings redemption needs of the business. (b) Special rules For purposes of subsection (a)- (1) Section 303 redemption needs The term "section 303 redemption needs" means, with respect to the taxable year of the corporation in which a shareholder of the corporation died or any taxable year there- after, the amount needed (or reasonably an- ticipated to be needed) to make a redemption of stock included in the gross estate of the de- cedent (but not in excess of the maximum amount of stock to which section 303(a) may apply). (2) Excess business holdings redemption needs The term "excess business holdings redemp- tion needs" means the amount needed (or reasonably anticipated to be needed) to redeem from a private foundation stock which- (A) such foundation held on May 26, 1969 (or which was received by such foundation pursuant to a will or irrevocable trust to which section 4943(c)(5) applies), and (B) constituted excess business holdings on May 26, 1969, or would have constituted excess business holdings as of such date if there were taken into account (i) stock re- ceived pursuant to a will or trust described in subparagraph (A), and (ii) the reduction in the total outstanding stock of the corpo- ration which would have resulted solely from the redemption of stock held by the private foundation. (3) Obligations incurred to make redemptions In applying paragraphs (1) and (2), the dis- charge of any obligation incurred to make a redemption described in such paragraphs shall be treated as the making of such re- demption. (4) No inference as to prior taxable years The application of this part to any taxable year before the first taxable year specified In paragraph (1) shall be made without regard to the fact that distributions in redemption coming within the terms of such paragraphs were subsequently made. (Aug. 16, 1954, ch. 736, 68A Stat. 182; Dec. 30, 1969, Pub. L. 91-172, title IX, § 906(a), 83 Stat. 714; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(a)(75), 90 Stat. 1777.) AMEmMEzrs 1976-Subsec. (b)(2). Pub. L. 94-455, § 1901(a)(75)(A), struck out "with respect to taxable years of the corpo- ration ending after May 26, 1969" following 'redemp- tion needs' means". Subsec. (b)(4). Pub. L. 94-455, § 1901(a)(75)(B), struck out "or (2)" following "paragraph (1)". 1969-Pub. L. 91-172 designated existing provisions as subsec. (a)(1), and added subsecs. (a)(2), (3) and (b). EFFECTIvE DATE OF 1976 AMENDMENT Amendment of subsecs. (b)(2), (b)(4) by section 1901(a)(75)(A), (B) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Section 906(b) of Pub. L. 91-172 provided that: "The amendment made by subsection (a) [adding subsecs. (a)(2), (3) and (b of this section] shall apply to the tax imposed under section 531 of the Internal Rev- enue Code of 1954 [section 531 of this title] with re- spect to taxable years ending after May 26, 1969." CRoss REFERENCES Unreasonable accumulation determinative of pur- pose to avoid income tax, see section 533 of this title. SECTION R ERUM TO IN OTHER SECTIONS This section is referred to in section 311 of this title. Page 407 § 537
TITLE 26-INTERNAL REVENUE CODE PART II-PERSONAL HOLDING "COMPANIES Sec. 541. Imposition of personal holding company tax. 542. Definition of personal holding company. 543. Personal holding company income. 544, Rules for determining stock ownership. 545. Undistributed personal holding company income. 546, Income not placed on annual basis. 547. Deduction for deficiency dividends. PART RE UtM TO IN OTHER SECTIONS This part is referred to in section 12 of this title. § 541. Imposition of personal holding company tax In addition to other taxes imposed by this chapter, there is hereby imposed for each tax- able year on the undistributed personal holding company income (as defined in section 545) of every personal holding company (as defined in section 542) a personal holding company tax equal to 70 percent of the undistributed person- al holding company income. (Aug. 16, 1954, ch. 736, 68A Stat. 182; Feb. 26, 1964, Pub. L. 88-272, title II, § 225(a), 78 Stat. 79.) AMENDmENTS 1964-Pub. L. 88-272 reduced the tax from 75 per- cent of undistributed income not in excess of $2,000, and 85 percent when in excess of $2,000, to 70 percent. EFEcTivE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272 applicable to taxable years beginning after Dec. 31, 1963, see section 225(1) of Pub. L. 88-272 set out as an Effective Date of 1964 Amendment note under section 316 of this title. CROSS REFERENCES Adjustments for- Accumulated taxable income as excluding deduc. tion for tax imposed by this section, see section 535 of this title. Undistributed foreign personal holding company income as excluding deduction for tax imposed by this section, see section 556 of this title. Undistributed personal holding company income as excluding deduction for tax imposed by this section, see section 545 of this title. Liquidations before Jan. 1, 1966, see section 225(h) of Pub. L. 88-272, set out as a note under section 333 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 46, 50A, 56, 111, 535, 545, 546, 547, 556. 563, 882, 901, 992, 6683 of this title. § 542. Definition of personal holding company (a) General rule For purposes of this subtitle, the term "per- sonal holding company" means any corporation (other than a corporation described in subsec- tion (c)) if- (1) Adjusted ordinary gross income requirement At least 60 percent of its adjusted ordinary gross income (as defined in section 543(b)(2)) for the taxable year is personal holding com- pany income (as defined in section 543(a)), and (2) Stock ownership requirement At any time during the last half of the tax- able year more than 50 percent in value of its outstanding stock is owned, directly or indi- rectly, by or for not more than 5 individuals. For purposes of this paragraph, an organiza- tion described in section 401(a), 501(c)(17), or 509(a) or a portion of a trust permanently set aside or to be used exclusively for the pur- poses described in section 642(c) or a corre- sponding provision of a prior income tax law shall be considered an individual. (b) Corporations filing consolidated returns (1) General rule In the case of an affiliated group of corpo- rations filing or required to file a consolidated return under section 1501 for any taxable year, the adjusted ordinary gross income re- quirement of subsection (a)(1) of this section shall, except as provided in paragraphs (2) and (3), be applied for such year with respect to the consolidated adjusted ordinary gross income and the consolidated personal holding company income of the affiliated group. No member of such an affiliated group shall be considered to meet such adjusted ordinary gross income requirement unless the affili- ated group meets such requirement. (2) Ineligible affiliated group Paragraph (1) shall not apply to an affili- ated group of corporations if- (A) any member of the affiliated group of corporations (including the common parent corporation) derived 10 percent or more of its adjusted ordinary gross income for the taxable year from sources outside the affili- ated group, and (B) 80 percent or more of the amount de- scribed in subparagraph (A) consists of per- sonal holding company income (as defined in section 543). For purposes of this paragraph, section 543 shall be applied as if the amount described in subparagraph (A) were the adjusted ordinary gross income of the corporation. (3) Excluded corporations Paragraph (1) shall not apply to an affili- ated group of corporations if any member of the affiliated group (including the common parent corporation) is a corporation excluded from the definition of personal holding com- pany under subsection (c). (4) Certain dividend income received by a common parent In applying paragraph (2) (A) and (B), per- sonal holding company income and adjusted ordinary gross income shall not include divi- dends received by a common parent corpora- tion from another corporation if- (A) the common parent corporation owns, directly or indirectly, more than 50 percent of the outstanding voting stock of such other corporation, and (B) such other corporation is not a per- sonal holding company for the taxable year in which the dividends are paid. (5) Certain dividend income received from a nonin- cludible life insurance company In the case of an affiliated group of corpo- rations filing or required to file a consolidated return under section 1501 for any taxable year, there shall be excluded from consolidat- ed personal holding company income and con- Page 408
TITLE 26-INTERNAL REVENUE CODE solidated adjusted ordinary gross income for purposes of this part dividends received by a member of the affiliated group from a life in- surance company taxable under section 802 that is not a member of the affiliated group solely by reason of the application of para- graph (2) of subsection (b) of section 1504. (c) Exceptions The term "personal holding company" as de- fined in subsection (a) does not include- (1) a corporation exempt from tax under subchapter F (sec. 501 and following); (2) a bank as defined in section 581, or a do- mestic building and loan association within the meaning of sect!on 7701(a)(19); (3) a life insurance company; (4) a surety company; (5) a foreign personal holding company as defined in section 552; (6) a lending or finance company if- (A) 60 percent or more of its ordinary gross income (as defined in section 543(b)(1)) is derived directly from the active and regular conduct of a lending or finance business; (B) the personal holding company income for the taxable year (computed without regard to income described in subsection (d)(3) and income derived directly from the active and regular conduct of a lending or finance business, and computed by includ- ing as personal holding company income the entire amount of the gross income from rents, royalties, produced film rents, and compensation for use of corporate property by shareholders) is not more than 20 per- cent of the ordinary gross income; (C) the sum of the deductions which are directly allocable to the active and regular conduct of its lending or finance business equals or exceeds the sum of- (i) 15 percent of so much of the ordi- nary gross income derived therefrom as does not exceed $500,000, plus (it) 5 percent of so much of the ordinary gross income derived therefrom as ex- ceeds $500,000 but not $1,000,000; and (D) the loans to a person who is a share- holder in such company during the taxable year by or for whom 10 percent or more in value of its outstanding stock is owned di- rectly or indirectly (including, in the case of an individual, stock owned by members of his family as defined in section 544(a)(2)), outstanding at any time during such year do not exceed $5,000 in principal amount; (7) a foreign corporation (other than a cor- poration which has income to which section 543(a)(7) applies for the taxable year), if all of its stock outstanding during the last half of the taxable year is owned by nonresident alien individuals, whether directly or indirect- ly through foreign estates, foreign trusts, for- eign partnerships, or other foreign corpora- tions; (8) A small business investment company which is licensed by the Small Business; Ad- ministration and operating under the Small Business Investment Act of 1958 (15 U.S.C. 661 and following) and which is actively en- gaged in the business of providing funds to small business concerns under that Act. This paragraph shall not apply if any share holder of the small business investment company owns at any time during the taxable year di- rectly or indirectly (including, in the case of an individual, ownership by the members of his family as defined in section 544(a)(2)) a 5 per centum or more proprietary interest in a small business concern to which funds are provided by the investment company or 5 per centum or more in value of the outstanding stock of such concern. (d) Special rules for applying subsection (c)(6) (1) Lending or finance business defined (A) In general Except as provided in subparagraph (B), for purposes of subsection (c)(6), the term "lending or finance business" means a busi- ness of- (I) making loans, (ii) purchasing or discounting accounts receivable, notes, or installment obliga- tions, (i) rendering services or making facili- ties available in connection with activities described in clauses (I) and (it) carried on by the corporation rendering services or making facilities available, or (iv) rendering services or making facili- ties available to another corporation which is engaged in the lending or finance business (within the meaning of this para- graph), if such services or facilities are re- lated to the lending or finance business (within such meaning) of such other cor- poration and such other corporation and the corporation rendering services or making facilities available are members of the same affiliated group (as defined in section 1504). (B) Exceptions For purposes of subparagraph (A), the term "lending or finance business" does not include the business of- (I) making loans, or purchasing or dis- counting accounts receivable, notes, or in- stallment obligations, if (at the time of the loan, purchase, or discount) the re- maining maturity exceeds 60 months, unless the loans, notes, or installment ob- ligations are evidenced or secured by con- tracts of conditional sale, chattel mort- gages, or chattel lease agreements arising out of the sale of goods or services in the course of the borrower's or transferor's trade or business, or (it) making loans evidenced by, or pur- chasing, certificates of indebtedness issued in a series, under a trust indenture, and in registered form or with interest coupons attached. For purposes of clause (I), the " maining maturity shall be treated as including any period for which there may be a renewal or extension under the terms of an option ex- ercisable by the borrower. (2) Business deductions For purposes of subsection (c)(6)(C), the de- ductions which may be taken into account shall include only- Page 409 § 542
TITLE 26-INTERNAL REVENUE CODE (A) deductions which are allowable only by reason of section 162 or section 404, except there shall not be included any such deduction in respect of compensation for personal services rendered by shareholders (including members of the shareholder's family as described in section 544(a)(2)), and (B) deductions allowable under section 167, and deductions allowable under section 164 for real property taxes, but in either case only to the extent that the property with respect to which such deductions are allowable Is used directly in the active and regular conduct of the lending or finance business. (3) Income received from certain affiliated corpora. tions For purposes of subsection (c)(6)(B), in the case of a lending or finance company which meets the requirements of subsection (c)(6)(A), there shall not be treated as person- al holding company income the lawful income received from a corporation which meets the requirements of subsection (c)(6) and which is a member of the same affiliated group (as de- fined in section 1504) of which such company is a member. (Aug. 16, 1954, ch. 736, 68A Stat. 182; Aug. 12, 1955, ch. 871, § 3, 69 Stat. 718; Sept. 23, 1959, Pub. L. 86-376, § 3(a), 73 Stat. 700; Oct. 9, 1962. Pub. L. 87-768, § 1, 76 Stat. 766; Feb. 26, 1964, Pub. L. 88-272, title II, § 225(b), (c), (k)(1), 78 Stat. 79, 80, 93; Nov. 13, 1966, Pub. L. 89-809, title I, § 104(h)(1), 80 Stat. 1559; Dec. 30, 1969, Pub. L. 91-172, title I, § 101(J)(16), 83 Stat. 528; Oct. 26, 1974, Pub. L. 93-480, § 3(a), 88 Stat. 1454; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(a)(76), 90 Stat. 1777.) Ranazxcxs IN TEXT The Small Business Investment Act of 1958, referred to in subsec. (c)(8), is Pub. L. 85-699, Aug. 21, 1958, 72 Stat. 689, as amended, which is classified principally to chapter 14B (§ 661 et seq.) of Title 15, Commerce and Trade. For complete classification of this Act to this Code, see Short Title note set out under section 661 of Title 15 and Tables volume. That Act, referred to in subsec. (c)(8), refers to the Small Business Investment Act of 1958. AMENDMENTS 1978-Subsec. (a)(2). Pub. L. 94-455, § 1901(a)(76)(A), struck out "The preceding sentence shall not apply in the case of an organization or trust organized or cre- ated before July 1, 1950, if at all thes on or after July 1, 1950, and before the close of the taxable year such organization or trust has owned all of the common stock and at least 80 percent of the total number of shares of all other classes of stock of the corporation" following "considered an individual". Subsec. (b)(2). Pub. L. 94-455, § 1901(a)(76)(B), struck out "other than an affiliated group of railroad corporations the common parent of which would be eligible to file a consolidated return under section 141 of the Internal Revenue Act of 1942" following "group of corporations". Subsec. (c)(2). Pub. L. 94-455, § 1901(a)(76)(C), struck out "without regard to subparagraphs (D) and CE) thereof" following "meaning of section 7701(a)(19)". Subsec. (c)(8). Pub. L. 94-455, § 1901(a)(76,D), added "(15 U.S.C. 661 and following)" after "Small Business Investment Act of 1958". 1974-Subsec. (b)(5). Pub. L. 93-480 added subsec. (b)(5). 1969-Subsec. (a)(2). Pub. L. 91-172 substituted "3ec- tion 401(a), 501(c)(17), or 509(a)" for "section 503(b)" in the list of sections that contain the description of organizations that may be considered as individuals for the purpose of establishing stock ownership, and struck out provisions which would have kept an orga- nization or trust created before July 1, 1950, from being so designated if it had been denied exemption under section 504 or an unlimited charitable deduction under section 681(c) of this title. 1966-Subsec. (c)(7). Pub. L. 89-809 substituted re- quirement that the foreign corporation be other than a corporation which has income to which section 543(a)(7) applies for the taxable y'ar for requirement that the foreign corporation's gross income from sources within the United States for the period speci- fied in section 861(a)(2)(B) be less than 50 percent of its total gross income from all sources, and expanded the devices included in methods of indirect ownership to encompass foreign estates, foreign trusts, and for- eign partnerships. 1964-Subsec. (a)(1). Pub. L. 88-272, § 225(b), substi- tuted "60 percent of its adjusted ordinary gross income (as defined in section 543(b)(2)) for the taxable year is personal holding company income (as defined in section 543(a))" for "80 percent of Its gross income for the taxable year is personal holding company income as defined in section 543". Subsec. (b). Pub. L. 88-272, § 225(k)(1), substituted "adjusted ordinary gross income" for "gross income", wherever appearing. Subsec. (c)(2), (6) to (11). Pub. L. 88-272, § 225(c)(1), (2), inserted among the exceptions, domestic building and loan associations within section 7701(a)(19) with. out regard to subpars. (D) and CE) thereof, added par. (6), redesignated former pars. (10) and (11) as (7) and (8), respectively, and omitted former pars. (6) to (9) which related to licensed personal finance companies, lending companies, loan or investment corporations, and finance companies, respectively. Subsec. d). Pub. L. 88-272, 3 225(c)(3), added subsec. d). 1962-Subsec. (c)(7). Pub. L. 87-768 substituted "au- thorized to engage in and actively and regularly en- gaged in the small loan business (consumer finance business)" for "authorized to engage in the small loan business", inserted provisions excepting from the defi. nition of "personal holding company" a lending com- pany that received 80 percent or more of its gross income from lawful income from domestic subsidiary corporations (of which stock possessing at least 80 per. cent of the voting power of all classes of stock and of which at least 80 percent of each class of the nonvot- ing stock is owned directly by such lending company), which are themselves excepted under pars. (6), (7), (8), or (9) of this subsection, increased the maximum amount of the loan where no limit is prescribed from $500 to $1,500, and eliminated provisions which re- quired loans to mature in not more than 38 months, and which limited interest, discount and other charges to not more than an amount equal to simple interest at 3 percent per month payable in advance and com- puted only on unpaid balances. 1959-Subsee. (c)(11). Pub. L. 86-376 added subsec. (c)(11). 1955--Subsec. (a)(2). Act Aug, 12, 1955, §3, added sentence at the end to except from consideration as "individuals" certain charitable foundations created before July 1, 1950. EFOTVE DATm or 1976 A MENzrT Amendment of subsecs. (a)(2), (b)(2), (c)(2), (8) by section 1901(a)(76)CA)-(D) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under sec- tion 2 of this title. Page 410
TITLE 26-INTERNAL REVENUE CODE EFFECTIVE DATE OF 1974 AMENDMENT Section 3(b) of Pub. L. 93-480 provided that: "The amendment made by this section [adding subsec. (b)(5) of this section] shall apply to taxable years be- ginning after December 31, 1973." EFFECTIVE DATE OF 1969 AMENDMENT Amendment by section 101(j)(16) of Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1969, see section 101(k)(2)(B) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 4940 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-809 with respect to tax- able years beginning after Dec. 31, 1966, see section 104(n) of Pub. L. 89-809, set out as an Effective Date of 1966 Amendment note under section 11 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment of subsecs. (a)(1), (b), (c)(6)-(8), and (d) by Pub. L. 88-272 applicable to taxable years begin- ning after Dec. 31, 1963, and amendment of subsec. (c)(2) by Pub. L. 88-272 applicable to taxable years be- ginning after Oct. 16, 1962, see section 225(1) of Pub. L. 88-272, set out as an Effective Date of 1964 Amend- ment note under section 316 of this title. EFFEcTIvE DATE OF 1962 AMENDMENT Section 2 of Pub. L. 87-768 provided that: "The amendment made by the first section of this Act [to subsec. (c)(7) of this section] shall apply with respect to taxable years beginning after December 31, 1961." EFFECTIVE DATE OF 1959 AMENDMENT Section 3(b) of Pub. L. 86-376 provided that: "The amendment made by this section [adding subsec. (c)(11) of this section] shall apply to taxable years be- ginning after December 31, 1958." EFFECTIVE DATE OF 1955 AMENDMENT Section 4 of act Aug. 12, 1955, provided that: "The amendment made by section 3 of this Act [to subsec- tion (a)(2)of this section] shall apply only with respect to taxable years beginning after December 31, 1954." CROSS REFERENCES Accumulated earnings tax as inapplicable to person- al holding company defined in this section, see section 532 of this title. Liquidations before Jan. 1. 1966, see section 225(h) of Pub. L. 88-272, set out as a note under section 333 of this title. Personal holding company dividend defined, see sec- tion 316 of this title. Regulated investment company as meaning any do- mestic corporation other than a personal holding com- pany as defined in this section, see section 851 of this title. Rules for determining stock ownership, see section 544 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 58, 280, 316, 465, 532, 541, 544, 545, 562, 851, 856, 864, 992, 1504 of this title. § 543. Personal holding company income (a) General rule For purposes of this subtitle, the term "per- sonal holding company income" means the por- tion of the adjusted ordinary gross income which consists of: (1) Dividends, etc. Dividends, Interest, royalties (other than mineral, oil, or gas royalties or copyright roy- alties), and annuities. This paragraph shall not apply to- (A) interest constituting rent (as defined in subsection (b)(3)), and (B) Interest on amounts set aside in a re- serve fund under section 511 or 607 of the Merchant Marine Act, 1936 (46 U.S.C. 1161 or 1177). (2) Rents The adjusted income from rents; except that such adjusted income shall not be In- cluded if- (A) such adjusted income constitutes 50 percent or more of the adjusted ordinary gross income, and (B) the sum of- (I) the dividends paid during the taxable year (determined under section 562), (ii) the dividends considered as paid on the last day of the taxable year under sec- tion 563(c) (as limited by the second sen- tence of section 563(b)), and (ili) the consent dividends for the tax- able year (determined under section 565), equals or exceeds the amount, if any, by which the personal holding company income for the taxable year (computed without regard to this paragraph and paragraph (6), and computed by Including as personal hold- ing company Income copyright royalties and the adjusted income from mineral, oil, and gas royalties) exceeds 10 percent of the ordi- nary gross Income. (3) Mineral, olland gas royalties The adjusted income from mineral, oil, and gas royalties; except that such adjusted income shall not be included if- (A) such adjusted income constitutes 50 percent or more of the adjusted ordinary gross Income, (B) the personal holding company income for the taxable year (computed without regard to this paragraph, and computed by including as personal holding company income copyright royalties and the adjusted income from rents) is not more than 10 per- cent of the ordinary gross Income, and (C) the sum of the deductions which are allowable under section 162 (relating to trade or business expenses) other than- (I) deductions for compensation for per- sonal services rendered by the sharehold- ers, and (ii) deductions which are specifically al- lowable under sections other than section 162, equals or exceeds 15 percent of the adjusted ordinary gross Income. (4) Copyright royalties Copyright royalties; except that copyright royalties shall not be included if- (A) such royalties (exclusive of royalties received for the use of, or right to use, copy- rights or interests in copyrights on works created In whole, or in part, by any share- holder) constitute 50 percent or more of the ordinary gross Income, (B) the personal holding company income for the taxable year computed- § 543 Page 411
TITLE 26-INTERNAL REVENUE CODE (i) without regard to copyright royal- ties, other than royalties received for the use of, or right to use, copyrights or inter- ests in copyrights in works created in whole, or in part, by any shareholder owning more than 10 percent of the total outstanding capital stock of the corpora- tion, (ii) without regard to dividends from any corporation in which the taxpayer owns at least 50 percent of all classes of stock entitled to vote and at least 50 per- cent of the total value of all classes of stock and which corporation meets the re- quirements of this subparagraph and sub- paragraphs (A) and (C), and (iii) by including as personal holding company income the adjusted income from rents and the adjusted income from mineral, oil, and gas royalties, is not more than 10 percent of the ordinary gross income, and (C) the sum of the deductions which are properly allocable to such royalties and which are allowable under section 162, other than- (I) deductions for compensation for per. sonal services rendered by the sharehold- ers, (ii) deductions for royalties paid or ac- crued, and (iii) deductions which are specifically al- lowable under sections other than section 162, equals or exceeds 25 percent of the amount by which the ordinary gross income exceeds the sum of the royalties paid or accrued and the amounts allowable as deductions under section 167 (relating to depreciation) with respect to copyright royalties. For purposes of this subsection, the term "copyright royalties" means compensation, however designated, for the use of, or the right to use, copyrights in works protected by copyright issued under title 17 of the United States Code (other than by reason of section 2 or 6 thereof) and to which copyright protec- tion is also extended by the laws of any coun- try other than the United States of America by virtue of any international treaty, conven- tion, or agreement, or interests in any such copyrighted works, and includes payments from any person for performing rights in any such copyrighted work and payments (other than produced fiL, rents as defined in para- graph (5)(B)) received for the use of, or right to use, films. For purposes of this paragraph, the term "shareholder" shall include any person who owns stock within the meaning of section 544. () Produced film rents (A) Produced film rents; except that such rents shall not be included if such rents constitute 50 percent or more of the ordi- nary gross income. (B) For purposes of this section, the term "produced film rents" means payments re- ceived with respect to an interest in a film for the use of, or right to use, such film, but only to the extent that such interest was ac- quired before substantial completion of pro- duction of such film. In the case of a pro- ducer who actively particpates in the pro- duction of the film, such term includes an interest in the proceeds or profits from the film, but only to the extent such interest is attributable to such active participation. (6) Use of corporate property by shareholder (A) Amounts received as compensation (however designated and from whomever received) for the use of, or the right to use, tangible property of the corporation in any case where, at any time during the taxable year, 25 percent or more in value of the out- standing stock of the corporation is owned, directly or indirectly, by or for an individual entitled to the use of the property (whether such right is obtained directly from the cor- poration or by means of a sublease or other arrangement). (B) Subparagraph (A) shall apply only to a corporation which has personal holding company income in excess of 10 percent of its ordinary gross income. (C) For purposes of the limitation in sub- paragraph (B), personal holding company income shall be computed- (i) without regard to subparagraph (A) or paragraph (2), (ii) by excluding amounts received as compensation for the use of (or right to use) intangible property (other than min- eral, oil, or gas royalties or copyright roy- alties) if a substantial part of the tangible property used in connection with such in- tangible property is owned by the corpo- ration and all such tangible and Intangi- ble property is used in the active conduct of a trade or business by an Individual or individuals described in subparagraph (A), and (iii) by including copyright royalties and adjusted income from mineral, oil, and gas royalties. (7 Personal service contracts (A) Amounts received under a contract under which the corporation is to furnish personal services; if some person other than the corporation has the right to designate (by name or by description) the individual who is to perform the services, or if the in- dividual who is to perform the services is designated (by name or by description) in the contract; and (B) amounts received from the sale or other disposition of such a contract. This paragraph shall apply with respect to amounts received for services under a particu- lar contract only if at some time during the taxable year 25 percent or more in value of the outstanding stock of the corporation is owned, directly or indirectly, by or for the in- dividual who has performed, is to perform, or may be designated (by name or by descrip- tion) as the one to perform, such services. (8) Estates and trusts Amounts includible in computing the tax- able income of the corporation under pai t I of subchapter J (sec. 641 and following, relat- ing to estates, trusts, and beneficiaries). Page 412
TITLE 26-INTERNAL REVENUE CODE (b) Definitions For purposes of this part- (1) Ordinary gross income The term "ordinary gross income" means the gross income determined by excluding-- (A) all gains from the sale or other dispo- sition of capital assets, (B) all gains (other than those referred to in subparagraph (A)) from the sale or other disposition of property described in section 1231(b), and (C) in the case of a foreign corporation all of the outstanding stock of which during the last half of the taxable year is owned by nonresident alien Individuals (whether di- rectly or indirectly through foreign estates, foreign trusts, foreign partnerships, or other foreign corporations), all items of income which would, but for this subpara- graph, constitute personal holding company income under any paragraph of subsection (a) other than paragraph (7) thereof: (2) Adjusted ordinary gross income The term "adjusted ordinary gross income" means the ordinary gross income adjusted as follows: (A) Rents From the gross income from rents (as de- fined in the second sentence of paragraph (3) of this subsection) subtract the amount allowable as deductions for- (1) exhaustion, wear and tear, obsoles- cence, and amortization of property other than tangible personal property which is not customarily retained by any one lessee for more than three years, (it) property taxes, (iii) interest, and (iv) rent, to the extent allocable, under regulations prescribed by the Secretary, to such gross income from rents. The amount subtracted under this subparagraph shall not exceed such gross income from rents. (B) Mineral royalties, etc. From the gross income from mineral, oil, and gas royalties described in paragraph (4), and from the gross income from work- ing interests in an oil or gas well, subtract the amount allowable as deductions for- (I) exhaustion, wear and tear, obsoles- pence, amortization, and depletion, (ii) property and severance taxes, (ii1) interest, and (iv) rent, to the extent allocable, under regulations prescribed by the Secretary, to such gross income from royalties or such gross income from working interests in oil or gas wells. The amount subtracted under this subpara- graph with respect to royalties shall not exceed the gross income from such royal- ties, and the amount subtracted under this subparagraph with respect to working inter- ests shall not exceed the gross income from such working interests. (C) Interest There shall be excluded- (i) interest received on a direct obliga- tion of the United States held for sale to customers in the ordinary course of trade or business by a regular dealer who is making a primary market in such obliga- tions, and (ii) interest on a condemnation award, a judgment, and a tax refund. (D) Certain excluded rents From the gross income consisting of com- pensation described in subparagraph (D) of paragraph (3) subtract the amount allowa- ble as deductions for the items described in clauses (I), (ii), (iii), and (iv) of subpara- graph (A) to the extent allocable, under regulations prescribed by the Secretary, to such gross income. The amount subtracted under this subparagraph shall not exceed such gross income. (3) Adjusted income from rents The term "adjusted income from rents" means the gross income from rents, reduced by the amount subtracted under paragraph (2)(A) of this subsection. For purposes of the preceding sentence, the term "rents" means compensation, however designated, for the use of, or right to use, property, and the in- terest on debts owed to the corporation, to the extent such debts represent the price for which real property held primarily for sale to customers in the ordinary course of its trade or business was sold or exchanged by the cor- poration; but such term does not include- (A) amounts constituting personal hold- ing company income under subsection (a)(6), (B) copyright royalties (as defined in sub- section (a)(4)), (C) produced film rents (as defined in sub- section (a)(5)(B)), or (D) compensation, however designated, for the use of, or the right to use, any tangi- ble personal property manufactured or pro- duced by the taxpayer, if during the tax- able year the taxpayer is engaged in sub- stantial manufacturing or production of tangible personal property of the same type. (4) Adjusted income from mineral, oil, and gas roy- alties The term "adjusted income from mineral, oil, and gas royalties" means the gross income from mineral, oil, and gas royalties (including production payments and overriding royal- ties), reduced by the amount subtracted under paragraph (2)(B) of this subsection in respect of such royalties. (c) Gross income of insurance companies other than life or mutual In the case of an insurance company other than life or mutual, the term "gross income" as used in this part means the gross income, as de- 'fined in section 832(b)(1), increased by the amount of losses incurred, as defined in section 832(b)(5), and the amount of expenses incurred, as defined in section 832(b)(6), and decreased by the amount deductible under section 832(c)(7) (relating to tax-free interest). (Aug. 16, 1954, ch. 736, 68A Stat. 186; Apr. 22, 1960, Pub. L. 86-435, § 1(a), (b), 74 Stat. 77, Feb. Page 413 § 543
TITLE 26-INTERNAL REVENUE CODE 2, 1962, Pub. L. 87-403, § 3(c), 76 Stat. 6; Feb. 26, 1964, Pub. L. 88-272, title II, § 225(d), (k)(2), 78 Stat. 81, 93; Aug. 22, 1964, Pub. L. 88-484, § 3(a), 78 Stat. 598; Nov. 13, 1968, Pub. L. 89-809, title I, § 104(h)(2), title II, § 206(a), (b), 80 Stat. 1559, 1578, 1579; Oct. 4, 1976, Pub. L. 94-455, title II, § 211(a), title XIX, §§ 1901(b)(32)(D), 1906(b)(13)(A), title XXI, § 2106(a), 90 Stat. 1544, 1800, 1834, 1902.) AMENDMENT EFFEcTIvE JANUARY 1, 1978 Last sentence of subsec. (a)(4) of this sec- tion amended effective Jan. 1, 1978, by Pub. L. 94-553, §§ 102, 105(d), Oct 19, 1976, 90 Stat. 2598, 2599, by striking out "(other than by reason of section 2 or 6 thereof)" immedi- ately after "title 17 of the United States Code". AMENDMENTS 1976-Subsec. (a)(1). Pub. L. 94-455, § 1901(b)(32)(D), added in subpar. (B) "(46 U.S.C. 1161 or 1177)" follow- ing "Merchant Marine Act, 1936", and struck out subpar. (C) relating to a dividend distribution of di- vested stock. Subsec. (a)(5)(B). Pub. L. 94-455, § 211(a), added "In the case of a producer who actually participates in the production of the film, such term includes an interest in the proceeds or profits from the film, but only to the extent such interest is attributable to such active participation" following "production of such film". Subsec. (a)(6). Pub. L. 94-455, § 2106(a), redesignated existing provisions as subpars. (a), (B), and (C) and, as redesignated, added in subpar. (A) "tangible" follow- ing "right to use" and in subpar. (C) added exclusions from income embodied in cl. (i1). Subsec. (b)(2). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" in subpars. (A), (B) and (D). 196--Subsec. (a)(2). Pub. L. 89-809, § 206(b)(1), struck out provision that royalties received for the use of, or for the privilege of using, a patent, invention, model, or design, secret formula, process, or other similar property right be treated as rent if such prop- erty right is also used by the corporation receiving such royalties in the manufacture or production of tangible personal property held for lease to customers and if the amount constituting rent from such leases to customers meets the requirement of subparagraph (A). Subsec. (b)(1). Pub. L. 89-809, § 104(h)(2), added subpar. (C). Subsec. (b)(2). Pub. L. 89-809, § 206(b)(2), added subpar. (D). Subsec. (b)(3). Pub. L. 89-809, § 206(a), struck out "amounts constituting personal holding company income under subsection (a)(6), nor copyright royal- ties (as defined in subsection (a)(4)), nor produced film rents (as defined in subsection (a)(5)(B))." following "but does not include", and added subpars. (A) to (D). 1964-Subsec. (a). Pub. L. 88-272, § 225(d), amended subsec. (a) generally, and among other changes, substi- tuted "adjusted ordinary gross income" for "gross income", provided, relative to rental income, that in addition to the 50-percent test of par. (2)(A), now ap- plied on the basis of adjusted income from rents and adjusted ordinary gross income, a second test for ex- clusion shall be whether the sum on the dividends paid during the taxable year, the dividends paid on the last day of the year, and the consent dividends for the taxable year, equals or exceeds the amount by which the personal holding company income for the year exceeds 10 percent of the ordinary gross income, relative to mineral, oil, and gas royalties, that in addi. tion to the 50-percent test of par. (3)(A), now applied on the basis of adjusted ordinary gross income, and the 15-percent test of par. (3)(C), from which test have been excluded deductions "specifically allowable under sections other than section 162" and is also now applied on the basis of adjusted gross income, the roy- alties shall be excluded if the personal holding compa- ny income for the taxable year is not more than 10 percent of the ordinary gross income, relative to copy- right royalties, retained the 50-percent test as in par. (4)(A). making it applicable to ordinary gross income, included in the computation of the income for the tax- able year the adjusted income from rents and the ad- Justed income from mineral, oil, and gas royalties, ex- cluded from the sum of deductions allocable to royal- ties, deductions specifically allowable under sections other than 162, and changed the requirement that de- ductions constitute 50 percent or more of gross income to provide that they must equal 25 percent of ordinary gross income reduced by royalties paid and by depreci- ation deductions with respect to copyrights, relative to produced film rents, that they be treated on their own basis and not as rentals, and defined "produced film rents", relative to use of corporation property by shareholders, that personal holding company income includes copyright royalties and the adjusted income from mineral, oil, and gas royalties, eliminated gains from the sale or other disposition of any interest in an estate or trust, from the sale or exchange of stock or securities, and from futures transactions in any com- modity, and also the definition of "rents" which can now be found in subsec. (b)(3). Subsec. (a)(2). Pub. L. 88-484 inserted sentence re- quiring royalties received for the use of, or for the privilege of using, a patent, invention, model, or design (whether or not patented), secret formula or process, or any other similar property right to be treated as rent, if such property right is also used by the corpora. tion receiving such royalties in the manufacture or production of tangible personal property held for lease to customers, and if the amount (computed with- out regard to this sentence) constituting rent from such leases to customers meets the requirements of subparagraph (A). Subsec. (b). Pub. L. 88-272, § 225(d), added subsec. (b), and omitted a prior subsec. (b) which provided that gross income and personal holding company income determined with respect to transactions relat- ing to gains from stock and security transactions, and with respect to transactions relating to gains from commodity transactions, should include only the excess of gains over losses from such transactions. Subsec. (d). Pub. L. 88-272, § 225(k)(2), eliminated subsec. (d) which related to special adjustment on dis- position of antitrust stock received as a dividend. 1962-Subsec. (a)(1). Pub. L. 87-403 prescribed the conditions making inapplicable the provisions of the paragraph to dividend distribution of divested stock. Subsec. (d). Pub. L. 87-403 added subsec. (d). 1960-Subsec. (a)(1). Pub. L. 86-435, § l(b)(1), ex- cluded copyright royalties. Subsec. (a)(6). Pub. L. 86-435, § l(b)(2), added sen- tence providing that copyright royalties constitute personal holding company income. Subsec. (a)(9). Pub. L. 86-435, § 1(a), added subsec. (a)(9). EFFECTIVE DATE OF 1978 AMENDMENT Section 211(b) of Pub. L. 94-455 provided that: "The amendment made by subsection (a) [to subsec. (a)(5)(B) of this section] shall apply to taxable years ending on or after December 31. 1975." Amendment of subsec. (a)(1) by section 1901(b)(32)(D) of Pub. L. 94-455 applicable with re- spect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 2 of this title. Section 2106(b) of Pub. L. 94-455 provided that: "The amendment made by subsection (a) [amending subsec. (a)(6) of this section] shall apply to taxable years beginning after December 31, 1976." EFFECTIVE DATE OF 1966 AMENDMENT Section 206(c) of Pub. L. 89-809 provided that: "The amendments made by subsections (a) and (b) [amend- § 543 Page 414
TITLE 26-INTERNAL REVENUE CODE ing subsecs. (a) and (b) of this section] shall apply to taxable years beginning after the date of the enact- ment of this Act (November 13, 1966]. Such amend- ments ahall also apply, at the election of the taxpayer (made at such time and in such manner as the Secre- tary or his delegate may prescribe), to taxable years beginning on or before such date and ending after De- cember 31, 1965." Amendment of subsec. (b)(1) by section 104(h)(2) of Pub. L. 89-809 applicable with respect to taxable years beginning after Dec. 31, 1966, see section 104(n) of Pub. L. 89-809, set out as an Effective Date of 1966 Amendment note under section 11 of this title. EFFCTIVE DATE OF 1964 AlmEMENT Section 3(b) of Pub. L. 88-484 provided that: "The amendment made by subsection (a) [to subsec. (a)(2) of this section] shall apply to taxable years beginning after December 31, 1963." Amendment by Pub. L. 88-272 applicable to taxable years beginning after Dec. 31, 1963, see section 225() of Pub. L. 88-272 set out as an Effective Date of 1964 Amendment note under section 316 of this title. EFFECTIVE DATE OF 1962 AMaimEirr Amendment by Pub. L. 87-403 applicable only with respect to distributions made after Feb. 2, 1962, see section 3(g) of Pub. L. 87-403. set out as an Effective Date of 1962 Amendments note under section 312 of this title. EFrFECIVE DATE OF 1960 AMENDMErr Section 2 of Pub. L. 86-435 provided that: "The amendments made by the first section of this Act [to subsec. (a) of this section and sections 544(a), (b), and 553 of this title] shall apply only with respect to tax- able years beginning after December 31, 1959." CRoss REFERENCES Foreign personal holding company income, see sec- tion 553 of this title. Limitations on assessment and collection, see section 6501 of this title. Liquidations before Jan. 1. 1966, see section 225(h) of Pub. L. 88-272, set out as a note under section 333 of this title. Personal holding company- Definition as dependent upon personal holding company income, see section 542 of this title. Dividend defined, see section 316 of this title. Rules for determining stock ownership, see section 544 of this title. Unincorporated business enterprises electing to be taxed as domestic corporations and treatment of per- sonal holding company income, see'section 1361 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 542, 544, 545, 856, 864, 992, 6501 of this title. § 544. Rules for determining stock ownership (a) Constructive ownership For purposes of determining whether a corpo- ration is a personal holding company, insofar as such determination is based on stock ownership under section 542(a)(2), section 543(a)(7), sec- tion 543(a)(6), or section 543(a)(4)- (1) Stock not owned by individual Stock owned, directly or indirectly, by or for R corporation, partnership, estate, or trust shall be considered as being owned propor- tionately by its shareholders, partners, or beneficiaries. (2) Family and partnership ownership An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family or by or for his partner. For purposes of this paragraph, the family of an individual includes only his brothers and sis- ters (whether by the whole or half blood), spouse, ancestors, and lineal descendants. (3) Options If any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this para- graph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock. (4) Application of family-partnership and option rules Paragraphs (2) and (3) shall be applied- (A) for purposes of the stock ownership requirement provided in section 542(a)(2), if, but only if, the effect is to make the cor- poration a personal holding company; (B) for purposes of section 543(a)(7) (re- lating to personal service contracts), of sec- tion 543(a)(6) (relating to use of property by shareholders), or of section 543(a)(4) (re- lating to copyright royalties), if, but only if, the effect is to make the amounts therein referred to includible under such paragraph as personal holding company income. (5) Constructive ownership as actual ownership Stock constructively owned by a person by reason of the application of paragraph (1) or (3), shall, for purposes of applying paragraph (1) or (2), be treated as actually owned by such person; but stock constructively owned by an individual by reason of the application of paragraph (2) shall not be treated as owned by him for purposes of again applying such paragraph in order to make another the constructive owner of such stock. (6) Option rule in lieu of family and partnership rule If stock may be considered as owned by an individual under either paragraph (2) or (3) it shall be considered as owned by him under paragraph (3). (b) Convertible securities Outstanding securities convertible into stock (whether or not convertible during the taxable year) shall be considered as outstanding stock- (1) for purposes of the stock ownership re- quirement provided in section 542(a)(2), but only if the effect of the inclusion of all such securities is to make the corporation a person- al holding company; (2) for purposes of section 543(a)(7) (relat- ing to personal service contracts), but only if the effect of the inclusion of all such securi- ties is to make the amounts therein referred to includible under such paragraph as person- al holding company income; (3) for purposes of section 543(a)(6) (relat- ing to the use of property by shareholders), but only if the effect of the inclusion of all such securities is to make the amounts there- in referred to includible under such para- graphs as personal holding company income; and (4) for purposes of section 543(a)(4) (relat- ing to copyright royalties), but only if the effect of the inclusion of all such securities is Page 415 § 544
TITLE 26-INTERNAL REVENUE CODE to make the amounts therein referred to in- cludible under such paragraph as personal holding company income. The requirement in paragraphs (1), (2), (3), and (4) that all convertible securities must be in- cluded if any are to be included shall be subject to the exception that, where some of the out- standing securities are convertible only after a later date than in the case of others, the class having the earlier conversion date may be In- cluded although the others are not included, but no convertible securities shall be included unless all outstanding securities having a prior conversion date are also included. (Aug. 16, 1954, ch. 736, 68A Stat. 188; Apr. 22, 1960, Pub. L. 86-435, § 1(c), (d), 74 Stat. 78; Feb. 26, 1964, Pub. L. 88-272, title II, § 225(k)(3), 78 Stat. 93.) AMENDMEuTS 1964-Pub. L. 88-272 substituted "section 543(a)(')" for "section 543(a)(5)", and "section 543(a)(4)" for "section 543(a)(9)," wherever appearing. 1960-Subsec. (a). Pub. L. 86-435, § 1(c)(1), inserted a reference to section 543(a)(9) in the opening provi- sions. Subsec. (a)(4)(B). Pub. L. 86-435, § l(c)(2). included section 543(a)(9). Subsec. (b). Pub. L. 86-435, § 1(d), added par. (4), and inserted a reference to par. (4) in the last sentence. EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272 applicable to taxable years beginning after Dec. 31, 1963, see section 225(t)(1) of Pub. L. 88-272 set out as an Effective Date of 1964 Amendment note under section 316 of this title. ErnivE DATE OF 1960 AmENoMENr Amendment of subsecs. (a) and (b) of this section by Pub. L. 86-435 applicable only with respect to taxable years beginning after Dec. 31, 1959, see section 2 of Pub. L. 86-435, set out as an Effective Date of 1960 Amendment note under section 543 of this title. CROSS REFEIENcrs Collapsible corporations, see section 341 of this title. Limitations on assessment and collection, see section 6501 of this title. Liquidations before Jan. 1, 1966, see section 225(h) of Pub. L. 88-272, set out as a note under section 333 of this title. Returns of officers, directors, and shareholders of foreign personal holding companies, see section 6035 of this title. SEcTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 341, 542, 543, 6035, 6501 of this title. § 545. Undistributed personal holding company income (a) Definition For purposes of this part, the term "undistri- buted personal holding company income" means the taxable income of a personal holding company adjusted in the manner provided in subsections (b), (c), and (d), minus the divi- dends paid deduction as defined in section 561. In the case of a personal holding company which is a foreign corporation, not more than 10 percent in value of the outstanding stock of which is owned (within the meaning of section 958(a)) during the last half of the taxable year by United States persons, the term "undistri- buted personal holding company income" means the amount determined by multiplying the undistributed personal holding company income (determined without regard to this sen- tence) by the percentage in value of its out- standing stock which is the greatest percentage in value of its outstanding stock so owned by United States persons on any one day during such period. (b) Adjustments to taxable income For the purposes of subsection (a), the tax- able income shall be adjusted as follows: (1) Taxes There shall be allowed as a deduction Fed- eral income and excess profits taxes and income, war profits and excess profits taxes of foreign countries and possessions of the United States (to the extent not allowable as a deduction under section 275(a)(4)), accrued during the taxable year or deemed to be paid by a domestic corporation under section 902(a) or 960(a)(1) for the taxable year, but not including the accumulated earnings tax imposed by section 531, the personal holding company tax imposed by section 541, or the taxes imposed by corresponding sections of a prior income tax law. (2) Charitable contributions The deduction for charitable contributions provided under section 170 shall be allowed, but in computing such deduction the limita- tions in section 170(b)(1)(A), (B), and (D) shall apply, and section 170(b)(2) and (d)(1) shall not apply. For purposes of this para- graph, the term "contribution base" when used in section 170(b)(1) means the taxable income computed with the adjustments (other than the 5.percent limitation) pro- vided in section 170(b)(2) and (d)(1) and with- out deduction of the amount disallowed under paragraph (6) of this subsection. (3) Special deductions disallowed The special deductions for corporations pro- vided in part VIII (except section 248) of sub- chapter B (section 241 and following, relating to the deduction for dividends received by corporations, etc.) shall not be allowed. (4) Net operating loss The net operating loss deduction provided in section 172 shall not be allowed, but there shall be allowed as a deduction the amount of the net operating loss (as defined in section 172(c)) for the preceding taxable year com- puted without the deductions provided in part VIII (except section 248) of subchapter B. (5) Net capital gains There shall be allowed as a deduction the net capital gain for the taxable year, minus the taxes imposed by this subtitle attribut- able to such net capital gain. The taxes at- tributable to such net capital gain shall be an amount equal to the difference between- (A) the taxes imposed by this subtitle (except the tax imposed by this part) for such year, and (B) such taxes computed for such year without including such excess in taxable income. § 545 Page 416
TITLE 26-INTERNAL REVENUE CODE (6) Expenses and depreciation applicable to proper- ty of the taxpayer The aggregate of the deductions allowed under section 162 (relating to trade or busi- ness expenses) and section 167 (relating to de- preciation), which are allocable to the oper- ation and maintenance of property owned or operated by the corporation, shall be allowed only in an amount equal to the rent or other compensation received for the use of, or the right to use, the property, unless it is estab- lished (under regulations prescribed by the Secretary) to the satisfaction of the Secre. tary- (A) that the rent or other compensation received was the highest obtainable, or, if none was received, that none was obtain- able; (B) that the property was held in the course of a business carried on bona fide for profit; and (C) either that there was reasonable ex- pectation that the operation of the proper- ty would result in a profit, or that the prop- erty was necessary to the conduct of the business. (c) Special adjustment to taxable income (1) In general Except as otherwise provided in this subsec- tion, for purposes of subsection (a) there shall be allowed as a deduction amounts used, or amounts irrevocably set aside (to the extent reasonable with reference to the size and terms of the indebtedness), to pay or retire qualified indebtedness. (2) Corporations to which applicable This subsection shall apply only with re- spect to a corporation- (A) which for at least one of the two most recent taxable years ending before Febru- ary 26, 1964 was not a personal holding company under section 542, but would have been a personal holding company under sec- tion 542 for such taxable year if the law ap- plicable for the first taxable year beginning after December 31, 1963, had been applica- ble to such taxable year, or (B) to the extent that it succeeds to the deduction referred to in paragraph (1) by reason of section 381(c)(15). (3) Qualified indebtedness (A) In general Except as otherwise provided in this para- graph, for purposes of this subsection the term "qualified indebtedness" means- (I) the outstanding indebtedness in- curred by the taxpayer after December 31, 1933, and before January 1, 1964, and (ii) the outstanding indebtedness in- carred after December 31, 1963, for the purpose of making a payment or set-aside referred to in paragraph (1) in the same taxable year, but, in the case of such a payment or set-aside which is made on or after the first day of the first taxable year beginning after December 31, 1963, only to the extent the deduction other- wise allowed in paragraph (1) with respect to such payment or set-aside is treated as nondeductible by reason of the election provided in paragraph (4). (B) Exception For purposes of subparagraph (A), quali- fied indebtedness does not include any amounts which were, at any time after De- cember 31, 1963, and before the payment or set-aside, owed to a person who at such time owned (or was considered as owning within the meaning of section 318(a)) more than 10 percent in value of the taxpayer's outstand- Ing stock. (C) Reduction for amounts irrevocably set aside For purposes of subparagraph (A), the qualified indebtedness with respect to a contract shall be reduced by amounts irre- vocably set aside before the taxable year to pay or retire such indebtedness; and no de- duction shall be allowed under paragraph (1) for payments out of amounts so set aside. (4) Election not to deduct A taxpayer may elect, under regulations prescribed by the Secretary, to treat as non- deductible an amount otherwise deductible under paragraph (1); but only if the taxpayer files such election on or before the 15th day of the third month following the close of the taxable year with respect to which such elec- tion applies, designating therein the amounts which are to be treated as nondeductible and specifying the indebtedness (referred to in paragraph (3)(A)(ii)) incurred for the purpose of making the payment or set-aside. (5) Limitations The deduction otherwise allowed by this subsection for the taxable year shall be re- duced by the sum of- (A) the amount, if any, by which- (I) the deductions allowed for the tax- able year and all preceding taxable years beginning after December 31, 1963, for ex- haustion, wear and tear, obsolescence, am- ortization, or depletion (other than such deductions which are disallowed in com- puting undistributed personal holding company income under subsection (b)(6)), exceed (ii) any reduction, by reason of this sub- paragraph, of the deductions otherwise al- lowed by this subsection for such preced- ing taxable years, and (B) the amount, if any, by which- (1) the deductions allowed under subsec- tion (b)(5) in computing undistributed personal holding company income for the taxable year and all preceding taxable years beginning after December 31, 1963, exceed (i) any reduction, by reason of this sub- paragraph, of the deductions otherwise al- lowed by this subsection for such preced- ing taxable years. (6) Pro-rata reduction in certain cases For purposes of paragraph (3)(A), if proper- ty (of a character which is subject to an allowance for exhaustion, wear and tear, ob- solescence, amortization, or depletion) is dis- posed of after December 31, 1963, tha total Page 417/ § 545
TITLE 26-INTERNAL REVENUE CODE amounts of qualified indebtedness of the tax- payer shall be reduced pro-rata in the taxable year of such disposition by the amount, If any, by which- (A) the adjusted basis of such property at the time of such disposition, exceeds (B) the amount of qualified indebtedness which ceased to be qualified indebtedness with respect to the taxpayer by reason of the assumption of the indebtedness by the transferee. (d) Certain foreign corporations In the case of a foreign corporation all of the outstanding stock of which during the last half of the taxable year is owned by nonresident alien individuals (whether directly or indirectly through foreign estates, foreign trusts, foreign partnerships, or other foreign corporations), the taxable income for purposes of subsection (a) shall be the income which constitutes per- sonal holding company income under section 543(a)(7), reduced by the deductions attribut- able to such income, and adjusted, with respect to such income, in the manner provided in sub- section (b). (Aug. 16, 1954, ch. 736, 68A Stat. 189; Sept. 2, 1958, Pub. L. 85-866, title I, § 32(a), (b), 72 Stat. 1631; Feb. 2, 1962, Pub. L. 87-403, § 3(d), 76 Stat. 7; Oct. 16, 1962, Pub. L. 87-834, § 9(d)(2), 76 Stat. 1001; Feb. 26, 1964, Pub. L. 88-272, title II, §§ 207(b)(5), 209(c)(2), 225(t)(1), (2), 78 Stat. 42, 46, 90; Nov. 2, 1966, Pub. L. 89-719, title I, § 101(b)(2), 80 Stat. 1132; Nov. 13, 1966, Pub. L. 89-809, title I, § 104(h)(3), 80 Stat. 1560; Dec. 30, 1969, Pub. L. 91-172, title II, § 201(a)(2)(B), 83 Stat. 558; Oct. 4, 1976, Pub. L. 94-455, title X, § 1033(b)(4), title XIX, §§ 1901(a)(77), (b)(20)(B), (32)(E), (33)(D), 1906(b)(13)(A), 1951(b)(9)(A), 90 Stat. 1628, 1777, 1797, 1800, 1801, 1834, 1839.) AMmEDMmETs 1976--Subsec. (b)(1). Pub. L. 94-455, §f 1033(b)(4), 1901(a)(77)(A), struck out "(other than excess profits tax imposed by subchapter E of chapter 2 of the Inter- nal Revenue Code of 1939 for taxable years beginning after December 31, 1940)" following "Federal income and excess profits taxes"; substituted "902(a) or 960(a)(1)" for "902(a)(1) or 960(a)(1)(C)" following "corporation under section"; and struck out provisions following "prior income tax law" relating to election by taxpayer who paid Federal income and excess prof- its taxes to deduct payments, when made, for purposes of computing subehapter A net Income or, for a tax- able year ending after June 30, 1954, to deduct such taxes when accrued, such election being irrevocable and applied to taxable year for which election was made and to all subsequent taxable years. Subsec. (b)(2). Pub. L. 94-455, § 1901(b)(20)(B)(ii), substituted "paragraph (6)" for "paragraph (8)" fol- lowing "amount disallowed under". Subset. (b)(5). Pub. L. 94-455, § 1901(b)(33)(D), sub. stituted "Net" for "Long-term" following "(5)". Subsec. (b)(6). Pub. L. 94-455, §§ 1901(b)(20)(B)(i), 1906(b)(13)(A), struck out subsec. (b)(6) relating to de- duction allowed to bank affiliates, redesignated former subsec. (b)(8) as (b)(6) and, as redesignated, struck out "or his-delegate" in two places following "Secretary". Subsec. (bX7). Pub. L. 94-455, § 1901(a)(77)(B), struck out subsec. (b)(7) relating to payment of indebt- edness incurred prior to January 1, 1934. Subsec. (b)(8). Pub. L. 94-455. § 1901(b)(20)(B)(i), re- designated former subsec. (b)(8) as (b)(6). Subsee. (b)(9). Pub. L. 94-455, § 1951(b)(9)(A), struck out subsec. (b)(9) relating to the deduction of the amount of a lien in favor of the United States. Subsec. (b)(10). Pub. L. 94-455, § 1901(b)(32)(E), struck out subsec. (b)(10) relating to deduction for dis. tributions of divested stock. Subsec. (b)(11). Pub. L. 94-455, § 1901(b)(32)(E), struck out subsec. (b)(1l) relating to special adjust- ment on the disposition of antitrust stock received as a dividend. Subsec. (c)(2)(A). Pub. L. 94-455, § 1901(a)(77)(C), substituted "February 26, 1964" for "the date of enact- ment of this subsection" following "years ending before". Subsec. (c)(4). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c)(5). Pub. L. 94-455, § 1901(b)(20)(B)(iii), substituted "subsection (b)(6)" for "subsection (b)(8)" following "company income under". 1969-Subset. (b)(2). Pub. L. 91-172 substituted "sec- tion 170(b)(1)(A), (B), and (D)", "section 170(b)(2) and (d)(1)" for "section 170(b)(1)(A) and (B)" and "section 170(b)(2) and (5)", respectively, in the provisions of the first sentence setting out the sections appropriate to the computation of the deduction, and in the provi- sions of the second sentence describing applicability of terms for purposes of this paragraph, substituted "contribution base" and "section 170(b)(2) and (d)(1)" for "adjusted gross income" and "the first sentence of section 170(b)(2) and (5)," respectively. 1966--Subsec. (a). Pub. L. 89-809, § 104(h)(3)(A), sub- stituted "in the manner provided in subsections (b), (c), and (d)" for "in the manner provided in subsection (b) and (c)" and added provisions governing the case of a personal holding company which is a foreign cor. poration. not more thano 10 percent in value of the out- standing stock of which is owned (within the meaning of section 958(a)) during the last half of the taxable year by United States persons. Subsec. (b)(9). Pub. L. 89-719 substituted "section 6323(f)" for "section 6323(a)(1), (2), or (3)". Subsec. (d). Pub. L. 89-809, § 104(h)(3)(B), added subsec. (d). 1964-Subsec. (a). Pub. L. 88-272, § 225(1)(1). Inserted the reference to subsection (c). Subsec. (b)(1), (2). Pub. L. 88-272, §§ 207(b)(5), 209(c)(2), substituted "section 275(a)(4)" for "section 164(b)(6)" in par. (1), and inserted the reference to section 170(b)(5) in par. (2). Subsec. (c). Pub. L. 88-272, § 225()(2), added subsec. (c). 1962-Subsec. (b)(1). Pub. L. 87-834 substituted "ac- crued during the taxable year or deemed to be paid by a domestic corporation under section 902(a)(1) or 960(a)(1)(C) for the taxable year" for "accrued during the taxable year". Subsec. (b)(10), (11). Pub. L. 87-403 added subsec. (b) (10), (11). 1958-Subsec. (b)(2). Pub. L. 85-866, § 32(a), substi- tuted in the first sentence ", but in computing such deduction the limitations in section 170(b)(1)(A) and (B) shall apply, and section 170(b) shall not apply" for "but with the limitations in section 170(b)(l)(A) and (B) (in lieu of the limitation in section 170(b)(2)", and inserted in the second sentence "(other than the 5-per- cent limitation)" and "the first sentence" following "with the adjustments" and "provided In", respective- ly. Subsec. (b)(4). Pub. L. 85-866, § 32(b). Inserted "com- puted without the deductions provided In part VIII (except section 248) of subchapter B". EFnmivE DATE OF 1976 AmNMENT Effective date of amendment of subsec. (b)(1) by sec- tion 1033(b)(4) of Pub. L. 94-455, see section 1033(c) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 902 of this title. Amendment of subsecs. .(b)(1), (2), (5) to (8), (10), (11), (c)(2)(A), (c)(5) by section 1901(a)(77), (b)(20)(B), (32)(E), (33)(D) of Pub. L. 94-455 applicable with re- spect to taxable years beginning after Dec. 31, 1976. § 545 Page 418
TITLE 26-INTERNAL REVENUE CODE see section 1901(d) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 2 of this title. Amendment of subsecs. (b)(9), (c)(4) by section 1951(b)(9)(A) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976. see sec- tion 1951(d) of Pub. L. 94-455 set out as an Effective Date of 1976 Amendment note under section 72 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Amendment by Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1969, see section 201(g) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 170 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-809 applicable with re- spect to taxable years beginning after Dec. 31, 1966, see section 104(n) of Pub. L. 89-809, set out as an Ef- fective Date of 1966 Amendment note under section 11 of this title. Amendment by Pub. L. 89-719 applicable after Nov. 2. 1966, regardless of when the title or lien of the United States arose or when the lien or interest of an- other person was acquired, except in a case in which a lien or title derived from enforcement of a lien held by the United States has been enforced by a civil action or suit which has become final by Judgment, sale, or agreement before Nov. 2, 1966, or in a case in which the amendment would impair a priority held by any person other than the United States holding a lien or interest prior to Nov. 2, 1966, operate to increase the liability of such person, or shorten the time for bring- Ing suit with respect to transactions occurring before Nov. 2, 1966, see section 114(a) to (e) of Pub. L. 89-719, set out as an Effective Date of 1966 Amendment note under section 6323 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment of subsec. (a) by Pub. L. 88-272 applica- ble to taxable years beginning after Dec. 31, 1963, see section 225(t)(1) of Pub. L. 88-272 set out as an Effec- tive Date of 1964 Amendment note under section 316 of this title. Amendment of subsec. (b)(1) by Pub. L. 88-272, § 207(b)(5), applicable to taxable years beginning after Dec. 31, 1963, see section 207(c) of Pub. L. 88-272, set out as an Effective Date of 1964 amendment note under section 164 of this title. Amendment of subsec. (b)(2) by Pub. L. 88-272, § 209(c)(2), applicable to contributions paid in taxable years beginning after Dec. 31, 1963, see section 209(f)(1) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 170 of this title. EFFECTIVE DATE OF 1062 AMENDMENT Amendment of subsec. (b)(1) by Pub. L. 87-834 appli- cable in respect of any distribution received by a do- mestic corporation after Dec. 31, 1964, and in respect of any distribution received by a domestic corporation before Jan. 1, 1965, in a taxable year of such corpora- tion beginning after Dec. 31, 1962, but only to the extent that such distribution is made out of the accu- mulated profits of a foreign corporation for a taxable year (of suoh foreign corporation) beginning after Dec. 31, 1962, see section 9(e) of Pub. L. 87-834, set out as an Effective Date of 1962 Amendment note under section 902 of this title. Amendment by Pub. L. 87-403 applicable only with respect to distributions made after Feb. 2, 1962, see section 3(g) of Pub. L. 87-403, set out as an Effective Date of 1962 Amendment note under section 312 of this title. EFFECTIVE DATE OF 1958 AMENDMENT Amendment of subsec. (b)(2) by Pub. L. 85-866 appli- cable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954. see section 1(c) of Pub. L. 85-866, set out as an Effective Date of 1958 Amend. ment note under section 165 of this title. Section 32(c) of Pub. L. 85-866 provided that: "The amendment made by subsection (b) of this section [to subsec. (b)(4) of this section] shall apply with respect to adjustments under section 545(b)(4) of the Internal Revenue Code of 1954 [subsec. (b)(4) of this section] for taxable years beginning after December 31, 1957." SAVINGS PROVISION Section 1951(b)(9)(B) of Pub. L. 94-455 provided that: "Notwithstanding subparagraph (A) [repealing subsec. (b)(9) of this section], if any amount was de- ducted under paragraph (9) of section 545(b) in a tax- able year beginning before January 1, 1977, on account of a lien which is satisfied or released in a taxable year beginning on or after such date, the amount so de- ducted shall be included in income, for purposes of section 545, as provided in the second sentence of such paragraph. Shareholders of any corporation which has amounts included in its income by reason of the preceding sentence may elect to compute the income tax on dividends attributable to amounts so included as provided in the third sentence of such paragraph." CRoss REFERENCES Acquiring corporation as distributor or transferor corporation for purpose of determining applicability of subsection (b)(7) of this section, see section 381 of this title. Charitable contributions deduction disallowed under certain circumstances when- Made in trust, see section 681 of this title. Made to exempt organization, see section 503 of this title. Dividend carryover determined by making adjust- ments provided in this section to taxable income, see section 564 of this title. Liquidations before Jan. 1, 1966, see section 225(h) of Pub. L. 88-272, set out as a note under section 333 of this title. Personal holding company dividend defined, see sec- tion 316 of this title. Provisions respecting disposal of coal with retained economic interest as inapplicable in determining amount of deduction under subsection (b)(S) of this section, see section 631 of this title. Rules relating to deduction for dividends paid after close of taxable year, see section 563 of this title. SECTION REFERIUM TO IN OTHER SECTIONS This section is referred to in sections 381, 508, 541, 564, 631, 4947, 4948 of this title. § 546. Income not placed on annual basis Section 443(b) (relating to computation of tax on change of annual accounting period) shall not apply in the computation of the personal holding company tax imposed by section 541. (Aug. 16, 1954, ch. 736, 68A Stat. 191.) Cnoss REFERENCES Accumulated earnings tax computation as not sub- ject to section 443(b), see section 536 of this title. Regulated investment company taxable income com- putation as not subject to section 443(b), see section 852 of this title. Undistributed foreign personal holding company computation as not subject to section 443(b), see sec- tion 557 of this title. SECTION REFERED TO IN OTHER SECTIONS This section is referred to in section 443 of this title. Page 419 § 646
TITLE 26-INTERNAL REVENUE CODE § 547. Deduction for deficiency dividends (a) General rule If a determination (as defined in subsection (c)) with respect to a taxpayer establishes li- ability for personal holding company tax im- posed by section 541 (or by a corresponding provision of a prior income tax law) for any taxable year, a deduction shall be allowed to the taxpayer for the amount of deficiency divi- dends (as defined in subsection d)) for the pur- pose of determining the personal holding com- pany tax for such year, but not for the purpose of determihing interest, additional amounts, or assessable penalties computed with respect to such personal holding company tax. (b) Rules for application of section (1) Allowance of deduction The deficiency dividend deduction shall be allowed as of the date the claim for the defi- ciency dividend deduction is filed. (2) Credit or refund If the allowance of a deficiency dividend de- duction results in an overpayment of personal holding- company tax for any taxable year, credit or refund with respect to such overpay- ment shall be made as if on the date of the determination 2 years remained before the expiration of the period of limitation on the filing of claim for refund for the taxable year to which the overpayment relates. No interest shall be allowed on a credit or refund arising from the application of this section. (c) Determination For purposes of this section, the term "deter- mination" means- (1) a decision by the Tax Court or a judg- ment, decree, or other order by any court of competent Jurisdiction, which has become final; (2) a closing agreement made under section 7121; or (3) under regulations prescribed by the Sec- retary, an agreement signed by the Secretary and by, or on behalf of, the taxpayer relating to the liability of such taxpayer for personal holding company tax. (d) Deficiency dividends (1) Definition For purposes of this section, the term "defi- ciency dividends" means the amount of the dividends paid by the corporation on or after the date of the determination and before filing claim under subsection (e), which would have been includible in the computation of the deduction for dividends paid under sec- tion 561 for the taxable year with respect to which the liability for personal holding com- pany tax exists, if distributed during such taxable year. No dividends shall be considered as deficiency dividends for purposes of subsec- tion (a) unless distributed within 90 days after the determination. (2) Effect on dividends paid deduction (A) For taxable year in which paid Deficiency dividends paid in any taxable year (to the extent of the portion thereof taken into account under subsection (a) in determining personal holding company tax) shall not be included in the amount of divi. dends paid for such year for purposes of computing the dividends paid deduction for such year and succeeding years. (B) For prior taxable year Deficiency dividends paid in any taxable year (to the extent of the portion thereof taken into account under subsection (a) in determining personal holding company tax) shall not be allowed for purposes of section 563(b) in the computation of the dividends paid deduction for the taxable year preced- ing the taxable year in which paid. (e) Claim required No deficiency dividend deduction shall be al- lowed under subsection (a) unless (under regu- lations prescribed by the Secretary) claim therefor is filed within 120 days after the deter- mination. (f) Suspension of statute of limitations and stay of collection (1) Suspension of running of statute If the corporation files a claim, as provided in subsection (e), the running of the statute of limitations provided in section 6501 on the making of assessments, and the bringing of distraint or a proceeding in court for collec- tion, in respect of the deficiency and all inter- est, additional amounts, or assessable penal- ties, shall be suspended for a period of 2 years after the date of the determination. (2) Stay of collection In the case of any deficiency with respect to the tax imposed by section 541 established by a determination under this section- (A) the collection of the deficiency and all interest, additional amounts, and assessable penalties shall, except in cases of Jeopardy, be stayed until the expiration of 120 days after the date of the determination, and (B) if claim for deficiency dividend deduc- tion is filed under subsection (e), the collec- tion of such part of the deficiency as is not reduced by the deduction for deficiency dividends provided in subsection Ca) shall be stayed until the date the claim is disallowed (in whole or in part) and if disallowed in part collection shall be made only with re- spect to the part disallowed. No distraint or proceeding in court shall be begun for the collection of an amount the col- lection of which is stayed under subpara- graph (A) or (B) during the period for which the collection of such amount is stayed. (g) Deduction denied in case of fraud, etc. No deficiency dividend deduction shall be al- lowed under subsection (a) if the determination contains a finding that any part of the deficien- cy is due to fraud with intent to evade tax, or to wilful failure to file an income tax return within the time prescribed by law or prescribed by the Secretary in pursuance of law. (Aug. 16, 1954, ch. 736, 68A Stat. 191; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(a)(78), 1906(b)(13)(A), 90 Stat. 1777, 1834.) Page 420
TITLE 26-INTERNAL REVENUE CODE AMENDMENTS 1976--Subsecs. (c)(3), (e), (g). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" wherever appearing. Subsec. (h). Pub. L. 94-455, § 1901(a)(78), struck out subsec. (h) relating to the effective date of provisions concerning deduction of deficiency dividends. EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (h) by section 1901(a)(78) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. CROSS REFERENCES Distributor or transfer corporation in carryover situ- ations as e~ititled to deficiency dividend deduction, see section 381 of this title. Personal holding company dividend defined, see sec- tion 316 of this title. Suspension of running of period of limitation, see section 6503 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 316, 381, 6422, 6515 of this title. PART III-FOREIGN PERSONAL HOLDING COMPANIES Sec. 551. Foreign personal holding company income taxed to United States shareholders. 552. Definition of foreign personal holding company. 553. Foreign personai .iolding company income. 554. Stock ownership. 555. Gross income of foreign personal holding compa- nies. 556. Undistributed foreign personal holding company income. 557. Income not placed on annual basis. 558. Returns of officers, directors, and shareholders of foreign personal holding companies. AMENDMENTS 1958-Pub. L.85-866, title I, § 33(d)(2), Sept. 2, 1958, 72 Stat. 1632, added item 558. § 551. Foreign personal holding company income taxed to United States shareholders (a) General rule The undistributed foreign personal holding company income of a foreign personal holding company shall be included in the gross income of the citizens or residents of the United States, domestic corporations, domestic partnerships, and estates or trusts (other than estates or trusts the gross income of which under this subtitle includes only income from sources within the United States), who are sharehold- ers in such foreign personal holding company (hereinafter called "United States sharehold- ers") in the manner and to the extent set forth in this part. (b) Amount included In gross income Each United States shareholder, who was a shareholder on the day in the taxable year of the company which was the last day on which a United States group (as defined in section 552(a)(2)) existed with respect to the company, shall include in his gross income, as a dividend, for the taxable year in which or with which the taxable year of the company ends, the amount he would have received as a dividend (deter- mined as if any distribution in liquidation actu- ally made in such taxable year had not been made) if on such last day there had been dis- tributed by the company, and received by the shareholders, an amount which bears the same ratio to the undistributed foreign personal holding company income of the company for the taxable year as the portion of such taxable year up to and including such last day bears to the entire taxable year. (c) Information in return Every United States shareholder who is re- quired under subsection (b) to include In his gross income any amount with respect to the undistributed foreign personal holding compa- ny income of a foreign personal holding compa- ny and who, on the last day on which a United States group existed with respect to the compa- ny, owned 5 percent or more in value of the outstanding stock o such company, shall set forth in his return in complete detail the gross income, deductions and credits, taxable incozme, foreign personal holding company, and undis- tributed foreign personal holding company income of such company. (d) Effect on capital account of foreign personal holding company An amount which bears the same ratio to the undistributed foreign personal holding compa- ny income of the foreign personal holding com- pany for its taxable year as the portion of such taxable year up to and including the last day on which a United States group existed with re- spect to the company bears to the entire tax- able year, shall, for the purpose of determining the effect of distributions in subsequent tax- able years by the corporation, be considered as paid-in surplus or as a contribution to capital, and the accumulated earnings and profits as of the close of the taxable year shall be corre- spondingly reduced, if such amount or any por- tion thereof is required to be included as a divi- dend, directly or indirectly, in the gross income of United States shareholders. (e) Basis of stock in hands of shareholders The amount required to be included in the gross income of a United States shareholder under subsection (b) shall, for the purs' .,, of adjusting the basis of his stock *with respect to which the distribution would have been made (if it had been made), be treated as having been reinvested by the shareholder as a contribution to the capital of the corporation; but only to the extent to which such amount is included in his gross income in his return, increased or de- creased by any adjustment of such amount in the last determination of the shareholder's tax liability, made before the expiration of 6 years after the date prescribed by law for filing the return. (f) Cross references (1) For basis of stock or securities in a foreign person. al holding company acquired from a decedent, see sec- tion 1014(b)(5). (2) For period of limitation on assessment and collec. tion without ansessment, in case of failure to include in gross income tite amount properly includible therein under subsection (b), see section 6501. (Aug. 16, 1954, ch. 736, 68A Stat. 193; Feb. 26, 1964, Pub. L. 88-272, title II, § 225(f)(4), 78 Stat. 88; Oct. 4, 1971, Pub. L. 94-455, title XIX, 71-999 0 - 78 - 29 (Vol. 7) Page 421 § 551
TITLE 26-INTERNAL REVENUE CODE § 1901(a)(79), (b)(1)(F)(i), (12)(A), 90 Stat. 1777, 1790, 1795.) AMEDMETS 1976-Subsec. (c). Pub. L. 94-455, §§ 1901(a)(79), (b)l(1)(F(i), struck out subsec. (c) relating to deduction for obligations of United States and its instrumental- ities. Former subsec. (d) redesignated c) and, as rede- signated, substituted "foreign personal holding compa- ny income" for "foreign personal holding company" following "credits, taxable income". Subsec. d). Pub. L. 94-455, § 1901(b)(1)(F)(i), rede- signated former subsec. (e) as Cd). Subsec. (e). Pub. L. 94-455, § 1901(b)(1)(F)(i), redesig- nated former subsec. (fM as e). Subsec. f). Pub. L. 94-455,. §§ 1901(b)(1)(P)(i), (b)(12)(A), redesignated former subsec. (g) as Mf) and, as redesignated, struck out par. (3) relating to cross reference for treatment of gain on liquidation of cer- tain foreign personal holding companies. Subsec. (g). Pub. L. 94-455, § 1901(b)(1)(F)(i), rede- signated former subsec. (g) as Mf). 1964-Subsec. Cb). Pub. L. 88-272 inserted "(deter- mined as if any distribution in liquidation actually made in such taxable year had not been made)". EFFECTIVE DATE OF 1976 AmipDmENT Amendment by Pub. L. 94-455 applicable with re- spect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1964 A MENT Amendment by Pub. L. 88-272 applicable to distribu. tions made in any taxable year of the distributing cor- poration beginning after Dec. 31, 1963, see section 225(t) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 316 of this title. CRoss RENERENcEs Adjustments to basis, see section 1016 of this title. Liquidations before Jan. 1, 1966, see section 225(h) of Pub. L. 88-272, set out as a note under section 333 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 951, 1016, 6103, 6501 of this title. § 552. Definition of foreign personal holding company (a) Ceneral rule For purposes of this subtitle, the term "for- eign personal holding company" means any for- eign corporation if- (l) Gross income requirement At least 60 percent of its gross income (as defined in section 555(a)) for the taxable year is foreign personal holding company income as defined in section 553; but If the corpora- tion is a foreign personal holding company with respect to any taxable year ending after August 26, 1937, then, for each subsequent taxable year, thc minimum percentage shall be 50 percent in lieu of 60 percert, until a taxable year during the whole of which the stock ownership required by paragraph (2) does not exist, or until the expiration of three consecutive taxable years in each of which less than 50 percent of the gross income is foreign personal holding company income. For purposes of this paragraph, there shall be included in the gross income the amount in- cludible therein as a dividend by reason of the application of section 555(c)(2); and (2) Stock ownership requirement At any time during the taxable year more than 50 percent in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals who are citi- zens or residents of the United States, herein- after called "United States group". (b) Exceptions The term "foreign personal holaing compa- ny" does not include- (1) a corporation exempt from tax under subchapter F (sec. 501 and following); and (2) a corporation organized and doing busi- ness under the banking and credit laws of a foreign country if it is established (annually or at other periodic intervals) to the satisfac- tion of the Secretary that such corporation is not formed or availed of for the purpose of evading or avoiding United States income taxes which would otherwise be imposed upon its shareholders. If the Secretary is sat- isfied that such corporation is not so formed or availed of, he shall issue to such corpora- tion annually or at other periodic intervals a certification that the corporation is not a for- eign personal holding company. Each United States shareholder of a foreign corporation which would, except for the provi- sions of paragraph (2), be a foreign personal holding company, shall attach to and file with his income tax return for the taxable year a copy of the certification by the Secretary made pursuant to paragraph (2). Such copy shall be filed with the taxpayer's return for the taxable year if he has been a shareholder of such cor- poration for any part of such year. (Aug. 16, 1954, ch. 736, 68A Stat. 195; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMNTS 1976-Subsec. Cb). Pub. L. 94-455 struck out "or his delegate" following "Secretary" in three places. CROSS REFERENCES Accumulated earnings tax as inapplicable to foreign personal holding company defined in this section, see section 532 of this title. Election as to taxable and partially taxable bonds under provisions respecting amortizable bond premi- um in case of bonds held by foreign personal holding company as defined in this section, see section 171 of this title. Personal holding company as excluding foreign per- sonal holding company, see section 542 of this title. Returns of officers, directors, and shareholders of foreign personal holding companies, see section 6035 of this title. SECTxON REFERI TO IN OTHER SECTIONS This section is referred to in sections 171, 532, 542, 551, 553, 554, 555, 562, 1212, 6035, 6103 of this title. § 553. Foreign personal holding company Income (a) Foreign personal holding company Income For purposes of this subtitle, the term "for- eign personal holding company income" means that portion of the gross income, determined for purposes of section 552, which consists of: (1) Dividends, etc. Dividends, interest, royalties, and annuities. Page 422
TITLE 26-INTERNAL REVENUE CODE (2) Stock and securities transactions Except in the case of regular dealers in stock or securities, gains from the sale or ex- change of stock or securities. (3) Commodities transactions Gains from futures trsnsactions in any commodity on or subject to the rules of a board of trade or commodity exchange. This paragraph shall not apply to gains by a pro- ducer, processor, merchant, or handler of the commodity which arise out of bona fide hedg- ing transactions reasonably necessary to the conduct of its business in the manner in which such business is customarily and usual- ly conducted by others. (4) Estates and trusts Amounts includible in computing the tax- able income of the corporation under part I of subchapter J (see. 641 and following, relat- ing to estatcs, trusts, and beneficiaries); and gains from the sale or other disposition of any interest in an estate or trust. (5) Personal service contracts (A) Amounts received under a contract under which the corporation is to furnish personal services; if some person other than the corporation has the right to designate (by name or by description) the individual who is to perform the services, or if the in- dividual who is to perform the services is designated (by name or by description) in the contract; and (B) amounts received from the sale or other disposition of such a contract. This paragraph shall apply with respect to amounts received for services under a particu- lar contract only if at some time during the taxable year 25 percent or more in vwae of the outstanding stock of the corporation is owned, directly or indirectly, by or for the in- dividual who has performed, is to perform, or may be designated (by name or by descrip- tion) as the one to perform, such services. (6) Use of corporation property by shareholder Amounts received as compensation (howev- er designated and from whomsoever received) for the use of, or right to use, property of the corporation in any case where, at any time during the taxable year, 25 percent or more in value of the outstanding stock of the cor- poration is owned, directly or indirectly, by or for an individual entitled to the use of the property; whether such right is obtained di- rectly from the corporation or by means of a sublease or other arrangement. This para- graph shall apply only to a corporation which has foreign personal holding company income for the taxable year, computed without regard to this paragraph and paragraph (7), in excess of 10 percent of its gross income. (7) Rents Rents, unless constituting 50 percent or more of the gross income. For purposes of this paragraph, the term "rents" means com- pensation, however designated, for the use of, or right to use, property, but does not include amounts constituting foreign personal hold- ing company income under paragraph (6). (b) Limitation on gross income in certain transac- tions For purposes of this part- (1) gross income and foreign personal hold- ing company income determined with respect to transactions described in subsection (a)(2) (relating to gains from stock and security transactions) shall include only the excess of gains over losses from such transactions, and (2) gross income and foreign personal hold- ing company income determined with respect to transactions described in subsection (a)(3) (relating to gairs from commodity transac- tions) shall include only the excess of gains over losses from such transactions. (Aug. 16, 1954, ch. 736, 68A Stat. 195; Apr. 22, 1960, Pub. L. 86- 135, § 1(e), 74 Stat. 78; Feb. 26, 1964, Pub. L. 88-272, title II, § 225(e), 78 Stat. 85; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(b)(32)(F), 90 Stat. 1800.) AMENDMENTS 1976-Subsec. (a)(1). Pub. L. 94-455 struck out provi- sions relating to dividend distribution of divested stock following "royalties, and annuities". 1964-Subsec. (a). Pub. L. 88-272 designated existing provisions as subsec. (a), and substituted pars. (1) to (7) for "personal holding company income, as defined in section 543, except that all interest, whether or not treated as rent, and all royalties, whether or not min- eral, oil, or gas royalties or copyright royalties, shall constitute "foreign personal holding company income". Subsec. (b). Pub. L. 88-272 added subsec. (b). 1960-Pub. L. 86-435 included copyright royalties within foreign personal holding company income. EFFECTIVE DATE OF 1976 AM.NDMENT Amendment by Pub. L. 94-455 applicable with re- spect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272 applicable to taxable years beginning after Dec. 31, 1963, see section 225(t)(1) of Pub. L. 88-272 set out as an Effective Date of 1964 Amendment note under section 316 of this title. EFFECTIVE DATE OF 1960 AMENDMENT Amendment by Pub. L. 86-435 applicable only with respect to taxable years beginning after Dec. 31, 1959, see section 2 of Pub. L. 86-435, set out as an Effective Date of 1960 Amendment note under section 543 of this title. CROSS REFERENCES Liquidations before Jan. 1, 1966, see section 225(h) of Pub. L. 88-272, set out as a note under section 333 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 552, 554, 954 of this title. § 554. Stock ownership (a) Constructive ownership For purposes of determining whether a corpo- ration is a foreign personal holding company, insofar as such determination is based on stock ownership under section 552(a)(2), section 553(a)(0), or section 553(a)(6)- Page 423 § 554
TITLE 26-INTERNAL REVENUE CODE (1) Stock not owned by individual Stock owned, directly or indirectly, by or for a corporation, partnership, estate, or trust shall be considered as being owned propor- tionately by its shareholders, partners, or beneficiaries. (2) Family and partnership ownership An individual shall be considered as owning the stock owned, directly or indirectly, by or for his family or by or for his partner. For purposes of this paragraph, the family of an individual includes only his brothers and sis- ters (whether by the whole or half blood), spouse, ancestors, and lineal descendants. (3) Options If any person has an option to acquire stock, such stock shall be considered as owned by such person. For purposes of this para- graph, an option to acquire such an option, and each one of a series of such options, shall be considered as an option to acquire such stock. (4) Application of family-partnership and option rules Paragraphs (2) and (3) shall be applied- (A) for purposes of the stock ownership requirement provided in section 552(a)(2), if, but only if, the effect is to make the cor- poration a foreign personal holding compa- ny; (B) for purposes of section 553(a)(5) (re- lating to personal service contracts) or of section 553(a)(6) (relating to the use of property by shareholders), if, but only if, the effect is to make the amounts therein referred to includible under such paragraph as foreign personal holding company income. (5) Constructive ownership as actual ownership Stock constructively owned by a person by reason of the application of paragraph (1) or (3) shall, for purposes of applying paragraph (1) or (2), be treated as actually owned by such person; but stock constructively owned by an individual by reason of the application of paragraph (2) shall not be treated as owned by him for purposes of again applying such paragraph in order to make another the constructive owner of such stock. (6) Option rule in lieu of family and partnership rule If stock may be considered as owned by an individual under either paragraph (2) or (3) it shall be considered as owned by him under paragraph (3). (b) Convertible securities Outstanding securities convertible into stock (whether or not convertible during the taxable year) shall be considered as outstanding stock- (1) for purposes of the stock ownership re- quirement provided in section 552(a)(2), but only if the effect of the inclusion of all such securities is to make the corporation a foreign personal holding company; (2) for purposes of section 553(a)(5) (relat- ing to personal service contracts), but only if the effect of the inclusion of all such securi- ties is to make the amounts therein referred to includible under such paragraph as foreign personal holding company income; and (3) for purposes of section 553(a)(6) (relat- ing to the use of property by shareholders), but only if the effect of the inclusion of all such securities is to make the amounts there- in referred to includible under such para- graph as foreign personal holding company income. The requirement in paragraphs (1), (2), and (3) that all convertible securities must be included if any are to be included shall be subject to the exception that, where some of the outstanding securities are convertible only after a later date than in the case of others, the class having the earlier conversion date may be included al- though the others are not included, but no con- vertible securities shall be included unless all outstanding securities having a prior conversion date are also included. (Aug. 16, 1954, ch. 736, 68A Stat. 196; Feb. 26, 1964, Pub. L. 88-272, title II, § 225(e), 78 Stat. 86.) AMEDMEmTS 1964-Pub. L. 88-272 amended section generally by designating existing provisions as subsec. (a), and sub- stituting pars. (1) to (6) therein and subsec. (b), for provisions which incorporated by reference substan- tially the same provisions as in such pars. (1) to (6) and subsec. (b). Ec aivE DATE OF 1964 AMEmMENT Amendment by Pub. L. 88-272 applicable to taxable years beginning after Dec. 31, 1963, see section 225(l)(1) of Pub. L. 88-272 set out as an Effective Date of 1964 Amendment note under section 316 of this title. CRoss REFERENcEs Liquidations before Jan. 1, 1966, see section 225(h) of Pub. L. 88-272, set out as a note under section 333 of this title. § 555. Gross income of foreign personal holding com- panies (a) General rule For purposes of this part, the term "gross income" means, with respect to a foreign corpo- ration, gross income computed (without regard to the provisions of subehapter N (see. 861 and following)) as if the foreign corporation were a domestic corporation which is a personal hold- ing company. (b) Additions to gross income In the case of a foreign personal holding com- pany (whether or not a United States group, as defined in section 552(a)(2), existed with re- spect to such company on the last day of its taxable year) which was a shareholder in an- other foreign personal holding company on the day in the taxable year of the second company which was the last day on which a United States group existed with respect to the second company, there shall be included, as a dividend, in the gross income of the first company, for the taxable year in which or with which the taxable year of the second company ends, the amount the first company would have received as a dividend if on such last day there had been distributed by the second company, and re- ceived by the shareholders, an amount which bears the same ratio to the undistributed for- eign personal holding company income of the § 555 Page 424
TITLE 26-INTERNAL REVENUE CODE second company for its taxable year as the por- tion of such taxable year up to and including such last day bears to the entire taxable year. (c) Application of subsection (b) The rule provided in subsection (b)- (1) shall be applied in the case of a foreign personal holding company for the purpose of determining its undistributed foreign person- al holding company income which, or a part of which, is to be included in the gross income of its shareholders, whether United States shareholders or other foreign personal hold- ing companies; (2) shall be applied in the case of every for- eign corporation with respect to which a United States group exists on some day of its taxable year, for the purpose of determining whether such corporation meets the gross income requirements of section 552(a)(1). (Aug. 16, 1954, ch. 736, 68A Stat. 196.) CROSS REFRENCES Charitable contributions adjustment to taxable income, see section 556 of this title. Deduction for obligations of United States and its in. strumentalites, see section 551 of this title. SECTIoN REFERRED TO IN OTrM SECTIONS This section is referred to in sections 551, 552, 556, 6035 of this title. § 556. Undistributed foreign personal holding compa- ny income (a) Definition For purposes of this part, the term "undistri- buted foreign personal holding company income" means the taxable income of a foreign personal holding company adjusted in the manner provided in subsection (b), minus the dividends paid deduction (as defined in section 561). (b) Adjustments to taxable income For the purposes of subsection (a), the tax- able income shall be adjusted as follows: (1) Taxes There shall be allowed as a deduction Fed- eral income and excess profits taxes and income, war profits, and excess-profits taxes of foreign countries and possessions of the United States (to the extent not allowable as a deduction under section 275(a)(4)), accrued during the taxable year, but not including the accumulated earnings tax imposed by section 531, the personal holding company tax im- posed by section 541, or the taxes imposed by corresponding sections of a prior income tax law. A taxpayer which, for each taxable year in which it was subject to the provisions of supplement P of the Internal Revenue Code of 1939, deducted Federal income and excess profits taxes when paid for the purpose of computing undistributed supplement P net income under such code, shall deduct taxes under this paragraph when paid, unless the corporation elects, under regulations pre- scribed by the Secretary, after the date of en- actment of this title to deduct the taxes de- scribed in this paragraph when accrued. Such election shall be irrevocable and shall apply to the taxable year for which the election is made and to all subsequent taxable years. (2) Charitable contributions The deduction for charitable contributions provided under section 170 shall be allowed, but in computing such deduction the limita- tions in section 170(b)(1)(A), (B), and (D) shall apply, and section 170(b)(2) and (d)(1) shall not apply. For purposes of this para- graph, the term "contribution base" when used in section 170(b)(1) means the taxable income computed with the adjustments (other than the 5-percent limitation) pro- vided in section 170(b)(2) and (d)(1) and with- out the deduction of the amounts disallowed under paragraphs (5) and (6) of this subsec- tion or the inclusion in gross income of the amounts includible therein as dividends by reason of the application of the provisions of section 555(b) (relating to the inclusion in gross income of a foreign personal holding company of its distributive share of the un- distributed foreign personal holding company income of another company in which it is a shareholder). (3) Special deductions disallowed The special deductions for corporations pro- vided in part VIII (except section 248) of sub- chapter B (section 241 and following, relating to the deduction for dividends received by corporations, etc.) shall not be allowed. (4) Net operating loss The net operating loss deduction provided in section 172 shall not be allowed, but there shall be allowed as a deduction the amount of the net operating loss (as defined in section 172(c)) for the preceding taxable year com- puted without the deductions provided in part VIII (except section 248) of subchapter B. (5) Expenses and depreciation applicable to proper- ty of the taxpayer The aggregate of the deductions allowed under section 162 (relating to trade or busi- ness expenses) and section 167 (relating to de- preciation) which are allocable to the oper- ation and maintenance of property owned or operated by the company, shall be allowed only in an amount equal to the rent or other compensation received for the use of, or the right to use, the property, unless it is estab- lished (under regulations prescribed by the Secretary) to the satisfaction of the Secre- tary- (A) that the rent or other compensation received was the highest obtainable, or, if none was received, that none was obtain- able; (B) that the property was held in the course of a business carried on bona fide for profit; and (C) either that there was reasonable ex- pectation that the operation of the proper- ty would result in a profit, or that the prop- erty was necessary to the conduct of the business. (6) Taxes and contributions to pension trusts The deductions provided in section 164(e) (relating to taxes of a shareholder paid by the corporation) and in section 404 (relating to pension, etc., trusts) shall not be allowed. Page 425 § 556
TITLE 26-INTERNAL REVENUE CODE (Aug. 16, 1954, ch. 736, 68A Stat. 196; Sept. 2, 1958, Pub. L. 85-866, title I, § 33(a), (b)(1), (c)(1), 72 Stat. 1632; Feb. 2, 1962, Pub. L. 87- 403, § 3(e), 76 Stat. 7; Feb. 26, 1964, Pub. L. 88- 272, title II, §§ 207(b)(6), 209(c)(2), 78 Stat. 42, 46; Dec. 30, 1969, Pub. L. 91-172, title II, § 201(a)(2)(B), 83 Stat. 558; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§1901(a)(80), (b)(32)(G), 1906(b)(13)(A), 90 Stat. 1778, 1800, 1834.) REFERENCEs IN TEXT Supplement P of the Internal Revenue Code of 1939, referred to in subsec. (b)(1), was comprised of sections 331 to 340 of former Title 26, Internal Revenue Code. Supplement P was repealed by section 7851(a)(1)(A) of this title. For table of comparisons of the 1939 Code to the 1954 Code, see Table I preceding section 1 of this title. See also section 7851(e) of this title for provision that references in the 1954 Code to a provision of the 1939 Code, not then applicable, shall be deemed a ref- erence to the corresponding provision of the 1954 Code, which is then applicable. AMENDmENTs 1976-Subsec. (b)(1). Pub. L. 94-455, §§ 1901(a)(80), 1906(b)(13)(A), struck out "(other than the excess profits tax imposed by subchapter E of chapter 2 of the Internal Revenue Code of 1939 for taxable years beginning after December 31, 1940)" following "deduc- tion Federal income and excess profits taxes" and "or his delegate" following "Secretary". Subsec. (b)(5). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" in two places. Subsec. (b)(7). Pub. L. 94-455, § 1901(b)(32)(G), struck out subsec. (b)(7) relating to disallowance of de- duction as applied to taxes of a shareholder paid by th'. corporation and contributions to pension funds. Subsec. (b)(8). Pub. L. 94-455, § 1901(b)(32)(G), struck out subsec. (b)(8) relating to special adjustment on disposition of antitrust stock received as a dividend. 1969-Subsec. (b)(2). Pub. L. 91-172 substituted "sec- tion 170(b)(1)(A), (B), and (D)" and "section 170(b)(2) and (d)(1)" for "section 170(b)(1)(A) and (B)" and "section 170(b)(2) and (5)" respectively in the provi- sions of the first sentence setting out the sections ap- propriate to the computation of the deduction, and in the provisions of the second sentence describing appli- cability of terms for purposes of this paragraph, sub- stituted "contribution base" and "section 170(b)(2) and (d)(1)" for "adjusted gross income" and "the first sentence of section 170(b)(2) and (5)", respectively. 1964-Subsec. (b)(1), (2). Pub. L. 88-272 substituted "section 275(a)(4)" for "section 164(b)(6)" in par. (1), and inserted the reference to section 170(b)(5) in par. (2). 1962-Subsec. (b)(7), (8). Pub. L. 87-403 added subsec. (b)(7), (8). 1958-Subsec. (b)(2). Pub. L. 85-866, § 33(a)(1), (2), substituted in the first sentence "but in computing such deduction the limitations in section 170(b)(1)(A) and (B) shall apply, and section 170(b)(2) shall not apply" for "but with the limitation in section 170(b)(1)(A) and (B) (in lieu of the limitation in sec- tion 170(b)(2))" and in the second sentence "the tax- able income computed with the adjustments (other than the 5-percent limitation) provided in the first sentence of section 170(b)(2) for "the taxable income computed with the adjustments provided in section 170(b)(2)". Subsec. (b)(3). Pub. L. 85-866, §33(b)(1), substituted "section 248" for "sections 242 and 248". Subsec. (b)(4). Pub. L. 85-866, §33(c)(1), inserted "computed without the deductions provided in part VIII (except section 248) of subchapter B". EFFECTIVE DATE OF 1976 AmENMENT Amendment by Pub. L. 94-455 applicable with re- spect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Amendment by Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1969, see section 201(g) of Pub. I. 91-172, set out as an Effective Date of 1969 Amendment note under section 170 of this title. EFFcrxvE DATE OF 1964 AMENDMENT Amendment of subsec. (b)(1) by Pub. L. 88-272, § 207(b)(6), applicable to taxable years beginning after Dec. 31, 1963, see section 207(c) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 164 of this title. Amendment of subsec. (b)(2) by Pub. L. 88-227, § 209(c)(2). applicable to contributions paid in taxable years beginning after Dec. 31, 1963, see section 209(f)(1) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 170 of this title. EFFECTIVE DATE OF 1962 AmENDMENT Amendment by Pub. L. 87-403 applicable only with respect to distribution made after Feb. 2, 1962, see sec- tion 3(g) of Pub. L. 87-403, set out as an Effective Date of 1962 Amendment note under section 312 of this title. EFFECTIVE DATE OF 1958 AMENDMENT Amendment of subsec. (b)(2) by Pub. L. 85-866 appli- cable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 1(c) of Pub. L. 85-866, set out as an Effective Date of 1958 Amend- ment note under section 165 of this title. Section 33(b)(2) of Pub. L. 85-866 provided that: "The amendmmt made by paragraph (1) [to subsec. (b)(3) of this section] shall apply only with respect to taxable years ending after December 31, 1957." Section 33(c)(2) of Pub. L. 85-866 provided that: "The amendment made by paragraph (1) [to subsec. (b)(4) of this section] shall apply with respect to ad- justments under section 556(b)(4) of the Internal Rev- enue Code of 1954 [subsec. (b)(4) of this section) for taxable years ending after December 31, 1957." CROSS REFRN cES Provisions for computation of tax on change of annual accounting period upon making returns for period less than 12 months as inapplicable in computa- tion of tax imposed by this section, see section 557 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 508, 557, 4947, 4948 of this title. § 557. Income not placed on annual basis Section 443(b) (relating to computation of tax on change of annual accounting period) shall not apply in the computation of the undistri- buted foreign personal holding company income under section 556. (Aug. 16, 1954, ch. 736, 68A Stat. 198.) CROSS REFERENcES Accumulated earnings tax computation as not sub- ject to section 443(b), see section 536 of this title. Personal holding company tax computation as not subject to section 443(b), see section 546 of this title. Regulated investment company taxable income com- putation as not subject to section 443(b), see section 852 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 443 of this title. Page 426
TITLE 26-INTERNAL REVENUE CODE § 558. Returns of officers, directors, and shareholders of foreign personal holding companies For provisions relating to returns of officers, directors, and shareholders of foreign personal holding companies, see section 6035. (Added Pub. L. 85-866, title I, § 33(d)(1), Sept. 2, 1958, 72 Stat. 1632.) EFFEcrIvE DATE Section applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see sec- tion 1(c) of Pub. L. 85-866, set out as an Effective Date of 1958 Amendment note under section 165 of this title. PART IV-DEDUCTION FOR DIVIDENDS PAID See. 561. Definition of deduction for dividends paid. 562. Rules applicable in determining dividends eligible for dividends paid deduction. 563. Rules relating to dividends paid after close of taxable year. 564. Dividend carryover. 565. Consent dividends. § 561. Definition of deduction for dividends paid (a) General rule The deduction for dividends paid shall be the sum of- (1) the dividends paid during the taxable year, (2) the consent dividends for the taxable year (determined under section 565), and (3) in the case of a personal holding compa- ny, the dividend carryover described in sec. tion 564. (b) Special rules applicable In determining the deduction for dividends paid, the rules provided in section 562 (relating to rules applicable in determining dividends ':li- gible for dividends paid deduction) and section 563 (relating to dividends paid after the close of the taxable year) shall be applicable. (Aug. 16, 1954, ch. 736, 68A Stat. 198; Feb. 2, 1962, Pub. L. 87-403, § 3(f), 76 Stat. 8; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(b)(32)(H), 90 Stat. 1800.) AMENDMzNs 1976-Subsec. (b). Pub. L. 94455 redesignated exist- ing provisions of par. (1) as (b) and struck out par. (2) relating to special adjustment on disposition of anti. trust stock as a dividend. 1962-Subsec. (b). Pub. L. 87403 designated existing provisions as par. (1) and added par. (2). EmcrxvE DATE OF 1976 AmENDMENT Amendment by Pub. L. 94-455 applicable with re- spect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 2 of this title. EFFEcTIVE DATE OF 1962 AmENDmErr Amendment by Pub. L. 87-403 applicable only with respect to distributions made after Feb. 2, 1962, see section 3(g) of Pub. L. 87403, set out as an Effective Date of 1962 Amendments note under section 312 of this title. CRoss RErEENcEs Accumulated taxable income as taxable income minus, among others, dividends paid deduction, and accumulated earnings credit as related to dividends paid deduction, see section 535 of this title. Deficiency dividend deduction of personal holding companies, see section 547 of this title. Taxation of regulated investment companies and their shareholders, see section 852 of this title. Undistributed foreign personal holding company income as taxable income minus, among others, divi- dends paid deduction, see section 556 of this title. Undistributed personal holding company income as taxable income minus, among others, dividends paid deduction, see section 545 of this title. SECTION REFERRED TO IN OTiER SECTIONS This section is referred to in sections 535, 545, 547, 556, 564, 565, 852, 857, 4981 of this title. § 562. Rules applicable in determining dividends eligi- ble for dividends paid deduction (a) General rule For purposes of this part, the term "divi- dend" shall, except as otherwise provided in this section, include only dividends described in section 316 (relating to definition of dividends for purposes of corporate distributions). (b) Distributions in liquidation (1) Except in the case of a personal holding company described in section 542 or a foreign personal holding company described in sec- tion 552- (A) in the case of amounts distributed in liquidation, the part of such distribution which is properly chargeable to earnings and profits accumulated after February 28, 1913, shall be treated as a dividend for pur- poses of computing the dividends paid de- duction, and (B) in the case of a complete liquidation occurring within 24 months after the adop- tion of a plan of liquidation, any distribu- tion within such period pursuant to such plan shall, to the extent of the earnings and profits (computed without regard to capital losses) of the corporation for the taxable year in which such distribution is made, be treated as a dividend for purposes of com- puting the dividends paid deduction. (2) In the case of a complete liquidation of a personal holding company, occurring within 24 months after the adoption of a plan of liq- uidation, the amount of any distribution within such period pursuant to such plan shall be treated as a dividend for purposes of computing the dividends paid deduction, to the extent that such amount is distributed to corporate distributees and represents such corporate distributees' allocable share of the undistributed personal holding company income for the taxable year of such distribu- tion computed without regard to this para- graph and without regard to subparagraph (B) of section 316(b)(2). (c) Preferential dividends The amount of any distribution shall not be considered as a dividend for purposes of com- puting the dividends paid deduction, unless such distribution is pro rata, with no preference to any share of stock as coml Ared with other shares of the same class, and with no prefer- ence to one class of stock as compared with an- other class except to the extent that the former is entitled (without reference to waivers Page 427 § 562
TITLE 26-INTERNAL REVENUE CODE of their rights by shareholders) to such prefer- ence. (d) Distributions by a member of an affiliated group In the case where a corporation which is a member of an affiliated group of corporations filing or rf.quired to file a consolidated return for a taxp ole year is required to file a separate personal holding company schedule for such taxable year, a distribution by such corporation to another member of the affiliated group shall be considered as a dividend for purposes of computing the dividends paid deduction if such distribution would constitute a dividend under the other provisions of this section to a recipi- ent which is not a member of an affiliated group. (Aug. 16, 1954, ch. 736, 68A Stat. 198; Feb. 26, 1964, Pub. L. 88-272, title II, § 225(f)(3), 78 Stat. 88.) AMENDMENTS 1964-Subsec. (b). Pub. L. 88-272 designated existing provisions as subpars. (A) and (B) of par. (1), excepted personal holding companies in section 542, and foreign personal holding companies in section 552 therefrom, and added par. (2). EFFEcTIvE DATE OF 1964 AMENDMENT Amendment Pub. L. 88-272 applicable to distribu- tions made in any taxable year of the distributing cor- poration beginning after Dec. 31, 1963, see section 225() of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 316 of this title. CROSS REFERENCES Limitations on consent dividends, see section 565 of this title. Liquidations before Jan. 1, 1966, see section 225(h) of Pub. L. 88-272, set out as a note under section 333 of this title. Partial liquidation defined, see section 346 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 316, 346, 543, 561, 563, 565, 852 of this title. § 563. Rules relating to dividends paid after close of taxable year (a) Accumulated earnings tax In the determination of the dividends paid deduction for purposes of the accumulated earnings tax imposed by section 531, a dividend paid after the close of any taxable year and on or before the 15th day of the third month fol- lowing the close of such taxable year shall be considered as paid during such taxable year. (b) Personal holding company tax In the determination of the dividends paid deduction for purposes of the personal holding company tax imposed by section 541, a dividend paid after the close of any taxable year and on or before the 15th day of the third month fol- lowing the close of such taxable year shall, to the extent the taxpayer elects in its return for the taxable year, be considered as paid during such taxable year. The amount allowed as a dividend by reason of the application of this subsection with respect to any taxable year shall not exceed either- (1) The undistributed personal holding com- pany income of the corporation for the tax- able year, computed without regard to this subsection, or (2) 20 percent of the sum of the dividends paid during the taxable year, computed with- out regard to this subsection. (c) Dividends considered as paid on last day of tax- able year For the purpose of applying section 562(a), with respect to distributions under subsection (a) or (b) of this section, a distribution made after the close of a taxable year and on or before the 15th day of the third month follow- ing the close of the taxable year shall be con- sidered as made on the last day of such taxable year. (Aug. 16, 1954, ch. 736, 68A Stat. 199; Dec. 30, 1969, Pub. L. 91-172, title IX, § 914(a), 83 Stat. 823.) AMENDMENTS 1969-Subsec. (b)(2). Pub. L. 91-172 substituted "20 percent" for "10 percent". EFcTivE DATE OF 1969 AMENDMENT Section 914(b) of Pub. L. 91-172 provided that: "The amendment made by subsection (a) (amending this section] shall apply to taxable years beginning after December 31, 1969." CROSS REFERENCES Accumulated earnings credit reduced under certain circumstances by dividends paid after close of taxable year but considered as paid during taxable year, see section 535 of this title. Deficiency dividend deduction of personal holding companies, see section 547 of this title. Personal hold- ing company dividend defined, see section 316 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 316, 535, 543, 547, 561 of this title. § 564. Dividend carryover (a) General rule For purposes of computing the dividends paid deduction under section 561, in the case of a personal holding company the dividend car- ryover for any taxable year shall be the divi- dend carryover to such taxable year, computed as provided in subsection (b), from the two pre- ceding taxable years. (b) Computation of dividend carryover The dividend carryover to the taxable year shall be determined as follows: (1) For each of the 2 preceding taxable years there shall be determined the taxable income computed with the adjustments pro- vided in section 545 (whether or not the tax- payer was a personal holding company for either of such preceding taxable years), and there shall also be determined for each such year the deduction for dividends paid during such year as provided in section 561 (but de- termined without regard to the dividend car- ryover to such year). (2) There shall be determined for each such taxable year whether there is an excess of such taxable income over such deduction for dividends paid or an excess of such deduction for dividends paid over such taxable income, and the amount of each such excess. § 5,63 Page 428
TITLE 26-INTERNAL REVENUE CODE (3) If there is an excess of such deductions for dividends paid over such taxable income for the first preceding taxable year, such excess shall be allowed as a dividend car- ryover to the taxable year. (4) If there is an excess of such deduction for dividends paid over such taxable income for the second preceding taxable year, such excesa shall be reduced by the amount deter- mined in paragraph (5), and the remainder of such excess shall be allowed as a dividend car- ryover to the taxable year. (5) The amount of the reduction specified in paragraph (4) shall be the amount of the excess of the taxable income, if any, for the first preceding taxable year over such deduc- tion for dividends paid, if any, for the first preceding taxable year. (Aug. 16, 1954, c. 736, 68A Stat. 200; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(a)(81), 90 Stat. 1778.) AMENDMENTS 1976-Subsec. (c). Pub. L. 94-455 struck out subsec. (c) which related to the determination of dividend car- ryover from taxable years to which this subtitle does not apply. EFFECTIVE DATE OF 1976 AMENDMENT Amendment by Pub. L. 94-455 applicable with re- spect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 2 of this title, CROSS REFERENCES Items of distributor or transferor corporation in car- ryover situations as including dividend carryover de- scribed in this section, see section 381 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 381, 561 of this title. § 565. Consent dividends (a) General rule If any person owns consent stock (as defined in subsection (f)(1)) in a corporation on the last day of the taxable year of such corporation, and such person agrees, in a consent filed with the return of such corporation in accordance with regulations prescribed by the Secretary, to treat as a dividend the amount specified in such consent, the amount so specified shall, except as provided in subsection (b), constitute a con- sent dividend for purposes of section 561 (relat- ing to the deduction for dividends paid). (b) Limitations A consent dividend shall not include- (1) an amount specified in a consent which, if distributed in money, would constitute, or be part of, a distribution which would be dis- qualified for purposes of the dividends paid deduction under section 562(c) (relating to preferential dividends), or (2) an amount specified in a consent which would not constitute a dividend (as defined in section 316) if the total amounts specified in consents filed by the corporation had been distributed in money to shareholders on the last day of the taxable year of such corpora- tion. () Effect of consent The amount of a consent dividend shall be considered, for purposes of this title- (1) as distributed in money by the corpora- tion to the shareholder on the last day of the taxable year of the corporation, and (2) as contributed to the capital of the cor- poration by the shareholder on such day. (d) Consent dividends and other distributions If a distribution by a corporation consists in part of consent dividends and in part of money or other property, the entire amount specified in the consents and the amount of such money or other property shall be considered together for purposes of applying this title. (e) Nonresident aliens and foreign corporations In the case of a consent dividend which, if paid in money would be subject to the provi- sions of section 1441 (relating to withholding of tax on nonresident aliens) or section 1442 (re- lating to withholding of tax on foreign corpora- tions), this section shall not apply unless the consent is accompanied by money, or such other medium of payment as the Secretary may by regulations authorize, in an amount equal to the amount that would be required to be de- ducted and withheld under sections 1441 or 1442 If the consent dividend had been, on the last day of the taxable year of the corporation, paid to the shareholder in money as a dividend. The amount accompanying the consent shall be credited against the tax imposed by this subti- tle on the shareholder. (f) Definitions (1) Consent stock Consent stock, for purposes of this section, means the class or classes of stock entitled, after the payment of preferred dividends, to a share in the distribution (other than in com- plete or partial liquidation) within the tax- able year of all the remaining earnings and profits, which share constitutes the same pro- portion of such distribution regardless of the amount of such distribution. (2) Preferred dividends Preferred dividends, for purposes of this section, means a distribution (other than in complete or partial liquidation), limited in amount, which must be made on any class of stock before a further distribution (other than in complete or partial liquidation) of earnings and profits may be made within the taxable year. (Aug. 16, 1954, ch. 736, 68A Stat. 200; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Subsecs. (a), (e). Pub. L. 94-455 struck out "or his delegate" following "Secretary". SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 543, 561 of this title. Subchapter H-Banking Institutions Part I. Rules of general application to banking Institu- tions. II. Mutual savings banks, etc. Page 429 § 565
TITLE 26-INTERNAL REVENUE CODE AMENDMENTS 1976-Pub. L. 94-455. title XIX, § 1901(b)(20)(C), Oct. 4. 1976, 90 Stat. 1797, struck out Part III from Part analysis. PART I-RULES OF GENERAL APPLICA- TION TO BANKING INSTITUTIONS See. 581. 582. C583. 584. 585. 586. Definition of bank. Bad debts, losses, and gains with respect to secu- rities held by financial institutions. Repealed.] Common trust funds. Reserves for losses on loans of banks. Reserves for losses on loans of small business in- vestment companies, etc. AMENDMENTS 1976-Pub. L. 94-455, title XIX, § 1901(b)(18), Oct. 4, 1976, 90 Stat. 1796, struck out item 583. 1969-Pub. L. 91-172. title IV. § 431(c)(2), Dec. 30, 1989, 83 Stat. 620, substituted "Bad debts, losses, and gains with respect to securities held by financial insti- tutions", for "Bad debt and loss deduction with re- spect to securities held by banks" in item 582, and added items 585 and 586. § 581. Definition of bank For purposes of sections 582 and 584, the term "bank" means a bank or trust company in, corporated and doing business under the laws of the United States (including laws relating to the District of Columbia) or of any State, a sub- stantial part of the business of which consists of receiving deposits and making loans and dis- counts, or of exercising fiduciary powers similar to those permitted to national banks under au- thority of the Comptroller of the Currency, and which is subject by law to supervision and examination by State, Territorial, or Federal authority having supervision over banking in- stitutions. Such term also means a domestic building and loan association. (Aug. 16, 1954, ch. 736, 68A Stat. 202; Sept. 28, 1962, Pub. L. 87-722, § 5, 76 Stat. 670; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(c)(5), 90 Stat. 1803.) AMENDMENTS 1976-Pub. L. 94-455 substituted "or of any State" for "of any State, or of any Territory" following "Dis- trict of Columbia)" and struck out "Territorial" fol- lowing "examination by State". 1962-Pub. L. 87-722 substituted "authority of the Comptroller of the Currency" for "section 11(k) of the Federal Reserve Act (38 Stat. 262; 12 U.S.C. 248(k))". CROss R'ramcES Debts owed by political parties, etc., deduction of, see section 271 of this title. Per.onal holding company as excluding bank as de- fined in this section, see section 542 of this title. Returns of banks with respect to common trust funds, see section 6032 of this title. SECTION RMWUU~M TO IN OTHER SECTIONS This section is referred to in sections 271, 279, 401, 542, 585, 586, 593, 992, 6032. 6323, 7512, 7609 of this title. § 582. Bad debts, losses, and gains with respect to se- curities held by financial institutions (a) Securities Notwithstanding sections 165(g)(1) and 166(e), subsections (a), (b), and (c) of section 166 (relating to allowance of deduction for bad debts) shall apply in the case of a bank to a debt which is evidenced by a security as defined in section 165(g)(2)(C). (b) Worthless stock in affiliated bank For purposes of section 165(g)(1), where the taxpayer is a bank and owns directly at least 80 percent of each class of stock of another bank, stock in such other bank shall not be treated as a capital asset. (c) Bond, etc., losses and gains of financial institu- tions (1) General rule For purposes of this subtitle, in the case of a financial institution to which section 585, 586, or 593 applies, the sale or exchange of a bond, debenture, note, or certificate or other evidence of indebtedness shall not be consid- ered a sale or exchange of a capital asset. (2) Transitional rule for banks In the case of a bank, if the net long-term capital gains of the taxable year from sales or exchanges of qualifying securities exceed the net short-term capital losses of the taxable year from such sales or exchanges, such excess shall be considered as gain from the sale of a capital asset held for more than 9 months to the extent it does not exceed the net gain on sales and exchanges described in paragraph (1). (3) Special rules For purposes of this subsection- (A) The term "qualifying security" means a bond, debenture, note, or certificate or other evidence of indebtedness held by a bank on July 11, 1969. (B) The amount treated as capital gain or loss from the sale or exchange of a qualify- ing security shall be determined by multi- plying the amount of capital gain or loss from the sale or exchange of such security (determined without regard to this subsec- tion) by a fraction, the numerator of which is the number of days before July 12, 1969, that such security was held by the bank, and the denominator of which is the number of days the security was held by the bank. (4) Transitional rule for banks In the case of a corporation which would be a bank except for the fact that it is a foreign corporation, the net gain, if any, for the tax- able year on sales and exchanges described in paragraph (1) shall be considered as gain from the sale or exchange of a capital asset to the extent such net gain does not exceed the portion of any capital loss carryover to such taxable year which is attributable to capital losses on sales or exchanges described in para- graph (1) for a taxable year beginning before July 12, 1969. For purposes of the preceding sentence, the portion of a net capital loss for a taxable year which is attributable to capital losses on sales or exchanges described in para- graph (1) is the amount of the net capital loss on such sales or exchanges for such taxable year (but not in excess of the net capital loss for such taxable year). (Aug. 16, 1954, ch. 736, 68A Stat. 202; Sept. 2, 1958, Pub. L. 85-866, title I, § 34, 72 Stat. 1632; § 5s1 Page 430
TITLE 26-INTERNAL REVENUE CODE Dec. 30, 1969, Pub. L. 91-172, title IV, § 433(a), (c), 83 Stat. 623, 624; Oct. 4, 1976, Pub. L. 94- 455, title X, § 1044(a), title XIV, § 1402(b)(1)(G), 90 Stat. 1642.) TAXABLE YEA s AFTER 1977 Subsec. (c)(2) of this section amended by Pub. L. 94-455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, effective for taxable years beginning after Dec. 31, 1977, by sub- stituting "1 year"for "9 months". AMENDMENTS 1976-Subsec. (c)(2). Pub. L. 94-455, § 1402(b)(1)(G), (2), provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977. Subsec. (c)(4). Pub. L. 94-455, § 1044(a), added par. (4). 1969-Pub. L. 91-172, §433(c), substituted "Bad debts, losses, and gains with respect to securities held by financial institutions" for "Bad debt and loss de- duction with respect to securities held by banks" in the section catchline. Subsec. (c). Pub. L. 91-172, § 433(a), redesignated ex- isting provisions as par. (1), expended the p,'visions by reference to sections 585, 586 and 593 in ptc. (1) as redesignated, and added pars. (2) and (3). 1958-Subsec. (c). Pub. L. 85-866 deleted "with inter- est coupons or in registered form," preceding "exceed the gains". Er r icTvE DATE o 1976 AismimrT Section 1044(b) of Pub. L. 94-455 providnd that: "(1) The amendment made by subsection (a) (enact- ing subsec. (c)(4) of this section] shall apply with re- spect to taxable years beginning after July 11, 1969. "(2) If the refund or credit of any overpayment at- tributable to the application of the amendment made by subsection (a) to any taxable year is otherwise pre- vented by the operation of any law or rule of law (other than section 7122 of the Internal Revenue Code of 1954, relating to compromises) on the day which is one year after the date of the enactment of this Act [Oct. 4, 1976], such credit or refund shall be neverthe- less allowed or made if claim therefor is filed on or before such day." Section 1402(b)(1) of Pub. L. 94-455 provided in part that the substitution of "9 months" for "6 months" in subsec. (c)(2) of this section by section 1402(b)(1)(G) of Pub. L. 94-455 is effective with respect to taxable years beginning in 1977. EFECzvE DATE oF 1969 AME-DuENr Section 433(d) of Pub. L. 91-172 provided that: "(1) In general.-The amendments made by this sec- tion [amending subsec. c) of this section and section 1243(1) of this title! shall apply to taxable years be- ginning after July 1", 969. "(2) Election for small business investment compa- nies and business development corporations.-Not- withstanding paragraph (1), in the case of a financial institution described in section 586(a) of the Internal Revenue Code of 1954 [section 586(a) of this title], the amendments made by this section [amending subsec. Wc) of this section and section 1243(1) of this title] shall not apply for its taxable years beginning after July 11, 1969, and before July 11, 1974, unless the tax- payer so elects at such time and in such manner as shall be prescribed by the Secretary of the Treasury or his delegate. Such election shall be irrevocable and shall apply to all such taxable years." E mTxv DATE OF 1958 AMDmENT Amendment of subsec. (c) by Pub. L. 85-866 applica- ble to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 1(c) of Pub. L. 85-866, set out as an Effective Date of 1958 Amend- ment note under section 165 of this title. CRoss REFERENcEs Bonds and other evidences of indebtedness, sale or exchange, see section 1232 of this title. Capital asset defined, see section 1221 of this title. Dealers in securities, see section 1236 of this title. Definition of bank, see section 581 of this title. SEcTION REFERRm TO IN OrmEn SECTzONs This section is referred to in sections 166, 581, 1236 of this title. [§ 583. Repealed. Pub. L. 94-455, title XIX, § 1901(a)(82), Oct 4, 1976, 90 Stat. 17781 Section, act Aug. 16, 1954, ch. 736, 68A Stat. 736, re- lated to deductions by certain taxpayers of dividends paid to the United States or any instrumenta'ity thereof exempt from Federal Income taxes on the pre- ferred stock of the corporation owned by the United States or such instrumentality. EFFECTIVE DATE OF REPEAL Repeal of section effective with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. § 584. Common trust funds (a) Definitions For purposes of this subtitle, the term "common trust fund" means a fund maintained by a bank- (1) exclusively for the collective investment and reinvestment of moneys contributed thereto by the bank in its capacity- (A) as a trustee, executor, administrator, or guardian, or (B) as a custodian of accounts- (1) which the Secretary determines are established pursuant to a State law which is substantially similar to the Uniform Gifts to Minors Act as published by the American Law Institute, and (ii) with respect to which the bank es- tablishes, to the satisfaction of the Secre- tary, that it has duties and responsibilities similar to duties and responsibilities of a trustee or guardian; and (2) in conformity with the rules and regula- tions, prevailing from time to time, of the Board of Governors of the Federal Reserve System or the Comptroller of the Currency pertaining to the collective investment of trust funds by national banks. For purposes of this subsection, two or more banks which are members of the same affiliated group (within the meaning of section 1504) shall be treated as one bank for the period of affiliation with respect to any fund of which any of the member banks is trustee or two or more of the member banks are cotrustees. (b) Taxation of common trust funds A common trust fund shall not be subject to taxation under this chapter and for purposes of this chapter shall not be considered a corpora- tion. (c) Income of participants in fund (1) Inclusions In taxable income Each participant in the common trust fund in computing its taxable income shall include, whether or not distributed and whether or not distributable- Page 431 § 584
TITLE 26-INTERNAL REVENUE CODE (A) as part of its gains and losses from sales or exchanges of capital assets held for not more than 9 months, its proportionate share of the gains and losses of the common trust fund from sales or exchanges of cap- ital assets held for not more than 9 months; (B) as part of Its gains and losses from sales or exchanges of capital assets held for more than 9 months, its proportionate share of the gains and losses of the common trust fund from sales or exchanges of cap- ital assets held for more than 9 months; (C) its proportionate share of the ordi- nary taxable income or the ordinary net loss of the common trust fund, computed as provided in subsection (d). (2) Dividends received The proportionate share of each participant in the amount of dividends received by the common trust fund and to which section 116 applies shall be considered for purposes of such section as having been received by such participant. (d) Computation of common trust fund income The taxable income of a common trust fund shall be computed in the same manner and on the same basis as in the case of an individual, except that- (1) there shall be segregated the gains and losses from sales or exchanges of capital assets; (2) after excluding all items of gain and loss from sales or exchanges of capital assets, there shall be computed- (A) an ordinary taxable income which shall consist of the excess of the gross income over deductions; or (B) an ordinary net loss which shall con- sist of the excess of the deductions over the gross income; (3) the deduction pro, Ided by section 170 (relating to charitable, eic., contributions and gifts) shall not be allowed; and (4) the standard deduction provided in sec- tion 141 shall not be allowed. (e) Admission and withdrawal No gain or loss shall be realized by the common trust fund by the admission or with- drawal of a participant. The admission of a par- ticipant shall be treated with respect to the participant as the purchase of, or an exchange for, the participating interest, The withdrawal of any participating interest by a participant shall be treated as a sale or exchange of such interest by the participant. (f) Different taxable years of common trust fund and participant If the taxable year of the common trust fund is different from that of a participant, the in- clusions with respect to the taxable income of the common trust fund, in computing the tax- able income of the participant for its taxable year, shall be based upon the taxable income of the common trust fund for any taxable year of the common trust fund ending within or with the taxable year of the participant. (g) Net operating loss deduction The benefit of the deduction for net operat- ing losses provided by section 172 shall not be allowed to a common trust fund, but shall be al- lowed to the participants in the common trust fund under regulations prescribed by the Secre- tary. (Aug. 16, 1954, ch. 736, 68A Stat. 203; Sept. 28, 1962, Pub. L. 87-722, § 4, 76 Stat. 670; Feb. 26, 1964, Pub. L. 88-272, title II, § 201(d)(5), 78 Stat. 32; Sept. 17, 1976, Pub. L. 94-414, § 1, 90 Stat. 1273; Oct. 4, 1976, Pub. L. 94-455, title XIV, § 1402(b)(1)(H), title XIX, §§ 1901(b)(1)(G), 1960(b)(13)(A), title XXI, §§ 2131(d), 2138, 90 Stat. 1732, 1790, 1834, 1924, 1932.) TAXABLE YEARS AFTER 1977 Subsecs. (c)(1)(A), (B) of this section amended by Pub. L. 94-455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, effec- tive for taxable years beginning after Dec. 31, 1977, by substituting "1 year" for "9 months". AMENDMENTS 1976-Subsec. (a). Pub. L. 94-414 added provision re- lating to treatment of two or more bank members of the same affiliated group. Subsec. (a)(1). Pub. L. 94-455, § 2138, designated ex- isting provisions relating to trustee, executor, adminis- trator and guardian as subpar. (A), and added subpar. (B). Subsec. (c)(1)(A), (B). Pub. L. 94-455, § 1402 (b)(1)(H), provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977. Subsec. (c)(2). Pub. L. 94-455, § 1901(b)(1)(G), struck out provisions relating to partially tax exempt interest and the election of a common trust fund to amortize premiums on bonds and other obligations. Subsec. (e). Pub. L. 94-455, § 2131(d), added "The ad- mission of a participant shall be treated with respect to the participant as the purchase of, or exchange for, the participating interest" following "withdrawal of a participant". Subsec. (g). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". 1964-Subsec. (c)(2). Pub. L. 88-272 deleted "section 34 or" preceding "section 116 applies". 1962-Subsec. (a)(2). Pub. L. 87-722 inserted "or the Comptroller of the Currency" after "the Board of Governors of the Federal Reserve System". EFFECTIVE DATE OF 1976 AMENDMENT Section 2131(f)(6) of Pub. L. 94-455 provided that: "The amendments made by subsections (d) and (e) [amending this section and section 683 of this title] shall take effect on April 8, 1976, in taxable years ending on or after such date." Section 1402(b)(1), (2) of Pub. L. 94-455 provided in part that the substitution of "9 months" for "6 months" in subsec. (c)(1)(A), (B) of this section by sec- tion 1402(b)(1)(H) of Pub. L. 94-455 is effective with respect to taxable years beginning in 1977. Amendment of subsec. (c)(2) by section 1901(b)(1)(G) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see sec- tion 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Section 2 of Pub. L. 94-414 provided that: "The amendment made by the first section of this Act [amending subsec. (a) of this section] shall apply to taxable years beginning after December 31, 1975." EFFECTxVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272 applicable with re- spect to dividends received after Dec. 31, 1964, in tax- able years ending after such date, ec section 201(e) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 37 of this title. Page 432 § 584
TITLE 26-INTERNAL REVENUE CODE SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 58, 170, 171, 581, 851 of this title. § 585. Reserves for losses on loans of banks (a) Institutions to which section applies This section shall apply to the following fi- nancial institutions: (1) any bank (as defined in section 581) other than an organization to which section 593 applies, and (2) any corporation to which paragraph (1) would apply except for the fact that it Is a foreign corporation, and in the case of any such foreign corporation this section shall apply only with respect to loans outstanding the interest on which is effectively connected with the conduct of a banking business within the United States. (b) Addition to reserves for bad debts (1) General rule For purposes of section 166(c), the reason- able addition to the reserve for bad debts of any financial institution to which this section applies shall be an amount determined by the taxpayer which shall not exceed the greater of- (A) for taxable years beginning before 1988 the addition to the reserve for losses on loans determined under the percentagie method as provided in paragraph (2), or (B) the addition to the reserve for losses on loans determined under the experience method as provided in paragraph (3). (2) Percentage method The amount determined under this para- graph for a taxable year shall be the amount necessary to increase the balance of the re- serve for losses on loans (at the close of the taxable year) to the allowable percentage of eligible loans outstanding at such time, except that- (A) If the reserve for losses on loans at the close of the base year is less than the al- lowable percentage of eligible loans out- standing at such time, the amount deter- mined under this paragraph with respect to the difference shall not exceed one-fifth of such difference. (B) If the reserve for losses on loans at the close of the base year is not less than the allowable percentage of eligible loans outstanding at such time, the amount deter- mined under this paragraph shall be the amount necessary to increase the balance of the reserve at the close of the taxable year to (I) the allowable percentage of eligible loans outstanding at such time, or (iti) the balance of the reserve at the close of the base yesr, whichever is greater, but if the amount of eligible loans outstanding at the close of the taxable year is less than the amount of such loans outstanding at the close of the base year, the amount deter- mined under clause (ii) shall be the amount necessary to increase the balance of the re- serve at the close of the taxable year to the amount which bears the same ratio to eligi- ble loans outstanding at the close of the taxable year as the balance of the reserve at the close of the base year bears to the amount of eligible loans outstanding at the close of the base year. For purposes of this paragraph, the term "al- lowable percentage" means 1.8 percent for taxable years beginning before 1976; 1.2 per- cent for taxable years beginning after 1975 but before 1982; and 0.6 percent for taxable years beginning after 1981. The amount de- termined under this paragraph shall not exceed 0.6 percent of eligible loans outstand- ing at the close of the taxable year or an amount sufficient to increase the reserve for losses on loans to 0.6 percent of eligible loans outstanding at the close of the taxable year, whichever is greater. For purposes of this paragraph, the term "base year" means: for taxable years beginning before 1976, the last taxable year beginning on or before July 11, 1969, for taxable years beginning after 1975 but before 1982, the last taxable year begin- ning before 1976, and for taxable years begin- ning after 1981, the last taxable year begin- ning before 1982; except that for purposes of subparagraph (A) such term means the last taxable year before the most recent adoption of the percentage method, if later. (3) Experience method The amount determined under this para- graph for a taxable year shall be the amount necessary to increase the balance of the re- serve for losses on loans (at the close of the taxable year) to the greater of- (A) the amount which bears the same ratio to loans outstanding at the close of the taxable year as (I) the total bad debts sustained during the taxable year and the 5 preceding taxable years (or, with the ap- proval of the Secretary, a shorter period), adjusted for recoveries of bad debts during such period, bears to (it) the sum of the loans outstanding at the close of such 6 or fewer taxable years, or (B) the lower of- (i) the balance of the reserve at the close of the base year, or (it) if the amount of loans outstanding at the close of the taxable year is less than the amount of loans outstanding at the close of the base year, the amount which bears the same ratio to loans out- standing at the close of the taxable year as the balance of the reserve at the close of the base year bears to the amount of loans outstanding at the close of the base year. For purposes of this paragraph, the base year shall be the last taxable year before the most recent adoption of the experience method, except that for taxable years beginning after 1987 the base year shall be the last taxable year beginning before 1988. (4) Regulations; definition of eligible loan, etc. The Secretary shall define the terms "loan" and "eligible loan" and prescribe such regula- tions as may be necessary to carry out the purposes of this section; except that the term "eligible loan" shall not include- (A) a loan to a bank (as defined In section 581), Page 433 § 585
TITLE 26-INTERNAL REVENUE CODE (B) a loan to a domestic branch of a for- eign corporation to which subsection (a)(2) applies, (C) a loan secured by a deposit (I) in the lending bank, or (ii) in an institution de- scribed in subparagraph (A) or (B) if the lending bank has control over withdrawal of such deposit, (D) a loan to or guaranteed by the United States, a possession or instrumentality thereof, or a State or a political subdivision thereof, (E) a loan evidenced by a security as de- fined in section 165(g)(2)(C), (F) a loan of Federal funds, and (G) commercial paper, including short- term promissory notes which may be pur- chased on the open market. (Added Pub. L. 91-172, title IV, § 431(a), Dec. 30, 1969, 83 Stat. 616, and amended Pub. L. 94- 455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) AMENDMENTS 1976-Subsecs. (b)(3), (4). Pub. L. 94-455 struck out "or his delegate" following "Secretary". EFFEcTIvE DATE Section 431(d) of Pub. L. 91-172 provided that: "The amendments made by subsections (a) (enacting this section and section 586 of this title] and (c) [adding par. (4) to section 166(h) of this title] shall apply to taxable years beginning after July 11, 1969." SECTION REWERED TO IN OTEN SECTIONS This section is referred to in sections 57, 166, 172, 582, 593 of this title. § 586. Reserves for losses on loans of small business investment companies, etc. (a) Institutions to which section applies This section shall apply to the following fi- nancial institutions: (1) any small business investment company operating under the Small Business Invest- ment Act of 1958, and (2) any business development corporation. For purposes of this section, the term "business development corporation" means a corporation which was created by or pursuant to an act of a State legislature for purposes of promoting, maintaining, and assisting the economy and in- dustry within such State on a regional or statewide basis by making loans to be used in trades and businesses which would generally not be made by banks (as defined in section 581) within such region or State in the ordinary course of their business (except on the basis of a partial participation), and which is operated primarily for such purposes. (b) Addition to reserves for bad debts (1) General rule For purposes of section 166(c), except as provided in paragraph (2) the reasonable ad- dition to the reserve for bad debts of any fi- nancial institution to which this section ap- plies shall be an amount determined by the taxpayer which shall not exceed the amount necessary to increase the balance of the re- serve for bad debts (at the close of the tax- able year) to the greater of- (A) the amount which bears the same ratio to loans outstanding at the close of the taxable year as (I) the total bad debts sustained during the taxable year and the 5 preceding taxable years (or, with the ap- proval of the Secretary, a shorter period), adjusted for recoveries of bad debts during such period, bears to (ii) the sum of the loans outstanding at the close of such 6 or fewer taxable years, or (B) the lower of- (i) the balance of the reserve at the close of the base year, or (ii) if the amount of loans outstanding at the close of the taxable year is less than the amount of loans outstanding at the close of the base year, the amount which bears the same ratio to loans out- standing at the close of the taxable year as the balance of the reserve at the close of the base year bears to the amount of loans outstanding at the close of the base year. For purposes of this subparagraph, the term "base year" means the last taxable year beginning on or before July 11, 1969. (2) New financial institutions In the case of any taxable year beginning not more than 10 years after the day before the first day on which a financial institution (or any predecessor) was authorized to do business as a financial institution described in subsection (a), the reasonable addition to the reserve for bad debts of such financial institu- tion shall not exceed the larger of the amount determined under paragraph (1) or the amount necessary to increase the balance of the reserve for bad debts at the close of the taxable year to the amount which bears the same ratio (as determined by the Secre- tary) to loans outstanding at the close of the taxable year as (i) the total bad debts sus- tained by all institutions described in the ap- plicable paragraph of subsection (a) during the 6 preceding taxable years (adjusted for recoveries of bad debts during such period), bears to (ii) the sum of the loans by all such histitutions outstanding at the close of such taxable years. (Added Pub. L. 91-172, title IV, § 431(a), Dec. 30, 1969, 83 Stat. 618, and amended Pub. L. 94- 455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) REFERENCEs IN TEXT The Small Business Investment Act of 1958, referred to in subsec. (a)(1), is Pub. L. 85-699, Aug. 21, 1958, 72 Stat. 689, as amended, which is classified principally to chapter 14B (§ 681 et seq.) of Title 15, Commerce and Trade. For complete classification of this Act to the Code, see Short Title note set out under section 661 of Title 15 and Tables volume. AMENDMENTS 1976-Subsecs. (b)(1)(A), (2). Pub. L. 94-455 struck out "or his delegate" following "Secretary". ErFEcTIVE DATE Section applicable to taxable years beginning after July 11, 1969, see section 431(d) of Pub. L. 91-172. set out as an Effective Date note under section 585 of this title. § 586 Page 434
TITLE 26-INTERNAL REVENUE CODE SECTION REFERRE- TO IN OTHER SECTIONS This section is referred to in sections 166, 172, 582 of this title. PART II-MUTUAL SAVINGS BANKS, ETC. Sec. 591. Deduction for dividends paid on deposits. [592. Repealed.] 593. Reserves for losses on loans. 594. Alternative tax for mutual savings banks con- ducting life insurance business. 595. Foreclosure on property securing loans. 596. Limitation on dividends received deduction. AMENDMENTS 1976-Pub. L. 94-455, title XIX, § 1901(b)(19), Oct. 4. 1976, 90 Stat. 1796, struck out item 592. 1969-Pub. L. 91-172, title IV, § 434(b)(2), Dec, 30, 1969, 83 Stat. 625, added item 596. 1962-Pub. L. 87-834, § 6(d), Oct. 16, 1962, 76 Stat. 984, substituted "Reserves for losses on loans" for "Additions to reserve for bad debts" in item 593, and added item 595. § 591. Deduction for dividends paid on deposits In the case of mutual savings banks, cooperat- ive banks, and domestic building and loan asso- ciations and other savings institutions char- tered and supervised as savings and loan or similar associations under Federal or State law, there shall be allowed as deductions in comput- ing taxable income amounts paid to, or credited to the accounts of, depositors or holders of ac- counts as dividends or interest on their deposits or withdrawable accounts, if such amounts paid or credited are withdrawable on demand sub- ject only to customary notice of intention to withdraw. (Aug. 16, 1954, ch. 736, 68A Stat. 204; Oct. 16, 1962, Pub. L. 87-834, § 6(f), 76 Stat. 984.) AMENDMENTS 1962-Pub. L. 87-834 included other savings institu- tions chartered and supervised as savings and loan or similar associations under Federal or State law, and authorized amounts paid as interest as a deduction. CRoss REFERENCES Partial exclusion of dividends received by individ- uals, see section 116 of this title. Special deduction for dividends received by corpora- tion, see section 243 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 116, 243, 593, 861, 6323 of this title. [§ 592. Repealed. Pub. L. 94-455, title XIX, § 1901(a)(83), Oct. 4, 1976, 90 Stat. 1778] Section, act Aug. 16, 1954, ch. 736, 68A Stat. 205, au- thorized a deduction by mutual savings banks for re- payment of loans made before Sept. 1, 1951, by the United States or any agency or instrumentality there- of, or any mutual fund established under the author- ity of the laws of any State. EFFECTIVE DArE OF REPEAL Repeal of section effective with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. § 593. Reserves for losses on loans (a) Organizations to which section applies This section shall apply to any mutual sav- ings bank not having capital stock represented by shares, domestic building and loan associ- ation, or cooperative bank without capital stock organized and operated for mutual purposes and without profit. (b) Addition to reserves for bad debts (1) In general For purposes of section 166(c), the reason- able addition for the taxable year to the re- serve for bad debts of any taxpayer described in subsection (a) shall be an amount equal to the sum of- (A) the amount determined to be a rea- sonable addition to the reserve for losses on nonqualifying loans, computed in the same manner as is provided with respect to addi- tions to the reserves for losses on loans of banks under section 585(b)(3), plus (B) the amount determined by the tax- payer to be a retoonable addition to the re- serve for losses c.., qualifying real property loans, but such amount shall not exceed the amount determined under paragraph (2), (3), or (4), whichever amount is the largest, but the amount determined under this sub- paragraph shall in no case be greater than the larger of- (I) the amount determined under para- graph (4), or (ii) the amount which, when added to the amount determined under subpara- graph (A), equals the amount by which 12 percent of the total deposits or withdrawable accounts of depositors of the taxpayer at the close of such year ex- ceeds the sum of its surplus, undivided profits, and reserves at the beginning of such year (taking into account any por- tion thereof attributable to the period before the first taxable year beginning after December 31, 1951). (2) Percentage of taxable income method (A) In general Subject to subparagraphs (B), (C), and (D), the amount determined under this paragraph for the taxable year shall be an amount equal to the applicable percentage of the taxable income for such year (deter- mined under the following table): For a taxable year beginning in- 1976 ..................................................... 1977 ........................................... 1978 ..................................................... 1979 or thereafter ............................. The applicable percentage under this paragraph shall be- 43 percent. 42 percent. 41 percent. 40 percent. (B) Reduction of applicable percentage in certain cases If, for the taxable year, the percentage of the assets of a taxpayer described in subsec- tion (a), which are assets described in sec- tion 7701(a)(19)(C), is less than- (i) 82 percent of the total assets in the case of a taxpayer other than a mutual savings bank, the applicable percentage Page 435
TITLE 26-INTERNAL REVENUE CODE for such year provided by subparagraph (A) shall be reduced by % of 1 percentage point for each 1 percentage point of such difference, or (i) 72 percent of the total assets in the case of a mutual savings bank, the appli- cable percentage for such year provided by subparagraph (A) shall be reduced by 1 percentage points for each 1 percent- age point of such difference. If, for the taxable year, the percentage of the assets of such taxpayer which are assets described in section 7701(a)(19)(C) is less than 60 percent (50 percent for a taxable year beginning before 1973 in the case of a mutual savings bank), this paragraph shall not apply. (C) Reduction for amounts referred to in para- graph (i)(A) The amount determined under subpara- graph (A) shall be reduced by that portion of the amount referred to in paragraph (1)(A) for the taxable year (not in excess of 100 percent) which bears the same ratio to such amount as (1) 18 percent (28 percent in the case of mutual savings banks) bears to (ii) the percentage of the assets of the tax- payer for such year which are not assets de- scribed in section 7701(a)(19)(C). (D) Overall limitation on paragraph The amount determined under this para- graph shall not exceed the amount neces- sary to increase the balance at the close of the taxable year of the reserve for losses on qualifying real property loans to 6 percent of such loans outstanding at such time. (E) Computation of taxable income For purposes of this paragraph, taxable income shall be computed- (i) by excluding from gross income any amount included therein by reason of sub- section (e), (ii) without regard to any deduction al- lowable for any addition to the reserve for bad debts, (iiI) by excluding from gross income an amount equal to the net gain for the tax- able year arising from the sale or ex- change of stock of a corporation or of ob- ligations the interest on which is exclud- able from gross income under section 103, (v) by excluding from gross income an amount equal to the lesser of % of the net long-term capital gain for the taxable year or % of the net long-term capital gain for the taxable year from the sale or exchange of property other than property described in clause (iII), and (v) by excluding from gross income divi- dends with respect to which a deduction is allowable by part VIII of subchapter B, reduced by an amount equal to the appli- cable percentage (determined under sub- paragraphs (A) and (B)) of the dividends received deduction (determined without regard to section 596) for the taxable year. (3) Percentage method The amount determined under this para- graph to be a reasonable addition to the re- serve for losses on qualifying real property loans shall be computed in the same manner as is provided with respect to additions to the reserves for losses on loans of banks under section 585(b)(2), reduced by the amount re- ferred to in paragraph (1)(A) for the taxable year. (4) Experience method The amount determined under this para- graph for the taxable year shall be computed in the same manner as is provided with re- spect to additions to the reserves for losses on loans of banks under section 585(b)(3). (5) Determination of reserve for percentage method For purposes of paragraph (3), the amount deemed to be the balance of the reserve for losses on loans at the beginning of the tax- able year shall be the total of the balances at such time of the reserve for losses on nonqua- lifying loans, the reserve for losses on qualify- ing real property loans, and the supplemental reserve for losses on loans. (c) Treatment of reserve for bad debts (I) Establishment of reserves Each taxpayer described in subsection (a) which uses the reserve method of accounting for bad debts shall establish and maintain a reserve for losses on qualifying real property loans, a reserve for losses on nonqualifying loans, and a supplemental reserve for losses on loans. For purposes of this title, such re- serves shall be treated as reserves for bad debts, but no deduction shall be allowed for any addition to the supplemental reserve for losses on loans. (2) Certain pre-1963 reserves Notwithstanding the second sentence of paragraph (1), any amount allocated pursu- ant to paragraph (5) (as in effect immediately before the enactment of the Tax Reform Act of 1976) during a taxable year beginning before January 1, 1977, to the reserve for losses on qualifying real property loans out of the surplus, undivided profits, and bad debt reserves (determined as of December 31, 1962) attributable to the period before the first tax- able year beginning after December 31, 1951, bhall not be treated as a reserve for bad debts for any purpose other than determining the amount referred to in subsection (b)(1)(B), and for such purpose such amount shall be treated as remaining in such reserve. (3) Charging of bad debts to reserves Any debt becoming worthless or partially worthless in respect of a qualifying real prop- erty loan shall be charged to the reserve for losses on such loans, and any debt becoming worthless or partially worthless in respect of a nonqualifying loan shall be charged to the reserve for losses on nonqualifying loans; except that any such debt may, at the elec- tion of the taxpayer, be charged in whole or in part to the supplemental reserve for losses on loans. §593 Page 436
TITLE 26-INTERNAL REVENUE CODE (d) Loans defined For purposes of this section- (1) Qualifying real property loans The term "qualifying real property loan" means any loan secured by an interest in im- proved real property or secured by an interest in real property which tq to be improved out of the proceeds of the loan, but such term does not include- (A) any loan evidenced by a security (as defined in section 165(g)(2)(C)); (B) any loan, whether or not evidenced by a security (as defined in section 165(g)(2)(C)), the primary obligor on which is- (I) a government or political subdivision or instrumentality thereof; (11) a bank (as defined in section 581); or (ill) another member of the same affili- ated group; (C) any loan, to the extent secured by a deposit in or share of the taxpayer; or (D) any loan which, within a 60-day period beginning in one taxable year of the creditor and ending in its next taxable year, is made or acquired and then repaid or dis- posed of, unless the transactions by which such loan was made or acquired and then repaid or disposed of are established to be for bona fide business purposes. For pur- poses of subparagraph (B)(iii), the term "af- filiated group" has the meaning assigned to such term by section 1504(a); except that (I) the phrase "more than 50 percent" shall be substituted for the phrase "at least 80 per- cent" each place it appears in section 1504(a), and (ii) all corporations shall be treated as includible corporations (without any exclusion under section 1504(b)). (2) Nonqualifying loans The term "nonqualifying loan" means any loan which is not a qualifying real property loan. (3) Loan The term "loan" means debt, as the berm "debt" is used in section 166. (e) Distributions to shareholders (1) In general For purposes of this chapter, any distribu- tion of property (as defined in section 317(a)) by a domestic building and loan association to a shareholder with respect to its stock, if such distribution is not allowable as a deduction under section 591, shall be treated as made- (A) first out of its earnings and profits ac- cumulated in taxable years beginning after December 31, 1951, to the extent thereof, (B) then out of the reserve for losses on qualifying real property loans, to the extent additions to such reserve exceed the addi- tions which would have been allowed under subsection (b)(4), (C) then out of the supplemental reserve for losses on loans, to the extent thereof, ID) then out of such other accounts as may be proper. This paragraph shall apply in the case of any distribution in redemption of stock or in par- tial or complete liquidation of the association, except that any such distribution shall be treated as made first out of the amount re- ferred to in subparagraph (B), second out of the amount referred to in subparagraph (C), third out of the amount referred to in subpar- agraph (A), and then out of such other ac- counts as may be proper. This paragraph shall not apply to any transaction to which section 381 (relating to carryovers in certain corporate acquisitions) applies. (2) Amounts charged to reserve accounts and in- cluded in gross income If any distribution is treated under para- graph (1) as having been made out of the re- serves described in subparagraphs (B) and (C) of such paragraph, the amount charged against such reserve shall be the amount which, when reduced by the amount of tax imposed under this chapter and attributable to the inclusion of such amount in gross income, is equal to the amount of such distri- bution; and the amount so charged against such reserve shall be included in gross income of the taxpayer. (3) Special rules (A) For purposes of paragraph (1)(B), addi- tions to the reserve for losses on qualifying real property loans for the taxable year in which the distribution occurs shall be taken into account. (B) For purposes of computing under this section the amount of a reasonable addition to the reserve for losses on qualifying real property loans for any taxable year, any amount charged during any year to such re- serve pursuant to the provisions of paragraph (2) shall not be taken into account. (Aug. 16, 1954, ch. 736, 68A Stat. 205; Oct. 16, 1962, Pub. L. 87-834, § 6(a), 76 Stat. 977; Dec. 30, 1969, Pub. L. 91-172, title IV, § 432(a), (b), 83 Stat. 620, 622; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(a)(84), 90 Stat. 1778.) REFEmmnCS IN TEXT The Tax Reform Act of 1976, referred to in subsec. (c)(2), is Pub. L. 94-455, Oct. 4, 1976, 90 Stat. 1520, which was enacted Oct. 4, 1976. For complete classifi- cation of this Act to the Code, see Tables volume. AMENDMENTS 1976-Subsec. (b)(2). Pub. L. 94-455, § 1901(a)(84)(A), struck from the percentage table in subpar. (A) the years 1969 to 1975, inclusive. Subsec. (b)(2)(E)(i). Pub. L. 94-455, § 1901(a)(84)(D), substituted "subsection (e)" for "subsection (f)" fol- lowing "by reason of". Subsec. (c)(2). Pub. L. 94-455, § 1901(a)(84)(B), added subsec. (c)(2). Former subsec. (c)(2), relating to alloca- tion of pre-1963 reserves for bad debts, was stricken. Subsec. (c)(3). Pub. L. 94-455, § 1901(a)(84)(B), rede- signated former subsec. (c)(6) as subsec. (c)(3). Former subsec. (c)(3), relating to the method of allocation to reserves for bad debts, was stricken. Subsec. (c)(4). Pub. L. 64-455, § 1901(a)(84)(B), struck out subsec. (c)(4) which defined "pre-1963 re- serves". Subsec. (c)(5). Pub. L. 94-455, § 1901(a)(84)(B), struck out subsec. (c)(5) which related to certain pre- 1952 surplus. Subsec. (c)(6). Pub. L. 94-455, § 1901(a)(84)(B), rede- signated former subsec. (c)(6) as subsec. (c)(3). Subsec. (d). Pub. L. 94-455, § 1901(a)(84)(C), struck out subsec. (d relating to the determination of tax- able income for taxpayer which uses the reserve method of accounting for bad debts for taxable years beginning in 1962 and ending in 1963. Former subsecs. (e) and (fM were redesignated (d) and (e), respectively. 71-999 0 - 78 - 30 (Vol. 7) Page 437 § 593
TITLE 26-INTERNAL REVENUE CODE Subsec. (e). Pub. L. 94-455, § 1901(a)(84)(C), redesig- nated former subsec. (f) as (e). Former subsec. (e) was redesignated (d). Subsec. (M. Pub. L. 94-455, § 1901(a)(84)(C), redesig- nated former subsec. (f) as (e). 1969-Subsec. (b)(1)(A). Pub. L. 91-172, §432(a)(1), added provisions for the method of computing the amount of the reasonable addition to the reserve for losses on nonqualifying loans. Subsec. (b)(2). Pub. L. 91-172, § 432(a)(2), substituted a table of applicable percentages of the taxable income for each year up to 1979 and thereafter for the amount in excess of 60 percent over the amount re- ferred to in former subsec. (b)(1)(A), transferred the remaining provisions of former subsec. (b)(2) to sub- part (D), and added subpars. (B) to (E). Subsec. (b)(3). Pub. L. 91-172, § 432(a)(2), substan- tially changed the method of computation of the amount by conforming it to the method of determin- ing the additions to the reserves for losses on loans of banks under section 585(b)(2). Subsec. (b)(4). Pub. L. 91-172, § 432(a)(2), changed the method of computation of the amount by con- forming it to the method of determining the additions to the reserves for losses on loans of banks under sec. tion 585(b)(3). Subsec. (b)(5). Pub. L. 91-172, § 432(a)(2), substituted provisions relating to the determination of reserve for percentage method for provisions relating to the limi- tation in case of certain domestic building and loan as- soclatlons. Subsec. (f). Pub. L. 91-172. § 432(b), excepted the ap- plication of par. (1) to any transaction to which sec- tion 381 of this title applied. 1962-Pub. L. 87-834 amended section generally to read as above set forth. Prior to such amendment, sec- tion read as follows: "§ 593. Additions to reserve for bad debts "In the case of a mutual savings bank not having capital stock represented by shares, a domestic build- ing and loan association, and a cooperative bank with- out capital stock organized and operated for mutual purposes and without profit, the reasonable addition to a reserve for bad debts under section 166(c) shall be determined with due regard to the amount of the tax- payer's surplus or bad debt reserves existing at the close of December 31, 1951. In the case of a taxpayer described in the preceding sentence, the reasonable addition to a reserve for bad debts for any taxable year shall in no case be less than the amount deter- mined by the taxpayer as the reasonable addition for such year; except that the amount determined by the taxpayer under this sentence shall not be greater than the lesser of- "(1) the amount of its taxable income for the tax- able year, computed without regard to this section, or"(2) the amount by which 12 percent of the total deposits or withdrawable accounts of its depositors at the close of such year exceeds the sum of its sur- plus, undivided profits, and reserves at the beginning of the taxable year." EFFEcTivE DATE OF 1976 AMENDMENT Amendment of subsecs. Cb)-f) by section 1901(a)(84) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EmrEcTivE DATE OF 1969 AMENDMENT Section 432(e) of Pub. L. 91-172 provided that: "The amendments made by this section [amending this sec- tion and section 7701(a)(19), (32) of this title] shall be effective for taxable years beginning after July 11, 1969." EfFEctivE DATE OF 1962 AMENDMENT Section 6(g)(1) of Pub. L. 87-834 provided that: "The amendment made by subsection (a) [amending this section] shall apply to taxable years ending after De- cember 31, 1962, except that section 593(f) of the In- ternal Revenue Code of 1954 [subsec. (f) of this sec- tion] shall apply to distributions after December 31, 1962, in taxable years ending after such date." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 46, 57, 50B, 166. 172, 582, 585, 595, 596, 992, 1038 of this title. § 594. Alternative tax for mutual savings banks con- ducting life Insurance business (a) Alternative tax In the case of a mutual savings bank not having capital stock represented by shares, au- thorized under State law to engage in the busi- ness of issuing life insurance contracts, and which conducts a life insurance business in a separate department the accounts of which are mairntained separately from the other accounts of the mutual savings bank, there shall be im- posed in lieu of the taxes imposed by section 11 or section 1201(a), a tax consisting of the sum of the partial taxes determined under para- graphs (1) and (2): (1) A partial tax computed on the taxable income determined without regard to any items of gross income or deductions properly allocable to the business of the life insurance department, at the rates and in the manner as if this section had not been enacted; and (2) a partial tax computed on the Income of the life insurance department determined without regard to any items of gross income or deductions not properly allocable to such department, at the rates and in the manner provided in subchapter L (sec. 801 and !ollow- ing) with respect to life insurance companies. (b) Limitations of section Subsection (a) shall apply only if the life in- surance department would, if it were treated as a separate corporation, qualify as a life insur- ance company under section 801. (Aug. 16, 1954, ch. 736, 68A Stat. 205; Mar. 13, 1956, ch. 83, § 5(3), 70 Stat. 49.) AMENDMENTS 1956-Subsec. (a)(2). Act Mar. 13, 1956, substituted "the income" for "the taxable income (as defined in section 803)". EFFECTIVE DATE OF 1956 AMENDMENT Amendment by act Mar. 13, 1956, applicable only to taxable years beginning after Dec. 31, 1954, see section 6 of act Mar. 13, 1956, set out as an Effective Date of 1956 Amendment note under section 316 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 11, 811 of this title. § 595. Foreclosure on property securing loans (a) Nonrecognition of gain or loss as a result of fore- closure In the case of a creditor which is an organiza- tion described in section 593(a), no gain or loss shall be recognized, and no debt shall be consid- ered as becoming worthless or partially worth- less, as the result of such organization having bid in at foreclosure, or having otherwise re- duced to ownership or possession by agreement § 594 Page 438
TITLE 26-INTERNAL REVENUE CODE or process of law, any property which was secu- rity for the payment of any indebtedness. (b) Character of property For purposes of sections 166 and 1221, any property acquired in a transaction with respect to which gain or loss to an organization was not recognized by reason of subsection (a) shall be considered as property having the same charac- teristics as the indebtedness for which such property was security. Any amount realized by such organization with respect to such property shall be treated for purposes of this chapter as a payment on account of such indebtedness, and any loss with respect thereto shall be treat- ed as a bad debt to which the provisions of sec- tion 166 (relating to allowance of a deduction for bad debts) apply. (c) Basis The basis of any property to which subsec- tion (a) applies shall be the basis of the indebt- edness for which such property was security (determined as of the date of the acquisition of such property), properly increased for costs of acquisition. (d) Regulatory authority The Secretary shall prescribe such regula- tions as he may deem necessary to carry out the purposes of this section. (Added Pub. L. 87-834, § 6(b), Oct. 16, 1962, 76 Stat. 982, and amended Pub. L. 94-455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (d). Pub. L. 94-455 struck out "or his delegate" following "Secretary". EnrEcTrvE DATE Section 6(g)(2) of Pub. L. 87-834 provided that: "The amendment made by :ubsection (b) [adding this sec- tion] shall apply to transactions described in section 595(a) of the Internal Revenue Code of 1954 [subsec. (a) of this section] occurring after December 31, 1962, in taxable years ending after such date." § 596. Limitation on dividends received deduction In the case of an organization to which sec- tion 593 applies and which computes additions to the reserve for losses on loans for the tax- able year under section 593(b)(2), the total amount allowed under sections 243, 244, and 245 (determined without regard to this section) for the taxable year as a deduction with respect to dividends received shall be reduced by an amount equal to the applicable percentage for such year (determined under subparagraphs (A) and (B) of section 593(b)(2)) of such total amount. (Added Pub. L. 91-172, title IV, § 434(a), Dec. 30, 1969, 83 Stat. 624.) EFFECTIvE DATE Section 434(c) of Pub. L. 91-172 provided that: "The amendments made by this section [enacting this sec- tion and adding subsec. (d) to section 246 of this title] shall apply to taxable years beginning after July 11, 1969." SECTION REFERD TO IN OTHER SECTIONS This section is referred to in section 593 of this title. [§ 601. Repealed. Pub. L. 94-455, title XIX, § 1901(a)(85), Oct. 4, 1976, 90 Stat. 1778] Section, act Aug. 16, 1954, ch. 736, 68A Stat. 206, re- lated to a special deduction for bank affiliates. E 'vEVE DATE OF REPEAL Repeal of section effective for taxable years begin. ning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amend- ment note under section 2 of this title. Subchapter I-Natural Resources Part I. Deductions. II. Exclusions from gross income. III. Sales and exchanges. IV. Mineral production payments. V. Continental shelf areas. PART I-DEDUCTIONS Sec. 611. 612. 613. 613A. 614. (615. 616. 617. Allowance of deduction for depletion. Basis for cost depletion. Percentage depletion. Limitations on percentage depletion in case of oil and gas wells. ' Definition of property. Repealed.] Development expenditures. Deduction and recapture of certain mining exploration expenditui es. AMENDMENTS 1976-Pub. L. 94-455, title XIX, § 1901(b)(21)(H), Oct. 4, 1976. 90 Stat. 1798, struck out item 615 "Explo- ration expenditures". 1969-Pub. L. 91-172, title V, §§ 503(b), 505(c), Dec. 30, 1969, 83 Stat. 631, 634, added "Part IV. Mineral production payments" and "Part V. Continental shelf areas." Pub. L. 91-172, title V, § 504(c)(5), Dec. 30, 1969, 83 Stat. 633, substituted "Pre-1970 exploration expendi- tures" for "Exploration expenditures" in item 615 and substituted "Deduction and recapture of certain mining exploration expenditures" for "Additional ex- ploration expenditures in the case of domestic mining" in item 617. 1966-Pub. L. 89-570, § 1(d), Sept. 12, 1966, 80 Stat. 762. added item 617. § 611. Allowance of deduction for depletion (a) General rule In the case of mines, oil and gas wells, other natural deposits, and timber, there shall be al- lowed as a deduction in computing taxable income a reasonable allowance for depletion and for depreciation of improvements, accord- ing to the peculiar conditions in each case; such reasonable allowance in all cases to be made under regulations prescribed by the Secretary. For purposes of this part, thn term "mines" in- cludes deposits of waste or residue, the extrac- tion of ores or minerals from which is treated as mining under section 613(c). In any case in which it is ascertafned as a result of operations or of development work that the recoverable units are greater or less than the prior estimate thereof, then such prior estimate (but not the basis for depletion) shall be revised and the allowance under this section for subsequent 'Item 613A has been editorially inserted. Section 613A was added by Pub. L. 94-12, title V, § 501(a), Mar. 29, 1975, 89 Stat. 47, without the addition of a corre- sponding item in the analysis of sections. Page 439 §611
TITLE 26-INTERNAL REVENUE CODE taxable years shall be based on such revised es- timate. (b) Special rules (1) Leases In the case of a lease, the deduction under this section shall be equitably apportioned be- tween the lessor and lessee. (2) Life tenant and remainderman In the case of property held by one person for life with remainder to another person, the deduction under this section shall be comput- ed as if the life tenant were the absolute owner of the property and shall be allowed to the life tenant. (3) Property held in trust In the case of property held in trust, the de- duction under this section shall be appor- tioned between the income beneficiaries and the trustee in accordance with the pertinent provisions of the instrument creating the trust, or, in the absence of such provisions, on the basis of the trust income allocable to each. (4) Prop!rty held by estate In the case of an estate, the deduction under this section shall be apportioned be- tween the estate and the heirs, legatees, and devisees on the basis of the income of the estate allocable to each. (c) Cross reference For other rules applicable to depreciation of improve- ments, see section 167. (Aug. 16, 1954, ch. 736, 68A Stat. 207; Sept. 2, 1958, Pub. L. 85-866, title I, § 35, 72 Stat. 1632; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455 struck out "or his delegate" following "Secretary". 1958-Subsec. (d)(4). Pub. L. 85-866 substituted "de. visees" for "devises". EFnivE DATE o0 1958 AmlENDMrNr Amendment of subsec. (b)(4) by Pub. L. 85-866 appli- cable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section l(c) of Pub. L. 85-866, set out as an Effective Date of 1958 Amend- ment note under section 165 of this title. SEC'TION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 57, 62, 163, 174, 613, 613A, 616, 617, 642, 691, 703, 705, 804, 822, 901, 1082, 4940 of this title. § 612. Basis for cost depletion Except as otherwise provided in this sub- chapter, the basis on which depletion is to be allowed in respect of any property shall be the adjusted basis provided in section 1011 for the purpose of determining the gain upon the sale or other disposition of such property. (Aug. 16, 1954, ch. 736, 68A Stat. 208.) CRoss REFERENcEs Adjusted basis of mine or deposit, see section 616 of this title. Adjustments to basis in respect of depletion, see sec- tion 1016 of this title. Basis for depreciation, see section 167 of this title. Basis of property as cost, see section 1012 of this title. § 613. Percentage depletion (a) General rule In the case of the mines, wells, and other nat- ural deposits listed in subsection (b), the allowance for depletion under section 611 shall be the percenta ge, specified in subsection (b), of the gross income from the property excluding from such gross income an amount equal to any rents or royalties paid or incurred by the tax- payer in respect of the property. Such allowance shall not exceed 50 percent of the taxpayer's taxable income from the property (computed without allowance for depletion). For purposes of the preceding sentence, the al- lowable deductions taken into account with re- spect to expenses of mining in computing the taxabie income from the property shall be de- creased by an amount equal to so much of any gain which (1) is treated under section 1245 (re- lating to gain from disposition of certain depre- ciable property) as ordinary income, and (2) is properly allocable to the property. In no case shall the allowance for depletion under section 611 be less than it would be if computed with- out reference to this section. (b) Percentage depletion rates The mines, wells, and other natural deposits, and the percentages, referred to in subsection (a) are as follows: (1) 22 percent (A) sulphur and uranium; and (B) if from deposits in the United States- anorthosite, clay, laterite, and nephelite syenite (to the extent that alumina and alu- minum compounds are extracted there- from), asbestos, bauxite, celestite, chromite, corundum, fluorspar, graphite, ilmenite, kyanite, mica, olivine, quartz crystals (radio grade), rutile, block steatite talc, and zircon, and ores of the following metals: antimony, beryllium, bismuth, cadmium, cobalt, co- lumbium, lead, lithium, manganese, mer- cury, molybdenum, nickel, platinum and platinum group metals, tantalum, thorium, tin, titanium, tungsten, vanadium, and zinc. (2) 15 percent If from deposits in the United States- (A) gold, silver, copper, and iron ore, and (B) oil shale (except shale described in paragraph (5)). (3) 14 percent (A) metal mines (if paragraph (1)(B) or (2)(A) does not apply), rock asphalt, and vermiculite; and (B) if paragraph (1)(B), (5), or (6)(B) does not apply, ball clay, bentonite, china clay, sagger clay, and clay used or sold for use for purposes dependent on its refractory prop- erties. (4) 10 percent Asbestos (if paragraph (1)(B) does not apply), brucite, coal, lignite, perlite, sodium chloride, and wollastonite. (5) 7V percent Clay and shale used or sold for use in the manufacture of sewer pipe or brick, and clay, § 612 Page 440
TITLE 26-INTERNAL REVENUE CODE shale, and slate used or sold for use as sin- tered or burned lightweight aggregates. (6) 5 percent (A) gravel, peat, pumice, sand, scoria, shale (except shale described in paragraph (2)(B) or (5)), and stone (except stone de- scribed in paragraph (7)); (B) clay used, or sold for use, in the manu- facture of drainage and roofing tile, flower pots, and kindred products; and (C) if from brine wells-bromine, calcium chloride, and magnesium chloride. (7) 14 percent All other minerals, including, but not limit- ed to, aplite, barite, borax, calcium carbon- ates, diatomaceous earth, dolomite, feldspar, fullers earth, garnet, gilsonite, granite, limes- tone, magnesite, magnesium carbonates, marble, mollusk shells (including clam shells and oyster shells), phosphate rock, potash, quartzite, slate, soapstone, stone (used or sold for use by the mine owner or operator as di- mension stone or ornamental stone), thenar- dite, tripoli, trona, and (if paragraph (1)(B) does not apply) bauxite, flake graphite, fluor- spar, lepidolite, mica, spodumene, and talc (including pyrophyllite), except that, unless sold on bid in direct competition with a bona fide bid to sell a mineral listed in paragraph (3), the percentage shall be 5 percent for any such other mineral (other than slate to which paragraph (5) applies) when used, or sold for use, by the mine owner or operator as rip rap, ballast, road material, rubble, concrete aggre- gates, or for similar purposes. For purposes of this paragraph, the term "all other minerals" does not include- (A) soil, sod, dirt, turf, water, or mosses; (B) minerals from sea water, the air, or similar inexhaustible sources; or (C) oil and gas wells. For the purposes of this subsection, minerals (other than sodium chloride) extracted from brines pumped from a saline perennial lake within the United States shall not be consid- ered minerals from an inexhaustible source. (c) Definition of gross income from property For purposes of this section- (1) Gross income from the property The term "gross income from the property" means, in the case of a property other than an oil or gas well, the gross income from mining. (2) Mining The term "mining" includes not merely the extraction of the ores or minerals from the ground but also the treatment processes con- sidered as mining described in paragraph (4) (and the treatment processes necessary or in- cidental thereto), and so much of the trans- portation of ores or minerals (whether or not by common carrier) from the point of extrac- tion from the ground to the plants or mills in which such treatment processes are applied thereto as is not in excess of 50 miles unless the Secretary finds that the physical and other requirements are such that the ore or mineral must be transported a greater dis- tance to such plants or mills. (3) Extraction of the ores or minerals from the ground The term "extraction of the ores or miner- als from the ground" includes the extraction by mine owners or operators of ores or miner- als from the waste or residue of prior mining. The preceding sentence shall not apply to any such extraction of the mineral or ore by a purchaser of such waste or residue or of the rights to extract ores or minerals therefrom. (4) Treatment processes considered as mining The following treatment processes where applied by the mine owner or operator shall be considered as mining to the extent they are applied to the ore or mineral in respect of which he is entitled to a deduction for deple- tion under section 611: (A) In the case of coal-cleaning, break- ing, sizing, dust allaying, treating to prevent freezing, and loading for shipment; (B) in the case of sulfur recovered by the Frasch process-cleaning, pumping to vats, cooling, breaking, and loading for shipment; (C) in the case of iron ore, bauxite, ball and sagger clay, rock asphalt, and ores or minerals which are customarily sold in the form of a crude mineral product-sorting, concentrating, sintering, and substantially equivalent processes to bring to shipping grade and form, and loading for shipment; (D) in the case of lead, zinc, copper, gold, silver, uranium, or fluorspar ores, potash, and ores or minerals which are not custom- arily sold in the form of the crude mineral product-crushing, grinding, and benefica- tion by concentration (gravity, flotation, amalgamation, electrostatic, or magnetic), cyanidation, leaching, crystallization, pre- cipitation (but not including electrolytic de- position, roasting, theremal or electric smelting, or refining), or by substantially equivalent processes or combination of pro- cesses used in the separation or extraction of the product or products from the ore or the mineral or minerals from other material from the mine or other natural deposi, (E) the pulverization of talc, the bui .ng of magnesite, the sintering and nodulizing of phosphate rock, the decarbonation of trona, and the furnacing of quicksilver ores; (F) in the case of calcium carbonates and other minerals when used in making cement-all processes (other than preheat- ing of the kiln feed) applied prior to the in- troduction of the kiln food into the kiln, but not including any subsequent process; (G) in the case of clay to which paragraph (5) or (6)(B) of subsection (b) applies- crushing, grinding, and separating the min- eral from waste, but not including any sub- sequent process; (H) in the case of oil shale-extraction from the ground, crushing, loading into the retort, and retorting, but not hydrogena- tion, refining, or any other process subse- quent to retorting; and (I) any other treatment process provided for by regulations prescribed by the Secre- tary which, with respect to the particular ore or mineral, is not inconsistent with the preceding provisions of this paragraph. Page 441 § 613
TITLE 26-INTERNAL REVENUE CODE (5) Treatment processes not considered as mining Unless such processes are otherwise pro- vided for in paragraph (4) (or are necessary or incidental to processes so provided for), the following treatment processes shall not be considered as "mining": electrolytic deposi- tion, roasting, calcining, thermal or electric smelting, refining, polishing, fine pulveriza tion, blending with other materials, treat- ment effecting a chemical change, thermal action, and molding or shaping. (d) Denial of percentage depletion in case of oil and gas wells Except as provided in section 613A, in the case of any oil or gas well, the allowance for de- pletion shall be computed without reference to this section. (Aug. 16, 1954, ch. 736, 68A Stat. 208; Sept. 2, 1958, Pub. L. 85-866, title I, § 36(a), 72 Stat. 1633; June 30, 1960, Pub. L. 86-564, title III, § 302(a), (b), 74 Stat. 291; Oct. 16, 1962, Pub. L. 87-834, § 13(e), 76 Stat. 1034; Sept. 2, 1964, Pub. L. 88-571, § 6(a), 78 Stat. 860; Nov. 13, 1966, Pub. L. 89-809, title II, §§ 207(a), 208(a), 209(a), (b), 80 Stat. 1579, 1580; Dec. 30, 1969, Pub. L. 91-172, title V, §§501(a), 502(a), 83 Stat. 629, 630; Oct. 29, 1974, Pub. L. 93-499, § 2(a), 88 Stat. 1550; Mar. 29, 1975, Pub. L. 94-12, title V, § 501(b)(1), (2), 89 Stat 53; Oct. 4, 1976, Pub. L. 94-455, title :XF , §§ 1901(b)(3)(K), 1906(b)(13)(A), 90 Stat. 1793, 1834.) APLNDME'rms 1976-Subsec. (a). Pub. L. 94-455, § 1901(b)(3)(K), substituted "ordinary income" for "gain Irom the sale or exchange of property which is neither a capital asset nor property described in section 1231". Subsec. (c)(2), (41(I). Pub. L. 94-455, § 1906(b)(13)(A). struck out "or his delegate" following "Secretary". 1975-Subsec. (b)(1). Pub. L. 94-12, § 501(b)(2)(A), struck out subpar. (A) "oil and gas wells" and redesig- nated former subpars. (B) and (C) as (A) and (B), re- spectively. Subsec. (b)(3), (4). Pub. L. 04-12, § 501(b)(2)(B), sub- stituted "(1)(B)" for "(1)(C)" wherever appearing. Subsec. (b)(7). Pub. L. 94-12, § 501(b)(2) (B), (C), sub- stituted "(1)(B) ' for "(1)(C)" in the provisions preced- ing subpar. (A) and added subpar. (C). Subsec. d). Pub. L. 94-12, §501(b)(1), substituted provisions denying the percentage depletion allowance in the case of oil and gas wells except as provided in section 613A for provisions governing the application of percentage depletion rates to certain taxable years ending in 1954. 1974-Subsec. (c)(4)(E). Pub. L. 93-499 added refer- ence to the decarbonation of trona. 1969-Subsec. (b). Pub. L. 91-172, § 501(a), reduced the percentage depletion rate on oil and gas wells from 27 percent to 22 percent, reduced to 22 percent other minerals formerly receiving percentage deple- tion at a rate of 23 percent, added molybdenum in the category of minerals subject to the 22 percent deple- tion rate, reduced to 14 percent the rate on minerals formerly receiving depletion at a 15 percent rate except in the case of domestic gold, silver, oil shale, copper, and Iron ore, and added provision that for per- centage depletion purposes, minerals other than sodium chloride, extracted from brine pumped from a saline perennial lake within the United States are not to be considered minerals from an inexhaustible source. Subsec. (c)(4). Pub. L. 91-172, § 502(a), added subpar. (H). Former subpar. (H) was redesignated as subpar. (I). 1966-Subsec. (b)(2)(B). Pub. L. 89-809, § 207(a)(1), inserted "clay, laterite, and nephelite syenite" follow- Ing "anorthosite". Subsec. (b)(3)(B). Pub. L. 89-809, §§ 207(a)(2), 209(a)(2), substituted "if neither paragraph (2)(B), (5), or (6)(B) applies" for "if paragraph (5)(B) does not apply". Subsec. (b)(5). Pub. L. 89-809, § 209(a)(1), added par. (5). Former par. (5) redesignated as par. (6). Subsec. (b)(6). Pub. L. 89-809. §§ 208(a)(1), 209(a)(1), (3), (4). redesignated former par. (5) as par. (6) and, in par. (6) as so redesignated, struck out "mollusk shells (including clam shells and oyster shells)," and substi- tuted "shale (except shale described in paragraph (5)), and stone (except stone described in paragraph (7))" for "shale, and stone, except stone described in para- graph (6)" in subpar. (A). and struck out "building or paving brick," and "sewer pipe," in subpar. (B). Former par. (6) redesignated as par. (7). Subsec. (b)(7). Pub. L. 89-809, §§ 208(a)(2). 209(a)(1), (5), redesignated former par. (6) as par. (7), and, in par. (7) as so redesignated, inserted "mollusk shells (including clam shells and oyster shells)," after "marble," and "(other than slate to which paragraph (5) applies)" following "any other such mineral". Subsec. (c)(4)(G). Pub. L. 89-809, § 209(b), substitut- ed "paragraph (5) or (6)(B)" for "paragraph (5)(B)". 1964-Subsec. (b)(2)(B), (6). Pub. L. 88-571 inserted "beryllium" following "antimony" in subpar. (2)(B), and deleted "beryl" following "bauxite" in both sub- pars. (2)(B) and (6). 1962-Subsec. (a). Fub. L. 87-834 inserted provisions requiring the allowable deductions taken into account with respect to expenses of mining in computing the taxable income from the property to be decreased by an amount equal to so much of any gain which is treated under section 1245 as gain from the sale or ex- change of property which is neither a capital asset nor property described in section 1231, and is properly al- locable to the property. 1960-Subsec. (b)(3). Pub. L. 86-564, § 302(a)(1), limited the 15 percent allowance for ball clay, benton- ite, china clay, and sagger clay to cases where para- graph (5)(B) does not apply, and authorized a 15 per- cent allowance, if paragraph (5)(B) does not apply, for clay used or sold for use for purposes dependent on its refractory properties. Subsec. (b)(5). Pub. L. 86-564, § 302(a)(2), substituted provisions authorizing a 5 percent allowance for clay used, or sold for use, in the manufacture of building or paving brick, drainage and roofing tile, sewer pipe, flower pots, and kindred products for provisions which authorized a 5 percent allowance for brick and tile clay. Subsec. (b)(6). Pub. L. 86-564, § 302(a)(3). eliminated provisions which authorized a 15 percent allowance for refractory and fire clay. See subsec. (b)(3) of this section. Subsec. (c)(2). Pub. L. 86-564, § 302(b)(1). substituted "the treatment processes considered as mining de- scribed in paragraph (4) (and the treatment processes necessary or incidental thereto)" for "the ordinary treatment processes normally applied by mine owners or operators in order to obtain the commercially mar- ketable mineral product or products", and "such treat- ment processes" for "the ordinary treatment process- es". Subsec. (c)(4). Pub. L. 86-564, § 302(b)(2), substituted "The following treatment processes where applied by the mine owner or operator shall be considered as mining to the extent they are applied to the ore or mineral in respect of which he is entitled to a deduc- tion for depletion under section 611" for "The term 'ordinary treatment processes' includes the following" in the opening provisions, included cleaning in cl. (B), substituted "ores or minerals which" for "minerals which" and included substantially equivalent process- es in cl. (C), included uranium and minerals which are not customarily sold in the form of the crude mineral product and substituted "from the ore or the mineral or minerals from other material from the mine or Page 442 § 613
TITLE 26-INTERNAL REVENUE CODE other natural deposit" for "from the ore, including the furnacing of quicksilver ores" in cl. (D), included the furnacing of quicksilver ores in cl. E), and added cis. (F) to (H). Subsec. (c)(5). Pub. L. 86-564, § 302(b)(2)0 added subsec. (c)(5). 1958-Subsec. d). Pub. L. 85-866 added subsec. d). EFFECTivz DATE OF 1976 A.wmm Amendment of subsec. (a) by section 1901(b)C3)CK) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EnrrvZ DATE OF 1975 AmzluNTr Amendment by Pub. L. 94-12 effective on Jan. 1, 1975, to apply to taxable years ending after Dec. 31, 1974, see section 501(c) of Pub. L. 94-12, set out as an Effective Note under section 613A of this title. EFrrIVE DATE OF 1974 AMxEMmEmr Section 2(b) of Pub. L. 93-499 provided that: "The amendment made by this section [amending subsec. (c)(4)(E) of thLq section] shall apply to taxable years beginning after December 31, 1970." EnFC-rIvE DATE OF 1969 AMENDMENT Section 501(b) of Pub. L. 91-172 provided that: "The amendment made by subsection (a) [amending suhsec. (b) of this section] shall apply to taxable years begin- ning after Octobf r 9, 1969." Section 502(b) of Pub. L. 91-172 provided that: "The amendments made by subsection (a) [amending subsec. (c)(4)CG) to (I) of this section] shall apply to taxable years beginning after the date of the enact- ment of this Act [Dec. 30, 1969]." EECrIVE DATE OF 1966 AMENDMENT Section 207(b) of Pub. L. 89-809 provided that: "The amendments made by subsection (a) [amending sub- secs. (b)(2) and (b)(3) of this section] shall apply to taxable years beginning after the date of the enact- ment of this Act [Nov. 13, 1966]." Section 208(b) of Pub. L. 89-809 provided that: "The amendments made by subsection (a) [amending sub- secs. (b)(6)CA) and (b)(7) of this section] shall apply to taxable years beginning after the date of the enact- ment of this Act [Nov. 13, 1966]." Section 209(c) of Pub. L 89-809 provided that: "The amendments made by subsections (a) and (b) [adding subsec. (b)(5) and amending subsecs. (b)(3)(B), (b)(6), (b)(7), and (c)(4)(0) of this section] shall apply to tax- able years beginning after the date of the enactment of this Act [Nov. 13, 1966]." EFFECTIVE DATE OF 1964 AENzmmrr Section 6(b) of Pub. L. 88-571 provided that: "The amendments made by subsection (a) [to this section] shall apply to taxable years beginning after December 31, 1963." EFFECTIVE DATE OF 1962 AMzwMxNT Amendment of subsec. a) by Pub. L. 87-834 applica- ble to taxable years beginning after Dec. 31, 1962, see section 13(g) of Pub. L. 87-834, set out as an Effective Date note under section 1245 of this title. EFFECTIVE DATE OF 1960 AMENDMENT Section 302(c) of Pub. L. 86-564, as amended by Pub. L. 86-781, § 4, Sept. 14, 1960, 74 Stat. 1018, provided that: "(c) Effective Date.- "(1) In general.-Except as provided in paragraph (2), the amendments made by subsections (a) and (b) [to subsecs. (b)(3), (5), (6), (c)(2), (4), (5) of this sec- tion] shall be applicable only with respect to taxable years beginning after December 31, 1960. "(2) Calcium carbonates, etc.- "(A) Election for past years.-In the case of cal. cium carbonates or other minerals when used in making cement, if an election is made by the tax- payer under subparagraph (C)- "i() the amendments made by subsection (b) (to subsecs. (b)(3), (5), (6), (c)(2), (4), (5) of this section] shall apply to taxable years with respect to which such election is effective and 1"(i provisions having the same effect as the amendments made by subsection (b) (to subsecs. b)(3), (5), (6), (c)(2), (4), (5) of this section] shall be deemed to be included in the Internal Rev- enue Code of 1939 and shall apply to taxable years with respect to which such election Is ef- fective in lieu of the corresponding provisions of such Code. "(B) Years to which applicable.-An election made under subparagraph CC) to have the provi. sions of this paragraph apply shall be effective for all taxable years beginning before January 1, 1961, in respect of which- "(i) the assessment of a deficiency, "ii) the refund or credit of an overpayment, or "CiII) the commencement of a suit for recovery of a refund under section 7405 of the Internal Revenue Code of 1954, [section 7405 of this title], is not prevented on the date of the enactment of this paragraph [Sept. 14, 1960] by the operation of any law or rule of law. Such election shall also be effective for any taxable year beginning before January 1, 1961, in respect of which an avsessment of a deficiency has been made but not collected on or before the date of the enactment of this para- graph. "CC) Time and manner of election.-An election to have the provisions of this paragraph apply shall be made by the taxpayer on or before the 60th day after the date of publication in the Fed- eral Register of final regulations issued under au- thority of subparagraph (F), and shall be made in such form and manner as the Secretary of the Treasury or his delegate shall prescribe by regula- tions. Such election, if made, may not be revoked, "(D) Statutes of limitation.-Notwithstanding any other law, the period within which an assess- ment of a deficiency attributable to the applica- tion of the amendments made by subsection (b) [to subsecs, (c)(2), (4), (5) of this section] may be made with respect to any taxable year to which such amendments apply under an election made under subparagraph (C), and the period within which a claim for refund or credit of an overpayment at- tributable to the application of such amendments may be made with respect to any such taxable year, shall not expire prior to one year after the last day for making an election under subpara- graph (C). An election by a taxpayer under subpar- agraph (C) shall be considered as a consent to the application of the provisions of this subparagraph. "CE) Terms; applicability of other laws.-Except where otherwise distinctly expressed or manifestly intended, terms used in this paragraph shall have the same meaning as when used in the Internal Revenue Code of 1954 [this title] (or correspond- ing provisions of the Internal Revenue Code of 1939) and all provisions of law shall apply with re- spect to this paragraph as if this paragraph were a part of such Code (or corresponding provisions of the Internal Revenue Code of 1939). "IF) Regulations.-The Secretary of the Trea- sury or his delegate shall prescribe such regula- tions as may be necessary to carry out the provi- sions of this paragraph." EFFECTIVE DATE OF 1958 AMENDMENT Subsec. (d) of this section applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 1(c) of Pub. ,. 85-866, set out as an Effective Date of 1958 Amendment note under sec- tion 165 of this title. Page 443 § 613
TITLE 26-INTERNAL REVENUE CODE REFUND OR CREDIT OF OVERPAYMENTS; LIMITATIONS; INTEREST Section 36(b) of Pub. L. 85-866 provided for the filing of a claim within 6 months of Sept. 2, 1958, and for the refund or credit of any overpayment, without interest, if such refund or credit, resulting from the addition of subsec. (d) of this section, was prevented on Sept. 2, 1958, or within 6 months thereof, by the operation of any law or rule of law other than certain specified sections of the Internal Revenue Codes of 1939 and 1954. ELECTION FOR CLAY AND SHALE USED IN MANUFACTURE OF CLAY PRODUCTS Pub. L. 87-312, Sept. 26, 1961, 75 Stat. 674, provided for the election of, and procedure for, a differing rate of depletion for clay and shale used in the manufac- ture of clay products, such election to be effective for all taxable years beginning before Jan. 1, 1961, in re- spect of which the assessment of a deficiency, a refund or credit of overpayment, or the commencement of a suit for recovery is not prevented on Sept. 26, 1961, by operation of any law or rule of law, and also effective for any taxable year beginning before Jan. 1961, in re- spect of which an assessment of a deficiency has been made but not collected on or before Sept. 26, 1961. ELECTION FOR QUARTZITE AND CLAY USED IN PRODUCTION OF REFRACTORY PRODUCTS Pub. L. 87-321, § 2, Sept. 26, 1961, 75 Stat. 683, pro- vided for an election of, and procedures for, a differing rate of depletion for quartzite and clay used in produc- tion of refractory products, such election to be effec- tive on and after Jan. 1, 1951, for all taxable years be- ginning before Jan. 1, 1961, in respect of which the as- sessment of a deficiency, the refund or credit of an overpayment, or the commencement of a suit for re- covery is not prevented on Sept. 26, 1961, by the oper- ation of any law or rule of law, and also effective on and after Jan. 1, 1951, for any taxable year beginning before Jan. 1, 1961, in respect of which an assessment of a deficiency has been made but not collected on or before Sept. 26, 1961. CROSS REFERENCES Allowance of deduction for depletion, see section 611 of this title. Percentage depletion inapplicable to certain owners of coal or iron ore, see section 631 of this title. Sale of oil and gas properties, surtax on sale, see sec- tion 632 of this title. SECTION REFEuRE TO IN OTHER SECTIONS This section is referred to in sections 163, 381. 611, 613A, 614, 617, 631, 636, 901, 903, 1082, 4940 of this title. § 613A. Limitations on percentage depletion in case of oil and gas wells (a) General rule Except as otherwise provided in this section, the allowance for depletion under section 611 with respect to any oil or gas well shall be com- puted without regard to section 613. (b) Exemption for certain domestic gas wells (1) In general The allowance for depletion under section 611 shall be computed in accordance with sec- tion 613 with respect to- (A) regulated natural gas, (B) natural gas sold under a fixed con- tract, and (C) any geothermal deposit in the United States or in a possession of the United States which is determined to be a gas well, and 22 percent shall be deemed to be speci- fied in subsection (b) of section 613 for pur- poses of subsection (a) of that section. (2) Definitions For purposes of this subsection- (A) Natural gas sold under a fixed contract The term "natural gas sold under a fixed contract" means domestic natural gas sold by the producer under a contract, in effect on February 1, 1975, and at all times there- after before such sale, under which the price for such gas cannot be adjusted to re- flect to any extejit the increase in liabilities of the seller for tax under this chapter by reason of the repeal of percentage depletion for gas. Price increases after February 1, 1975, shall be presumed to take increases In tax liabilities into account unless the tax- payer demonstrates to the contrary by clear and convincing evidence. (B) Regulated natural gas The term "regulated natural gas" means domestic natural gas produced and sold by the producer, before July 1, 1976, subject to the jurisdiction of the Federal Power Com- mission, the price for which has not been adjusted to reflect to any extent the in- crease in liability of the seller for tax under this chapter by reason of the repeal of per- centage depletion for gas. Price increases after February 1, 1975, shall be presumed to take increases in tax liabilities into account unless the taxpayer demonstrates the con- trary by clear and convincing evidence. (c) Exemption for independent producers and royalty owners (1) In general Except as provided in subsection (d), the allowance for depletion under section 611 shall be computed in accordance with section 613 with respect to- (A) so much of the taxpayer's average daily production of domestic crude oil as does not exceed the taxpayer's depletable oil quantity; and (B) so much of the taxpayer's average daily production of domestic natural gas as does not exceed the taxpayer's depletable natural gas quantity; and the applicable percentage (determined in accordance with the table contained in para- graph (5)) shall be deemed to be specified in subsection (b) of section 613 for purposes of subsection (a) of that section. (2) Average daily production For purposes of paragraph (1)- (A) the taxpayer's average daily produc- tion of domestic crude oil or natural gas for any taxable year, shall be determined by di- viding his aggregate production of domestic crude oil or natural gas, as the case may be, during the taxable year by the number of days in such taxable year, and (B) in the case of a taxpayer holding a partial interest in the production from any property (including an interest held in a partnership) such taxpayer's production shall be considered to be that amount of such production determined by multiplying § 613A Page 444
TITLE 26-INTERNAL REVENUE CODE the total production of such property by the taxpayer's percentage participation in the revenues from such property. In applying this paragraph, there shall not be taken into account any production of crude oil or natural gas resulting from secondary or tertiary processes (as defined in regulations prescribed by the Secretary). (3) Depletable oil quantity (A) In general For purposes of paragraph (1), the tax- payer's depletable oil quantity shall be equal to- (i) the tentative quantity determined under the table contained in subpara- graph (B), reduced (but not below zero) by (ii) the taxpayer's average daily second- ary or tertiary production for the taxable year. (B) Phase-out table For purposes of subparagraph A)- In the case of pro- The tentative duction during the quantity calendar year: in barrels is: 1975 ...................................................... 2,000 1976 ...................................................... 1,800 1977 ...................................................... 1,600 1978 ...................................................... 1,400 1979 ...................................................... 1,200 1980 and thereafter ........................... 1,000 (4) Daily depletable natural gas quantity For purposes of paragraph (1), the deplet- able natural gas quantity of any taxpayer for any taxable year shall be equal to 6,000 cubic feet multiplied by the number of barrels of the taxpayer's depletable oil quantity to which the taxpayer elects to have this para- graph apply. The taxpayer's depletable oil quantity for any taxable year shall be re- duced by the number of barrels with respect to which an election under this paragraph ap- plies. Such election shall be made at such time and in such manner as the Secretary shall by regulations prescribe. (5) Applicable percentage For purposes of paragraph (1)- In the case of pro- duction during the The applicable calendar year: percentage is: 1975 ..................................................... 22 1976 ..................................................... 22 1977 ..................................................... 22 1978 ..................................................... 22 1979 ..................................................... 22 1980 ..................................................... 22 1981 ..................................................... 20 1982 ..................................................... 18 1983 ..................................................... 16 1984 and thereafter .......................... 15 (6) Oil and natural gas resulting from secondary or tertiary processes (A) In general Except as provided in subsection (d), the allowance for depletion under section 611 shall be computed in accordance with sec- tion 613 with respect to- (i) so much of the taxpayer's average daily secondary or tertiary production of domestic crude oil as does not exceed the taxpayer's depletable oil quantity (deter- mined without regard to paragraph (3)(A)(ii)); and (i) so much of the taxpayer's average daily secondary or tertiary production of domestic natural gas as does not exceed the taxpayer's depletable natural gas quantity (determined without regard to paragraph (3)(A)(ii)); and 22 percent shall be deemed to be speci- fied in subsection (b) of section 613 for pur- posei of subsection (a) of that section. (B) Average daily secondary or tertiary produc- tion For purposes of this subsection- (i) the taxpayer's average daily second- ary or tertiary production of domestic crude oil or natural gas for any taxable year shall be determined by dividing his aggregate production of domestic crude oil or natural gas, as the case may be, re- sulting from secondary or tertiary pro- cesses during the taxable year by the number of days in such taxable year, and (ii) in the case of a taxpayer holding a partial interest in the production from any property (including any interest held in any partnership) such taxpayer's pro- duction shall be considered to be that amount of such production determined by multiplying the total production of such property by the taxpayer's percentage participation in the revenues from such property. (C) Termination This paragraph shall not apply after De- cember 31, 1983. (7) Special rules (A) Production of crude oil In excess of deplet. able oil quantity If the taxpayer's average daily production of domestic crude oil exceeds his depletable oil quantity, the allowance under paragraph (1)(A) with respect to oil produced during the taxable year from each property in the United States shall be that amount which bears the same ratio to the amount of de- pletion which would have been allowable under section 613(a) for all of the taxpay- er's oil produced from such property during the taxable year (computed as if section 613 applied to all of such production at the rate specified in paragraph (5) or (6), as the case may be) as his depletable oil quantity bears to the aggregate number of barrels repre- senting the average daily production of do- mestic crude oil of the taxpayer for such year. (B) Production of natural gas in excess of deplet- able natural gas quantity If the taxpayer's average daily production of domestic natural gas exceeds his deplet- able natural gas quantity, the allowance under paragraph (1)(B) with respect to nat- ural gas produced during the taxable year from each property in the United States shall be that amount which bears the same ratio to the amount of depletion which Page 445 § 613A
TITLE 26-INTERNAL REVENUE CODE would have been allowable under section 613(a) for all of the taxpayers I natural gas produced from such property during the taxable year (computed as if section 613 ap- plied to all of such production at the rate specified in paragraph (5) or (6), as the case may be) as the amount of his depletable natural gas quantity in cubic feet bears to the aggregate number of cubic feet repre- senting the average daily production of do- mestic natural gas of the taxpayer for such year. (C) Taxable income from the property If both oil and gas are produced from the property during the taxable year, for pur- poses of subparagraphs (A) and (B) the tax- able income from the property, in applying the 50-percent limitation in section 613(a), shall be allocated between the oil produc- tion and the gas production in proportion to the gross income during the taxable year from each. (D) Partnerships In the case of a partnership, the depletion allowance shall be computed separately by the partners and not by the partnership. The partnership shall allocate to each part- ner his proportionate share of the adjusted basis of each partnership oil or gas proper- ty. The allocation is to be made as of the later of the date of acquisition of the oil or gas property by the partnership, or January 1, 1975. A partner's proportionate share of the adjusted basis of partnership property shall be determined in accordance with his interest in partnership capital or income and, in the case of an agreement described in section 704(c)(2) (relating to effect of a partnership agreement on contributed prop- erty), such share shall be determined by taking such agreement into account. Each partner shall separately keep records of his share of the adjusted basis in each oil and gas property of the partnership, adjust such share of the adjusted basis for any deple- tion taken on such property, and use such adjusted basis each year in the computation of his cost depletion or in the computation of his gain or loss on the disposition of such property by the partnership. For purposes of section 732 (relating to basis of distribut- ed property other than money), the part- nership's adjusted basis in mineral property shall be an amount equal to the sum of the partners' adjusted basis in such property as determined under this paragraph. (M) Secondary or tertiary production If the taxpayer has production from sec- ondary or tertiary recovery processes during the taxable year, this paragraph (under regulations prescribed by the Secre- tary) shall be applied separately with re- spect to such production. (8) Business under common control; members of the same family (A) Component members of controlled group treated as one taxpayer For purposes of this subsection, persons who are memnbers of the same controlled 'So in original. Probably should be "taxpayer's". group of corporations shall be treated as one taxpayer. (B) Aggregation of business entities under common control If 50 percent or more of the beneficial in- terest in two or more corporations, trusts, or estates is owned by the same or related persons (taking into account only persons who own at least 5 percent of such benefi- cial interest), the tentative quantity deter- mined under the table in paragraph (3)(B) shall be allocated among all such entities in proportion to the respective production of domestic crude oil during the period in question by such entities. (C) Allocation among members of the same family In the case of individuals who are mem- bers of the same family, the tentative quan- tity determined under the table in para- graph (3)(B) shall be allocated among such individuals in proportion to the respective production of domestic crude oil during the period in question by such individuals. (D) lefiniton andi special rules For purposes of this paragraph- (i) the term "controlled group of corpo- rations" has the meaning given to such term by section 1563(a), except that sec- tion 1563(b)(2) shall not apply and except that "more than 50 percent." shall be sub- stituted for "at least 80 peicent" each place it appears in section 1563(a), (i) a person is a related person to an- other person if such persons are members of the same controlled group of corpora- tions or if the relationship between such persons would result in a disallowance of losses under section 267 or 707(b), except that for this purpose the family of an in- dividual includes only his spouse and minor children. (ili) the family of an individual includes only his spouse and minor children, and (iv) each 6,000 cubic feet of domestic natural gas shall be treated as 1 barrel of domestic crude oil. (9) Transfer of oil or gas property (A) in the case of a transfer (including the subleasing of a lease) after December 31, 1974 of an interest (including an interest in a partnership or trust) in any proven oil or gas property, paragraph (1) shall not apply to the transferee (or subleasee) with respect to production of crude oil or natural gas at- tributable to such interest, and such pro- duction shall not be taken Into account for any computation by the transferee (or sublessee) under this subsection. A property shall be treated as a proven oil or gas prop- erty if at the time of the transfer the prin- cipal value of the property has been demon- strated by prospecting or exploration or dis- covery work. (B) Subparagraph (A) shall not apply in the case of- (i) a transfer of property at death, or § 613A Page 446
TITLE 26-INTERNAL REVENUE CODE (ii) the transfer in an exchange to which section 351 applies if following the exchange the tentative quantity deter- mined under the table contained in para- graph (3)(B) is allocated under paragraph (8) between the transferor and transferee. (iii) a change of beneficiaries of a trust by reason of the death, birth, or adoption of any vested beneficiary if the transferee was a beneficiary of such trust or is a lineal descendant of the settlor or any other vested beneficiary of such trust, except in the case of any trust where any beneficiary of such trust is a member of the family (as defined in section 267(c)(4)) of a settlor who created inter vivos and testamentary trusts for members of the family and such settlor died within the last six days of the fifth month in 1970, and the law in the jurisdiction in which such trust was created requires all or a portion of the gross or net proceeds of any royalty or other interest in oil, gas, or other mineral representing any percent- age depletion allowance to be allocated to the principal of the trust, (iv) a transfer of property between cor- porations which are members of the same controlled group of corporations (as de- fined in paragraph (8)CD)(i)), or v) a transfer of property between busi- ness entities which are under common control (within the meaning of paragraph (8)(B)) or between related persons in the same family (within the meaning of para- graph (8)(C)), or (vi) a transfer of property between a trust and related persons in the same family (within the meaning of paragraph (8)(C)) to the extent that the beneficia- ries of that trust are and continue to be related persons in the family that trans- ferred the property, and to the extent that the tentative oil quantity is allocated among the members of the family (within the meaning of paragraph (8)(C)). Clause iv) or Cv) shall apply only so long as the tentative oil quantity determined under the table contained in paragraph (3)(B) is allocated under paragraph (8) between the transferor and transferee. (10) Special rule for fiscal year taxpayers In applying this subsection to a taxable year which is not a calendar year, each por- tion of such taxable year which occurs during a single calendar year shall be treated as if it were a short taxable year. (11) Certain production not taken into account In applying this subsection, there shall not be taken into account the production of natu- ral gas with respect to which subsection (b) applies. (d) Limitations on application of subsection Cc) (1) Limitation based on taxable income The deduction for the taxable year attribut- able to the application of subsection Cc) shall not exceed 65 percent of the taxpayer's tax- able income for the year computed without regard to- (A) any depletion on production from an oil or gas property which is subject to the provisions of subsection (c), (B) any net operating loss carryback to the taxable year under section 172, (C) any capital loss carryback to the tax- able year under section 1212, and (D) in the case of a trust, any distribu- tions to its beneficiary, except in the case of any trust where any beneficiary of such tr'ist is a member of the family (as defined in ,:ection 267(c)(4)) of a settlor who created inter" vivos and testamentary trusts for members of the family and such settlor died within the last six days of the fifth month in 1970, and the law in the jurisdiction in which such trust was created requires all or a portion of the gross or net proceeds of any royalty or other interest in oil, gas, or other mineral representing any percentage depletion allowance to be allocated to the principal of the trust. If an amount is disallowed as a deduction for the taxable year by reason of application of the preceding sentence, the disallowed amount shall be treated as an amount allowa- ble as a deduction under subsection (c) for the following taxable year, subject to the ap- plication of the preceding sentence to such taxable year. For purposes of basis adjust- ments and determining whether cost deple- tion exceeds percentage depletion with re- spect to the production from a property, any amount disallowed as a deduction on the ap- plication of this paragraph shall be allocated to the respective properties from which the oil or gas was produced in proportion to the percentage depletion otherwise allowable to such properties under subsection Mc). (2) Retailers excluded Subsection (c) shall not apply in the case of any taxpayer who directly, or through a re- lated person, sells oil or natural gas (exclud- ing bulk sales of such items to commercial or indurstrial users), or any product derived from oil or natural gas- (A) through any retail outlet operated by the taxpayer or a related person, or (B) to any person- (i) obligated under an agreement or con- tract with the taxpayer or a related person to use a trademark, trade name, or service mark or name owned by such tax- payer or a related person, in marketing or distributing oil or natural gas or any prod- uct derived from oil or natural gas, or (ii) given authority, pursuant to an agreement or contract with the taxpayer or a related person, to occupy any retail outlet owned, leased, or in any way con- trolled by the taxpayer or a related person. Notwithstanding the preceding sentence this paragraph shall not apply in any case where the combined gross receipts from the sale of such oil, natural gas, or any product derived therefrom, for the taxable year of all retail outlets taken into account for purposes of this paragraph do not exceed $5,000,000. For purposes of this paragraph, sales of oil, natu- ral gas, or any product derivel from oil or Page 447 § 613A
TITLE 26-INTERNAL REVEN1UE CODE natural gas shall not include sales made of such items outside the United States, if no do- mestic production of the taxpayer or a relat- ed person is exported during the taxable year or the immediately preceding taxable year. (3) Related person For purposes of this subsection, a person is a related person with respect to the taxpayer if a significant ownership interest in either the taxpayer or such person is held by the other, or if a third person has a significant ownership interest in both the taxpayer and such person. For purposes of the preceding sentence, the term "significant ownership in- terest" means- (A) with respect to any corporation, 5 per- cent or more in value of the outstanding stock of such corporation, (B) with respect to a partnership, 5 per- cent or more interest in the profits or cap- ital of such partnership, and (C) with respect to an estate or trust, 5 percent or more of the beneficial interests in such estate or trust. For purposes of determining a significant ownership interest, an interest owned by or for a corporation, partnership, trust, or estate shall be considered as owned directly both by itself and proportionately by its shareholders, partners, or beneficiaries, as the case may be. (4) Certain refiners excluded If the taxpayer or a related person engages in the refining of crude oil, subsection (c) shall not apply to such taxpayer if on any day during the taxable year the refinery runs of the taxpayer and such person exceed 50,000 barrels. (e) Definitions For purposes of this section- (1) Crude oil The term "crude oil" includes a natural gas liquid recovered from a gas well in lease sepa- rators or field facilities. (2) Natural gas The term "natural gas" means any product (other than crude oil) of an oil or gas well if a deduction for depletion is allowable under section 611 with respect to such product. (3) Domestic The term "domestic" refers to production from an oil or gas well located in the United States or in a possession of the United States. (4) Barrel The term "barrel" means 42 United States gallons. (Added Pub. L. 94-12, title V, § 501(a), Mar. 29, 1975, 89 Stat. 47, and amended Pub. L. 94-455, title XIX, §§ 1901(a)(86), 1906(b)(13)(A). title XXI, § 2115(a)-(c)(1), (d), (e), Oct. 4, 1976, 90 Stat. 1779, 1834, 1907-1909.) AMEmMENTS 1976-Subsec. (b)(1)(C). Pub. L. 94-455, § 1901(a)(86)(A), struck out "within the meaning of section 613(b)(1)(A)" following "determined to be a gas well". Subsec. (c)(2). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c)(4). Pub, L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c)(6)(A)(i). Pub. L. 94-455, § 1901(a)(86)(B), substituted "determined without" for "determined With". Subsec. (c)(7)(D). Pub. L. 94-455, § 2115(c)(1), added provisions relating to the method to be employed by the partners in computing the depletion allowance. Subsec. (c)(7)(E). Pub. L. 94-455, §1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c)(9)(B). Pub. L. 94-455, § 2115(b)(1), (e), added cls. (III) to (vi) and provision following cl. (vi). Subsec. (d)(1). Pub. L. 94-455. §2115(b)(2), substitut- ed in subpar. (A) reference to any depletion on produc- tion from an oil or gas property which is subject to the provisions of subsection (c) for reference to depletion with respect to production of oil and gas subject to the provisions of subsection (c) and added subpar. (D). Subsec. (d)(2). Pub. L. 94-455, § 2115(a), inserted "(excluding bulk sales of such items to commercial or industrial users)" before ", or any product derived" and added provisions following subpar. (B) relating to the application of this paragraph where combined gross receipts from the sale of oil, natural gas, or any product derived therefrom, for the taxable year of all retail outlets taken into account do not exceed $5,000,000 and relating to the exclusion of sales made outside the United States. Subsec. (d)(3). Pub. L. 94-455, § 2115(d), added provi- sion following subpar. (C) relating to the determina- tion of a significant ownership interest of a corpora- tion, partnership, trust, or estate. Er n'rzvz DATE OF 1976 AMENDMENT Amendment of subsecs, (b)(1)(C) and (c)(6)(A)(i) by section 1901(a)(86) of Pub. L. 94-455 effective for tax- able years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Section 2115(f) of Pub. L. 94-455 provided that: "The amendments made by this section [amending subsecs. (c)(7)(9) and (d)(1)-(3) of this section, and sections 703(a)(2) and 705(a) of this title] shall take effect on January 1, 1975. and shall apply to taxable years ending after December 31, 1974." Enrr vr DATE Section 501(c) of Pub. L. 94-12 provided that: "The amendments made by this section [enacting this sec- tion and amending sections 613 and 703 of this title] shall take effect on January 1, 1975, and shall apply to taxable years ending after December 31, 1974." SECTION Rxr EMnz TO IN OTMER SEcTIoNs This section is referred to in sections 613, 993 of this title. § 614. Definition of property (a) General rule For the purpose of computing the depletion allowance in the case of mines, wells, and other natural deposits, the term "property" means each separate interest owned by the taxpayer in each mineral deposit in each separate tract or parcel of land. (b) Special rules as to operating mineral interests in oil and gas wells In the case of oil and gas wells- (1) In general Except as otherwise provided in this subsec- tion- (A) all of the taxpayer's operating miner- al interests in a separate tract or parcel of land shall be combined and treated as one property, and (B) the taxpayer may not combine an op- erating mineral interest in one tract or § 614 Page 448
TITLE 26-INTERNAL REVENUE CODE parcel of land with an operating mineral in- terest in another tract or parcel of land. (2) Election to treat operating mineral Interests as separate properties. If the taxpayer has more than one operat- ing mineral interest in a single tract or parcel of land, he may elect to treat one or more of such operating mineral interests as separate properties. The taxpayer may not have more than one combination of operating mineral interests in a single tract or parcel of land. If the taxpayer makes the election provided in this paragraph with respect to any interest in a tract or parcel of land, each operating min- eral interest which Is discovered or acquired by the taxpayer in such tract or parcel of land after the taxable year for which the election is made shall be treated- (A) if there is no combination of interests in such tract or parcel, as a separate proper- ty unless the taxpayer elects to combine It with another interest, or (B) if there is a combination of interests in such tract or parcel, as part of such com- bination unless the taxpayer elects to treat it as a separate property. (3) Certain unitization or pooling arrangements (A) In general Under regulations prescribed by the Sec- retary, if one or more of the taxpayer's op- erating mineral interests participate, under a voluntary or compulsory unitization or pooling agreement, in a single cooperative or unit plan of operation, then for the period of such participation- (I) they shall be treated for all purposes of this subtitle as one property, and (ii) the application of paragraphs (1), (2), and (4) in respect of such interests shall be suspended. (B) Limitation Subparagraph (A) shall apply to a volun- tary agreement only if all the operating mineral interests covered by such agree- ment- (i) are in the same deposit, or are in 2 or more deposits the joint development or production of which is logical from the standpoint of geology, convenience, econ- omy, or conservation, and (i) are in tracts or parcels of land which are contiguous or in close proximity. (C) Special rule in the case of arrangements en- tered into a taxable years beginning before January 1, 1964 If- (i) two or more of the taxpayer's operat- ing mineral interests participate under a voluntary or compulsory unitization or pooling agreement entered into in any taxable year beginning before January 1, 1964, in a single cooperative or unit plan of operation, (i) the taxpayer, for the last taxable year beginning before January 1, 1964, treated such interests as two or more sep- arate properties, and (iii) it is determined that such treat- ment was proper under the law applicable to such taxable year, such taxpayer may continue to treat such interests in a consistent manner for the period of such participation. (4) Manner, time, and scope of election (A) Manner and time Any election provided in paragraph (2) shall be made for each operating mineral interest, in the manner prescribed by the Secretary by regulations, not later than the time prescribed by law for filing the return (including extensions thereof) for whichev- er of the following taxable years is the later: The first taxable year beginning after December 31, 1963, or the first taxable year in which any expenditure for development or operation in respect of such operating mineral interest is made by the taxpayer after the acquisition of such interest. (B) Scope Any election under paragraph (2) shall be for all purposes of this subtitle and shall be binding on the taxpayer for all subsequent taxable years. (5) Treatment of certain properties If, on the day preceding the first day of the first taxable year beginning after December 31, 1963, the taxpayer has any operating min- eral interests which he treats under subsec- tion (d) of this section (as in effect before the amendments made by the Revenue Act of 1964), such treatment shall be continued and shall be deemed to have been adopted pursu- ant to paragraphs (1) and (2) of this subsec- tion (as amended by such Act). (c) Special rules as to operating mineral interests in mines (1) Election to aggregate separate interests Except in the case of oil and gas wells, if a taxpayer owns two or more separate operat- ing mineral interests which constitute part or all of an operating unit, he may elect (for all purposes of this subtitle)- (A) to form an aggregation of, and to treat as one property, all such interests owned by him which comprise any one mine or any two or more mines; and (B) to treat as a separate property each such interest which is not included within an aggregation referred to in subparagraph (A). For purposes of this paragraph, separate op- erating mineral interests which constitute part or all of an operating unit may be aggre- gated whether or not they are included in a single tract or parcel of land and whether or not they are included in contiguous tracts or parcels. For purposes of this paragraph, a taxpayer may elect to form more than one ag- gregation of operating mineral interests within any one operating unit; but no aggre- gation may include any operating mineral in- terest which is a part of a mine without in- cluding all of the operating mineral interests which are a part of such mine in the first tax- able year for which the election to aggregate is effective, and any operating mineral inter- Page 449 § 614
TITLE 26-INTERNAL REVENUE CODE est which thereafter becomes a part of such mine shall be included in such aggregation. (2) Election to treat a single interest as more than one property Except in the case of oil and gas wells, if a single tract or parcel of land contains a min- eral deposit which is being extracted, or will be extracted by means of two or more mines for which expenditures for development or operation have been made by the taxpayer, then the taxpayer may elect to allocate to such mines, under regulations prescribed by the Secretary, all of the tract or parcel of land and of the mineral deposit contained therein, and to treat as a separate property that portion of the tract or parcel of land and of the mineral deposit so allocated to each mine. A separate property formed pursuant to an election under this paragraph shall be treated as a separate property for all pur- poses of this subtitle (including this para- graph). A separate property so formed may, under regulations prescribed by the Secre- tary, be included as a part of an aggregation in accordance with paragraphs (1) and (3). The election provided by this paragraph may not be made with respect to any property which is a part of an aggregation forned by the taxpayer under paragraph (1) except with the consent of the Secretary. (3) Manner and scope of election The elections provided by paragraphs (1) and (2) shall be made, in accordance with reg- ulations prescribed by the Secretary, not later than the time prescribed for filing the return (including extensions thereof) for the first taxable year- (A) in which, in the case of an election under paragraph (1), any expenditure for development or operation in respect of the separate operating mineral interest is made by the taxpayer after the acquisition of such interest, or (B) in which, in the case of an election under paragraph (2), expenditures for de- velopment or operation of more than one mine in respect of a property are made by the taxpayer after the acquisition of the property. An election made under paragraph (1) or (2) for a taxable year shall be binding upon the taxpayer for such year and all subsequent taxable years, except that the Secretary may consent to a different treatment of any inter- est with respect to which an election has been made. (d) Operating mineral interests defined For purposes of this section, the term "oper- ating mineral interest" includes only an inter- est in respect of which the costs of production of the mineral are required to be taken into ac- count by the taxpayer for purposes of comput- ing the 50 percent limitation provided for in section 613, or would be so required if the mine, well, or other natural deposit were in the pro- duction stage. (e) Special rule as to nonoperating mineral interests (I) Aggregation of separate interests If a taxpayer owns two or more separate nonoperating mineral interests in a single tract or parcel of land or in two or more adja- cent tracts or parcels of land, the Secretary shall, on showing by the taxpayer that a prin- cipal purpose is not the avoidance of tax, permit the taxpayer to treat (for all purposes of this subtitle) all such mineral interests in each separate kind of mineral deposit as one property. If such permission is granted for any taxable year, the taxpayer shall treat such interests as one property for all subse- quent taxable years unless the Secretary con- sents to a different treatment. (2) Nonoperating mineral interests defined For purposes of this subsection, the term "nonoperating mineral interests" includes only interests which are not operating miner- al interests, (Aug. 16, 1954, ch. 736, 68A Stat. 210; Sept. 2, 1958, Pub. L. 85-866, title I, § 37(a)-(d), 72 Stat. 1633-1637; Feb. 26, 1964, Pub. L. 88-272, title II, § 226(a), (b), 78 Stat. 94, 96; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(a)(87)(A)(i), (B), (C), 1906(b)(13)(A), 90 Stat. 1779, 1834.) REznmcms IN TEXT The Revenue Act of 1964, referred to in subsec. (b)(5), is Pub. L. 88-272, Feb. 26, 1964, 78 Stat. 19. For complete classification of this Act to the Code, see Short Title note set out under section 1 of this title and Tables volume. AMENDmENTS 1976-Subsecs. (b)(3)(A), (4)(A), (e). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c)(2). Pub. L. 94-455, §§ 1901(a)(87)(B). 1i6(b)(13)(A), struck out "or his delegate" following ' Secretary" wherever appearing and ", but the provi- sions of paragraph (4) shall not apply with respect to such separate property" following "in accordance with paragraphs (1) and (3)". Subsec. (c)(3). Pub. L. 94-455, § 1901(a)(87)(C), among other changes, struck out references to the first taxable year beginning after Dec. 31, 1957, and provisions relating to elections for taxable years begin- ning before Jan. 1, 1958, relating to election after final regulations, and relating to statute of limitations. Subsec. (c)(4). Pub. L. 94-455, § 1901(a)(87)(A)(i), struck out subsec. (c)(4) which related to a special rule as to deductions under section 615(a) of this title prior to aggregation. 1964-Subsec. (b). Pub. L. 88-272, § 226(a), amended subsec. (b) generally, and among other changes, sub- stituted provisions stacing that except as otherwise provided, all of the taxpayer's operating mineral inter- ests in a separate tract or parcel of land will be com- bined and treated as one property, that the taxpayer may not combine any operating mineral interest in one tract or parcel of land with an operating mineral interest in another tract or parcel of land, that if he has more than one operating mineral interest in a single tract of land he may elect to treat one or more of such interests as separate properties, limited, how- ever, to one combination of interests in a single tract of land, and providing, in the event the election in par. (2) is made with respect to any tract of land, for the treatment of interests discovered or acquired by the taxpayer in such a tract after the taxable year for which the election is made, for provisions which per- mitted a taxpayer who owned two or more separate operating mineral interests which constituted all or a part of an operating unit, to elect to form one aggrega- tion and treat as one property any two or more of these interests, treating as separate properties any in- terests which he did not include in the one aggrega- tion, to aggregate separate interests whether or not in a single tract of land, or contiguous tracts of land, and Page 450 § 614
TITLE 26-INTERNAL REVENUE CODE which forbade him to form more than one aggregation within a single operating unit, inserted provisions in par. (3) relating to unitization or pooling arrange. ments, and in par (5), providing that if the taxpayer has operating mineral interests on the day preceding the first day of the first taxable year beginning after Dec. 31, 1963, which he treats under subsec. (d) of this section as in effect before amendment by Pub. L. 88- 272, he shall continue such treatment and it shall be deemed adopted pursuant to pars. (1) and (2) of this subsection, and eliminated provisions defining "oper- ating mineral interests", and providing for termina- tion of election with respect to mines, excepting oil and gas wells. For definition of "operating mineral in- terests". see subsec. (d) of this section. Subsec. (c). Pub. L. 88-272, § 226(b)(1), (2), eliminat- ed par. (5) which defined operating mineral interests, and "1958" which preceded "Special rules" in the sub- section catchline. Subsec. Cd). Pub. L. 88-272, § 226(b)(3), amended subsec. (d) generally by substituting the definition of operating mineral interests, for provisions relating to the 1939 Code treatment respecting operating mineral interest in case of oil and gas wells. Subsec. (e)(2). Pub. L. 88-272, § 226(b)(4), deleted "within the meaning of subsection (b)(3)" from the end of the sentence. 1958-Subsec. (b)(4). Pub. L. 85-866, § 37(a), added subsec. (b)(4). Subsec. Cc). Pub. L. 85-866, § 37(b), added subsec. c) and redesignated former subsec. Cc) as (e). Subsec. d). Pub. L. 85-866, § 37(c), added subsec. Cd). Subsec. (e). Pub. L. 85-866, § 37(b), (d), redesignated former subsec. Cc) as (e) and substituted in first sen- tence of par. (1) "or in two or more adjacent tracts" for "or in two or more contiguous tracts" and "shall, on showing by the taxpayer that a principal purpose is not the avoidance of tax, permit the taxpayer to treat (for all purposes of this subtitle) all such mineral in- terests in each separate kind of mineral deposit as one property" for "may, on showing of undue hardship, permit the taxpayer to treat (for all purposes of this subtitle) all such mineral interests as one property". EFrIvE DATE OF 1976 AMENDMENT Section 1901(a)(87)(A)(ii) of Pub. L. 94-455 provided that: "The amendment made by clause (i) [repealing subsec. (c)(4) of this section] shall apply with respect to elections to form aggregations of operating mineral interests made under section 614(c)(1) of the Internal Revenue Code of 1954 [subsec. (c)(1) of this title] for taxable years beginning after December 31, 1.976." ErmzcivE DATE OF 1964 AMmN mNT Section 226(d) of Pub. L. 88-272 provided that: "The amendments made by subsections (a) and (b) [to this section] shall apply to taxable years beginning after December 31, 1963." E cTivzE DATE OF 1958 AtmxaNrT Section 37(e) of Pub. L. 85-866 provided that: "The amendments made by subsections (a) and Cc) [adding subsers. (b)(4) and (d) of this section] shall apply with respect to taxable years beginning after December 31, 1953, and ending after August 16, 1954. The amend- ments made by subsection (b) [to subsecs. Cc) and (e) of this section] shall apply with respect to taxable years beginning after December 31, 1957, oxcept that such amendments shall, at the election of the taxpay- er made in conformity with such amendments, apply with respect :u taxable years beginning after Decem- ber 31, 1953, and ending after August 16, 1954. The amendment made by subsection Cd) [to subsecs. (e)(1) of this sectionl shall apply with respect to taxable years beginning after December 31, 1957, except that with respect to any taxpayer such amendment shall, at the election of the taxpayer, apply with respect to taxable years beginning after December 31, 1953, and ending after August 16, 1954." ALLOCATION OF BASIS IN CERTAIN CASES Section 226(c) of Pub. L. 88-272 provided that: "For purposes of the Internal Revenue Code of 1954- "(1) Fair market value rule.-Except as provided in paragraph (2), if a taxpayer has a section 614(b) ag- gregation, then the adjusted basis (as of the first day of the first taxable year beginning after Decem- ber 31, 1963) of each property included in such ag- gregation shall be determined by multiplying the ad- justed basis of the aggregation by a fraction- "CA) the numerator of which is the fair mtrket value of such property, and "(B) the denominator of which is the fair market value of such aggregation. For purposes of this paragraph, the adjusted basis and the fair market value of the aggregation, and the fair market value of each property included therein, shall be determined as of the day preceding the first day of the first taxable year which begins after December 31, 1963. "(2) Allocation of adJustmemts, etc.-If the taxpay- er makes an election under this paragraph with re- spect to any section 614(b) aggregation, then the ad- justed basis (as of the first day of the first taxable year beginning December 31, 1963) of each property included in such aggregation shall be the adjusted basis of such property at the time it was first includ- ed in the aggregation by the taxpayer, adjusted for that portion of those adjustments to the basis of the aggregation which are reasonably attributable to such property. If, under the preceding sentence, the total of the adjusted bases of the interests included in the aggregation exceeds the adjusted basis of the aggregation (as of the day preceding the first day of the first taxable year which begins after December 31, 1963), the adjusted bases of the properties which include such interests shall be adjusted, under regu- lations prescribed by the Secretary of the Treasury or his delegate, so that the total of the adjusted bases of such interests equals the adjusted basis of the aggregation. An election under this paragraph shall be made at such time and in such manner as the Secretary of the Treasury or his delegate shall by regulations prescribe. "C3) Definitions. For purposes of this subsection- "CA) Section 614(b) aggregation.- "The term 'secticn 614(b) aggregation' means any aggregation to which section 614(b)(1)(A) of the Internal Revenue Code of 1954 [subsec. (b)(1)(A) of this section] (as in effect before the amendments made by subsection (a) of this sec- tion) applied for the day preceding the first day of the first taxable year beginning after December 31, 1963. "(B) Property. "The term 'property' has the same meaning as is applicable, under section 614 of the Internal Rev- enue Code of 1954 [this sectlonl, to the taxpayer for the first taxable year beginning after Decem- ber 31, 1963." SECTION REFEMED TO IN OTHER SEC£IONS This section is referred to in sections 57, 465, 617, 636, 1016 of this title. [§615. Repealed. Pub. L. 94-455, title XIX, § 1901(a)(88), Oct. 4, 1976, 90 Stat. 1779] Section, acts Aug. 16, 1954, ch. 736, 68A Stat. 211: July 6, 1960, Pub. L. 86-594, § 1, 74 Stat. 333; Sept. 12, 1966, Pub. L. 89-570, § 2(a), 80 Stat. 703; Dec. 30, 1969, Pub. L. 91-172, title V, § 504(a), 83 Stat. 632, related to pre-1970 exploration expenditures. ErIvE DATE OF RF.EAL Repeal of section effective with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Page 451 § 816
TITLE 26-INTERNAL REVENUE CODE § 616. Development expenditures (a) In general Except as provided in subsection (b), there shall be allowed as a deduction in computing taxable income all expenditures paid or in- curred during the taxable year for the develop- ment of a mine or other natural deposit (other than an oil or gas well) if paid or incurred after the existence of ores or minerals in commercial- ly marketable quantities has been disclosed. This section shall not apply to expenditures for the acquisition or improvement of property of a character which is subject to the allowance for depreciation provided in section 167, but allowances for depreciation shall be considered, for purposes of this section, as expenditures. (b) Election of taxpayer At the election of the taxpayer, made in ac- cordance with regulations prescribed by the Secretary, expenditures described in subsection (a) paid or incurred during the taxable year shall be treated as deferred expenses and shall be deductible on a ratable basis as the units of produced ores or minerals benefited by such ex- penditures are sold. In the case of such expen- ditures paid or incurred during the develop- Ynent stage of the mine or deposit, the election shall apply only with respect to the excess of such expenditures during the taxable year over the net receipts during the taxable year from the ores or minerals produced from such mine or deposit. The election under this subsection, if made, must be for the total amount of such expenditures, or the total amount of such excess, as the case may be, with respect to the mine or deposit, and shall be binding for such taxable year. (c) Adjusted basis of mine or deposit The amount of expenditures which are treat- ed under subsection (b) as deferred expenses shall be taken into account in computing the adjusted basis of the mine or deposit, except that such amount, and the adjustments to basis provided in section 1016(a)(9), shall be disre- garded in determining the adjusted basis of the property for the purpose of computing a deduc- tion for depletion under section 611. (Aug. 16, 1954, ch. 736, 68A Stat. 212; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (b). Pub. L. 94-455 struck out "or his delegate" following "Secretary". CROSS Ru'ERNcEs Exception from denial of deduction for capital ex- penditures, see section 263 of this title. S c ioN RErmEIU TO IN OTHER SECTIONS This section is referred to in sections 263, 381, 1016 of this title. § 617. Deduction and recapture of certain mining ex- ploration expenditures (a) Allowance of deduction (1) General rule At the election of the taxpayer, expendi- tures paid or incurred during the taxable year for the purpose of ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral, and paid or incurred before the beginning of the development stage of the mine, shall be allowed as a deduc- tion in computing taxable income. This sub- section shall apply only with respect to the amount of such expenditures which, but for this subsection, would not be allowable as a deduction for the taxable year. This subsec- tion shall not apply to expenditures for the acquisition or improvement of property of a character which is subject to the allowance for depreciation provided in section 167, but allowances for depreciation shall be consid- ered, for purposes of this subsection, as ex- penditures paid or Incurred. In no case shall this subsection apply with respect to amounts paid or incurred for the purpose of ascertain- ing the existence, location, extent, or quality of any deposit of oil or gas or of any mineral with respect to which a deduction for per- centage depletion is not allowable under sec- tion 613. (2) Elections (A) Method Any election under this subsection shall be made in such manner as the Secretary may by regulations prescribe. (B) Time and scope The election provided by paragraph (1) for the taxable year may be made at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for the taxable year. Such an election for the taxable year shall apply to all expendi- tures described in paragraph (1) paid or in- curred by the taxpayer during the taxable year or during any subsequent taxable year. Such an election may not be revoked unless the Secretary consents to such revocation. (C) Deficiencies The statutory period for the assessment of any deficiency for any taxable year, to the extent such deficiency is attributable to an election or revocation of an election under this subsection, shall not expire before the last day of the 2-year period be- ginning on the day after the date on which such election or revocation of election is made; and such deficiency may be assessed at any time before the expiration of such 2- year period, notwithstanding any law or rule of law which would otherwise prevent such assessment. () Recapture on reaching producing stage (1) Recapture If, in any taxable year, any mine with re- spect to which expenditures were deducted pursuant to subsection (a) reaches the pro- ducing stage, then- (A) If the taxpayer so elects with respect to all such mines reaching the producing stage during the taxable year, he shall in- clude in gross income for the taxable year an amount equal to the adjusted explora- tion expenditures with respect to such mines, and the amount so included in income shall be treated for purposes of this subtitle as expenditures which (I) are paid Page 452 § 616
TITLE 26-INTERNAL REVENUE CODE or incurred on the respective dates on which the mines reach the producing stage, and ii) are properly chargeable to capital account. (B) If subparagraph (A) does not apply with respect to any such mine, then the de- duction for depletion under section 611 with respect to the property shall be disallowed until the amount of depletion which would be allowable but for this subparagraph equals the amount of the adjusted explora- tion expenditures with respect to such mine. (2) Elections (A) Method Any election under this subsection shall be made in such manner as the Secretary may by regulations prescribe. (B) Time and scope The election provided by paragraph (1) for any taxable year may be made or changed not later than the time prescribed by law for filing the return (including ex- tensions thereof) for such taxable year. (c) Recapture in case of bonus or royalty If an election has been made under subsec- tion (a) with respect to expenditures relating to a mining property and the taxpayer receives or accrues a bonus or a royalty with respect to such property, then the deduction for depletion under section 611 with respect to the bonus or royalty shall be disallowed until the amount of depletion which would be allowable but for this subsection equals the amount of the adjusted exploration expenditures with respect to the property to which the bonus or royalty relates. (d) Gain from dispositions of certain mining property (1) General rule Except as otherwise provided in this subsec- tion, if mining property is disposed of the lower of- (A) the adjusted exploration expenditures with respect to such property, or (B) the excess of- (I) the amount realized (in the case of a sale, exchange, or involuntary conver- sion), or the fair market value (in the case of any other disposition), over (ii) the adjusted basis of such property, shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle. (2) Disposition of portion of property For purposes of paragraph (1)- (A) In the case of the disposition of a por- tion of a mining property (other than an undivided interest), the entire amount of the adjusted exploration expenditures with respect to such property shall be treated as attributable to such portion to the extent of the amount of the gain to which paragraph (1) applies. (B) In the case of the disposition of an un- divided interest in a mining property (or a portion thereof), a proportionate part of the adjusted exploration expenditures with respect to such property shall be treated as attributable to such undivided interest to the extent of the amount of the gain to which paragraph (1) applies. This paragraph shall not apply to any expen- diture to the extent the taxpayer establishes to the satisfaction of the Secretary that such expenditure relates neither to the portion (or Interest therein) disposed of nor to any mine, in the property held by the taxpayer before the disposition, which has reached the pro- ducing stage. (3) Exceptions and limitations Paragraphs (1), (2), and (3) of section 1245(b) (relating to exceptions and limita- tions with respect to gain from disposition of certain depreciable property) shall apply in respect of this subsection in the same manner and with the same effect as if references in section 1245(b) to section 1245 or any provi- sion thereof were references to this subsec- tion or the corresponding provisions of this subsection and as if references to section 1245 property were references to mining property. (4) Application of subsection This subsection shall apply notwithstanding any other provision of this subtitle. (e) Basis of property (1) Basis The basis of any property shall not be re- duced by the amount of any depletion which would be allowable but for the application of this section. (2) Adjustments The Secretary shall prescribe such regula- tions as he may deem necessary to provide for adjustments to the basis of property to re- flect gain recognized under subsection (d)(1). (f) Definitions For purposes of this section (1) Adjusted exploration expenditures The term "adjusted exploration expendi- tures" means, with respect to any property or mine- (A) the amount of the expenditures al- lowed for the taxable year and all preceding taxable years as deductions under subsec- tion (a) to the taxpayer or any other person which are properly chargeable to such prop- erty or mine and which (but for the election under subsection (a)) would be reflected in the adjusted basis of such property or mine, reduced by (B) for the taxable year and for each pre- ceding taxable year, the amount (if any) by which (i) the amount which would have been allowable for percentage depletion under section 613 but for the deduction of such expenditures, exceeds (ii) the amount allowable for depletion under section 611, properly adjusted for any amounts included in gross income under subsection (b) or (c) and for any amounts of gain to which subsec- tion (d) applied. (2) Mining property The term "mining property" means any property (within the meaning of section 614 after the application of subsections (c) and (e) thereof) with respect to which any expendi- 71-999 0 - 78 - 31 (Vol. 7) Page 453 § 617
TITLE 26-INTERNAL REVENUE CODE tures allowed as a deduction under subsection (a)(1) are properly chargeable. (3) Disposal of coal or domestic iron ore with a re- tained economic interest A transaction which constitutes a dLqposal of coal or iron ore under section 631(c) shall be treated as a dispositon. In such a case, the excess referred to in subsection (d)(1)(B) shall be treated as equal to the gain (if any) referred to in section 631(c). (g) Special rules relating to partnership property (1) Property distributed to partner In the case of any property or mine re- ceived by the taxpayer in a distribution with respect to part or all of his interest in a part- nership, the adjusted exploration expendi- tures with respect to such property or mine include the adjusted exploration expendi- tures (not otherwise included under subsec- tion (f)(1)) with respect to such property or mine immediately prior to such distribution, but the adjusted exploration expenditures with respect to any such property or mine shall be reduced by the amount of gain to which section 751(b) applied realized by the partnership (as constituted after the distribu- tion) on the distribution of such property or mine. (2) Property retained by partnership In the case of any property or mine held by a partnership after a distribution to a partner to which section 751(b) applied, the adjusted exploration expenditures with respect to such property or mine shall, under regulations pre- scribed by the Secretary, be reduced by the amount of gain to which section 751(b) ap- plied realized by such partner with respect to such distribution on account of such property or mine, (h) Limitation (1) In general Subsection (a) shall apply to any amount paid or incurred after December 31, 1969, with respect to any deposit of ore or other mineral located outside the United States, only to the extent that such amount, when added to the amounts which are or have been deducted under subsection (a) and section 615 (as in effect before the enactment of the Tax Reform Act of 1976), or the corresponding provisions of prior law, does not exceed $400,000. (2) Amounts taken into account For purposes of paragraph (1), there shall be taken into account amounts deducted and amounts treated as deferred expenses by- (A) the taxpayer, and (B) any individual or corporation who has transferred to the taxpayer any mineral property. (3) Application of paragraph (2)(B) Paragraph (2)(B) shall apply with respect to all amounts deducted before the latest such transfer from the individual or corpora- tion to the taxpayer. Paragraph (2)(B) shall apply only if- (A) the taxpayer acquired any mineral property from the individual or corporation under circumstances which make paragraph (7), (8), (11), (15), (17), (20), or (22) of sec- tion 113(a) of the Internal Revenue Code of 1939 apply to such transfer; or (B) the taxpayer acquired any mineral property from the individual or corporation under circumstances which make section 334(b), 362(a) and (b), 372(a), 374(b)(1), 1051, or 1082 apply to such transfer. (I) Certain pre-1970 exploration expenditures If- (1) the taxpayer receives mineral property in a transaction as a result of which the basis of such property in the hands of the transfer- ee is determined by reference to the basis in the hands of the transferor, (2) an election made by the transferor under subsection (e) of section 615(e) (as in effect before the enactment of the Tax Reform Act of 1976) applied with respect to expenditures which were made by him and which were properly chargeable to such prop- erty, and (3) the taxpayer has made or makes an elec- tion under subsection (a), then in the application of this section with re- spect to the transferee, the amounts allowed as deductions under such section 615 to the trans- feror, which (but for the transferor's election) would be reflected in the adjusted basis of such property in the hands of the transferee, shall be treated as expenditures allowed as deduc- tions under subsection (a) to the transferor. (Added Pub. L. 89-570, § 1(a), Sept. 12, 1966, 80 Stat. 759, and amended Pub. L. 91-172, title V, § 504(b), Dec. 30, 1969, 83 Stat. 632; Pub. L. 94- 455, title XIX, §§ 1901(a)(89), (b)(3)(K), (21)(C)- (E), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1779, 1793, 1797, 1834.) RsRm czs IN TxxT The Tax Reform Act of 1976, referred to in subsecs. (h)(1), and (i)(2), is Pub. L. 94-455, Oct. 4, 1976, 90 Stat. 1520, which was enacted Oct. 4, 1976. For com- plete classification of this Act to the Code, see Tables volume. Paragraph (7), (8), (11), (15), (17), (20), or (22) of sec- tion 113(a) of the Internal Revenue Code of 1939, re- ferred to in subsec. (h)(3), was classified to section 113 of former Title 26, Internal Revenue Code. Section 113 was repealed by section 7851(a)(1) of this title. For table of comparisons of the 1939 Code to the 1954 Code, see table I preceding section 1 of this title. See, also, section 7851(e) of this title for provision that ref- erences in the 1954 Code to a provision of the 1939 Code, not then applicable, shall be deemed a reference to the corresponding provision of the 1954 Code, which is then applicable. AMENmENTs 1976--Subsec. (a)(2)(A). Pub. L. 94455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (a)(2)(B). Pub. L. 94-455, §§ 1901(a)(89), 1906(b)(13)(A), substituted "may not be revoked unless" for "may not be revoked after the last day of the third month following the month in which the final regulations issued under the authority of this subsection are published in the Federal Register, unless", and struck out "or his delegate" following "Secretary". Subsec. (b)(2)(A). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (d)(1). Pub. L. 94-455, § 1901(b)(3)(K), substi- tuted "ordinary income" for "gain from the sale or ex- Lt617 Page 454
TITLE 26-INTERNAL REVENUE CODE change of property which is neither a capital asset nor property described in section 1231". 3ubsecs. (d)(2), (e)(2), (g)(2). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (h)(1). Pub. L. 94-455, § 1901(b)(21)(C), sub- stituted "and subsection (a) of section 615 (as in effect before the enactment of the Tax Reform Act of 1976)" for "and section 615(a) and the amounts which are or have been treated as deferred expenses under section 615(b)". Subsec. (h)(3). Pub. L. 94-455, § 1901(b)(21)(D), struck out "and all amounts treated as deferred ex- penses which were paid or incurred" following "amounts deducted" in the provisions preceding subpar. (A), redesignated former subpar. (C) as (B), and in subpar. (B) as so redesignated, substituted "374(b)(1)" for "373(b)(1)". Former subpar. (B), which related to the application of par. (2)(B) where the tax- payer would be entitled under section 381(c)(10) to deduct expenses deferred under section 615(b) had the distributor or transferor corporation elected to defer such expenses, was struck out. Subsec. (I). Pub. L. 94-455, § 1901(b)(21)(E), added subsec. (I). 1969-Pub. L. 91-172, § 504(b)(1), substituted "De- duction and recapture of certain mining exploration expenditures" for "Additional exploration expendi- tures in the case of domestic mining" in the section catchline. Subsec. (a)(1). Pub. L. 91-172, § 504(b)(2), struck out reference to United States, the Outer Continental Shelf and the Outer Continental Shelf Lands Act from general rule dealing with allowance of deduc- tions for expenditures in ascertaining the existence, location, extent, or quality of any deposit of ore or other mineral. Subsec. (h). Pub. L. 91-172, § 504(b)(3), substituted provisions imposing limitations on the operation of this section for provision making cross reference to subsecs. f) and (g) of section 615. Errvn DATE oF 1976 AMmxwrr Amendment of subsecs. (a)(2)(B), (d)(1), (h)(1), (3), (i), by section 1901(a)(89), (b)(3)(K), (21)(C), (D), (E) of Pub. L. 94455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EnFFcTrv DATE Or 1969 AmEmzEWT Amendment by Pub. L. 91-172 applicable with re- spect to exploration expenditures paid or incurred after Dec. 31, 1969, and for purposes of this section, elections under section 615(e) of this title, effective with respect to exploration expenditures paid or in- curred before Jan. 1, 1970, to be treated as an election under subsec. (a) of this section with respect to explo- ration expenditures paid or incurred after Dec. 31, 1969, see section 504(d) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 243 of this title. En'xcTrv DATE Section 3 of Pub. L. 89-570 provided that: "The amendments made by this Act [enacting this section and amending sections 170, 301, 312, 341, 453, 615, 703, and 751 of this title] shall apply to taxable years ending after the date of the enactment of this Act ESept. 12, 1966] but only in respect of expenditures paid or incurred after such date." SacTxoN RxnmR TO IN OTHrn SECTIONS This section is referred to in sections 170, 243, 301, 312, 341, 381, 453, 703, 751 of this title, PART II-EXCLUSIONS FROM GROSS INCOME Sec. 621. Payments to encourage exploration, develop- ment, and mining for defense purposes. § 621. Payments to encourage exploration, develop- ment, and mining for defense purposes There shall not be included in gross income any amount paid to a taxpayer by the United States (or any agency or instrumentality there- of), whether by grant or loan, and whether or not repayable, for the encouragement of explo- ration, development, or mining of critical and strategic minerals or metals pursuant to or in connection with any undertaking approved by the United States (or any of its agencies or in- strumentalities) and for which an accounting is made or required to be made to an appropriate governmental agency, or any forgiveness or dis- charge of any part of such amount. Any expen- ditures (other than expenditures made after the repayment of such grant or loan) attribut- able to such grant or loan shall not be deduct- ible by the taxpayer as an expense nor increase the basis of the taxpayer's property either for determining gain or loss on sale, exchange, or other disposition or for computing depletion or depreciation, but on the repayment of any por- tion of any such grant or loan which has been expended in accordance with the terms thereof such deductions and such increase in basis shall to the extent of such repayment be allowed as if made at the time of such repayment. (Aug. 16, 1954, ch. 736, 68A Stat. 212.) PART III--SALES AND EXCHANGES Sec. 631. Gain or loss in the case of timber, coal, or do- mestic iron ore. [632. Repealed.] AMENDMExTS 1976-Pub. L. 94-455, title XIX, § 1901(b)(22)(A), Oct. 4, 1976, 90 Stat. 1798, struck out item 632 "Sale of oil or gas properties". 1964-Pub. L. 88-272, title II, § 227(b)(2), Feb. 26, 1964, 78 Stat. 98, inserted the reference to domestic iron ore in item 631. § 631. Gain or loss in the case of timber, coal, or do- mestic iron ore (a) Election to consider cutting as sale or exchange If the taxpayer so elects on his return for a taxable year, the cutting of timber (for sale or for use in the taxpayer's trade or business) during such year by the taxpayer who owns, or has a contract right to cut, such timber (provid- ing he has owned such timber or has held such contract right for a period of more than 9 months) shall be considered as a sale or ex- change of such timber cut during such year. If such election has been made, gain or loss to the taxpayer shall be recognized in an amount equal to the difference between the fair market value of such timber, and the adjusted basis for depletion of such timber in the hands of the taxpayer. Such fair market value shall be the fair market value as of the first day of the tax- able year in which such timber is cut, and shall thereafter be considered as the cost of such cut timber to the taxpayer for all purposes for Page 455 § 631
TITLE 26-INTERNAL REVENUE CODE which such cost is a necessary factor. If a tax- payer makes an election under this subsection, such election shalh apply with respect to all timber which is owned by the taxpayer or which the taxpayer has a contract right to cut and shall be binding on the taxpayer for the taxable year for which the election is made and for all subsequent years, unless the Secretary, on showing of undue hardship, permits the tax- payer to revoke his election; such revocation, however, shall preclude any further elections under this subsection except with the consent of the Secretary. For purposes of this subsec- tion and subsection (b), the term "timber" in- cludes evergreen trees which are more than 6 years old at the time severed from the roots and are sold for ornamental purposes. (b) Disposal (if timber with a retained economic in- terest In the case of the disposal of timber held for more than 9 months before such disposal, by the owner thereof under any form or type of contract by virtue of which such owner retains an economic interest in such timber, the differ- ence between the amount realized from the dis- posal of such timber and the adjusted depletion basis thereof, shall be considered as though it were a gain or loss, as the case may be, on the sale of such timber. In determining the gross income, the adjusted gross income, or the tax- able income of the lessee, the deductions al- lowable with respect to rents and royalties shall be determined without regard to the provisions of this subsection. The date of disposal of such timber shall be deemed to be the date such timber is cut, but if payment Is made to the owner under the contract before such timber is cut the owner may elect to treat the date of such payment as the date of disposal of such timber. For purposes of this subsection, the term "owner" means any person who owns an interest in such timber, including a sublessor and a holder of a contract to cut timber. (c) Disposal of coal or domestic iron ore with a re- tained economic interest In the case of the disposal of coal (including lignite), or iron ore mined in the United States, held for more than 9 months before such dis- posal, by the owner thereof under any form of contract by virtue of which such owner retains an economic interest in such coal or iron ore, the difference between the amount realized from the disposal of such coal or iron ore and the adjusted depletion basis thereof plus the deductions disallowed for the taxable year under section 272 shall be considered as though it were a gain or loss, as the case may be, on the sale of such coal or iron ore. Such owner shall not be entitled to the allowance for percentage depletion provided in section 613 with respect to such coal or iron ore. This subsection shall not apply to income realized by any owner as a co-adventurer, partner, or principal in the mining of such coal or iron ore, and the word "owner" means any person who owns an eco- nomic interest in coal or iron ore in place, in- cluding a sublessor. The date of disposal of such coal or iron ore shall be deemed to be the date such coal or iron ore is mined. In deter- mining the gross income, the adjusted gross income, or the taxable income of the lessee, the deductions allowable with respect to rents and royalties shall be determined without regard to the provisions of this subsection. 'I nis subsec- tion shall have no application, for purposes of applying subchapter G, relating to corporations used to avoid income tax on shareholders (in- cluding the determinations of the amount of the deductions under section 535(b)(6) or sec- tion 545(b)(5)). This subsection shall not apply to any disposal of iron ore- (1) to a person whose relationship to the person disposing of such iron ore would result in the disallowance of losses under section 267 or 707(b), or (2) to a person owned or controlled directly or indirectly by the same interests which own or control the person disposing of such iron ore. (Aug. 16, 1954, ch. 736, 68A Stat. 213; Feb. 26, 1964 Pub. L. 88-272, title II, § 227(a)(1), (b)(1), 78 Stat. 97, 98; Oct. 4, 1976, Pub. L. 94-455, title XIV, § 1402(b)(1)(I), (3), title XIX. § 1906(b)(13)(A), 90 Stat. 1732, 1733, 1834.) TAXABLE YEARs AFTER 1977 Subsecs. (a), (b), (c) of this section amend- ed by Pub. L. 94-455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, effective for tax- able years beginning after Dec. 31, 1977, by substituting "1 year"for "9 months". AMENDMENTS 1976--Subsec. (a). Pub. L. 94-455, §§ 1402(b)(1)(I), (3), 1906(b)(13)(A), provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977 and struck out "before the beginning of such year" before" ) shall be considered as a sale" effective for taxable years beginning after Dec. 31, 1976, and "or his delegate" following "Secretary" wherever ap- pearing. Subsec. (b). Pub. L. 94455, § 1402(b)(1)(I), provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977. Subsec. (c). Pub. L. 94-455, § 1402(b)(1)(I), provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977. 1964-Pub. L. 88-272, § 227(b)(1), inserted the refer- ence to domestic iron ore in the section catchline. Subsec. (c). Pub. L. 88-272, § 227(a)(1). inserted "or domestic iron ore" in the subsection catchline, "or iron ore mined in the United States" after "coal (including lignite)", "or iron ore" after "coal" wherever appear. ing, and provided that the subsection shall not apply to any disposal of iron ore to a person whose relation- ship to the person disposing of such ore would result in the disallowance of losses under section 267 of 717(b), or to a person owned or controlled by the same interests which own or control the person disposing of such iron ore. EFFECrIVE DATE or 1976 AMENDMENT Section 1402(b)(1) of Pub. L. 94-455 provided in part that the substitution of "9 months" for "6 months" in subsecs. (a), (b), and (c) of this section by section 1401(b)(1)(I) of Pub. L. 94-455 is effective with respect to taxable years beginning in .1977. Section 1402(b)(3) of Pub. L. 94-455 provided in part that the amendment to subsec. (a) by section 1402(b)(3) of Pub. L. 94-455, striking out "before the beginning of such year", is effective with respect to taxable years beginning after Dec. 31, 1976. EFFECTIVE DATE OF 1964 AMENDMENT Amendment of section by Pub. L. 88-272 applicable with respect to amounts received or accrued in taxable years beginning after Dec. 31, 1963. attributable to Page 456
TITLE 26-INTERNAL REVENUE CODE iron ore mined in such years, see section 227(c) of Pub. L. 88-272, set out as an Effective Date of 1964 Amend- ment note under section 272 of this title. CRoss RPERwczs Disposal of coal or domestic iron ore, see section 272 of this title. Gain or loss under this section excluded from net earnings from self-employment, see section 1402 of this title. Property used in trade or business as including timber, coal or domestic iron ore under this section, see section 1231 of this title. Tax on foreign corporations not engaged in business in United States, applicability of subsections (b) and (c) of this section, see section 881 of this title. Tax on nonresident alien individuals, applicability of subsections (b) and (c) of this section to, see section 871 of this title. Unrelated business taxable income, inapplicability of this section to, see section 512 of this title. Withholding tax on nonresident aliens, applicability of subsections (b) and (c) of this section to, see section 1441 of this title. SECTON REFERRED TO IN OTHER SECTIONS This section is referred to in sections 57, 272, 512, 617, 871, 881, 882, 1231, 1402, 1441 of this title; title 42 section 411. [§ 632. Repealed. Pub. L. 94-455, title XIX, § 1901(a)(90), Oct. 4, 1976, 90 Stat. 1779] Section, acts Aug, 16, 1954, ch. 736, 68A Stat. 214; Dec. 30, 1969, Pub. L. 91-172, title VIII, § 803(d)(4), 83 Stat. 684. related to tax in case of sale of oil and gas properties. EFFECTIvE DATE OF REPEAL Repeal of section effective for taxable years begin- ning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amend- ment note under section 2 of this title. PART IV-MINERAL PRODUCTION PAYMENTS Sec. 636. Income tax treatment of mineral production pay- ments. AMENDMENTS 1969-Pub. L. 91-172, title V, § 503(a), Dec. 30, 1969, 83 Stat. 630, added Part heading and section analysis. 636. Income tax treatment of mineral production payments (a) Carved-out production payments A production payment carved out of mineral property shall be treated, for purposes of this subtitle, as if it were a mortgage loan on the property, and shall not qualify as an economic interest in the mineral property. In the case of a production payment carved out for explora- tion or development of a mineral property, the preceding sentence shall apply only if and to the extent gross income from the property (for purposes of section 613) would be realized, in the absence of the application of such sentence, by the person creating the production payment. (b) Retained production payment on sale of mineral property A production payment retained on the sale of a mineral property shall be treated, for pur- poses of this subtitle, as if it were a purchase money mortgage loan and shall not qualify as an economic interest in the mineral property. (c) Retained production payment on lease of mineral property A production payment retained in a mineral property by the lesor in a leasing transaction shall be treated, for purposes of this subtitle, insofar as the lessee (or his successors in inter- est) is concerned, as if it were a bonus granted by the lessee to the lessor payable in install- ments. The treatment of the production pay- ment in the hands of the lessor shall be deter- mined without regard to the provisions of this subsection. (d) Definition As used in this section, the term "mineral property" has the meaning assigned to the term "property" in section 614(a). (e) Regulations The Secretary shall prescribe such regula- tions as may be necessary to carry out the pur- poses of this section. (Added Pub. L. 91-172, title V, § 503(a), Dec. 30, 1969, 83 Stat. 630, and amended Pub. L. 94-455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) AMENDMENTs 1976-Subsec. (e). Pub. L. 94-455 struck out "or his delegate" following "Secretary". EFFECTIVE DATE Section 503(c) of Pub. L. 91-172 provided that: "(1) General rule.-The amendments made by this section [adding this section] shall apply with respect to mineral production payments created on or after August 7, 1969, other than mineral production pay- ments created before January 1, 1971, pursuant to a binding contract entered into before August 7, 1969. "(2) Election.-At the election of the taxpayer (made at such time and in such manner as the Secretary of the Treasury or his delegate prescribes by regula- tions), the amendments made by this section shall apply with respect to all mineral production payments which the taxpayer carved out of mineral properties after the beginning of his last taxable year ending before August 7, 1969. No interest shall be allowed on any refund or credit of any overpayment resulting from such election for any taxable year ending before August 7, 1969. "(3) Special rule.-With respect to a taxpayer who does not elect the treatment provided in paragraph (2) and who carves out one or more mineral production payments on or after August 7, 1969, during the tax- able year which includes such date, the amendments made by this section shall apply to such production payments only to the extent the aggregate amount of such production payments exceeds the lesser of- "(A) the excess of "(i) the aggregate amount of production pay- ments carved out and sold by the taxpayer during the 12-month period immediately preceding his taxable year which includes August 7, 1969, over "(ii) the aggregate amount of production pay- ments carved out before August 7, 1969, by the taxpayer during his taxable year which includes such date, or "((B) the amount necessary to increase the amount of the taxpayer's gross income, within the meaning of chapter 1 of subtitle A of the Internal Revenue Code of 1954 [this title], for the taxable year which includes August 7, 1969, to an amount equal to the amount of deductions (other than any deduction under section 172 of such Code [section 172 of this titleJ) allowable for such year under such chapter. Page 457 § 636
TITLE 26-INTERNAL REVENUE CODE The preceding sentence shall not apply for purposes of determining the amount of any deduction allowable under section 611 [section 611 of this title] or the amount of foreign tax credit allowable under section 904 of such Code [section 904 of this title]." PART V-CONTINENTAL SHE-11 AREAS Sec. 638. Continental shelf areas. AMENDmNTS 1969-Pub. L. 91-172, title V, § 505(a), Dec. 30, 1969, 83 Stat. 634, added Part heading and section analysis. § 638. Continental shelf areas For purposes of applying the provisions of thLq chapter (including sections 861(a)(3) and 862(a)(3) in the case of the performance of per- sonal services) with respect to mines, oil and gas wells, and other natural deposits- (1) the term "United States" when used in a geographical sense includes the seabed and subsoil of those submarine areas which are adjacent to the territorial waters of the United States and over which the United States has exclusive rights, in accordance with international law, with respect to the ex- ploration and exploitation of natural re- sources; and (2) the terms "foreign country" and "pos- session of the United States" when used in a geographical sense include the seabed and subsoil of those submarine areas which are adjacent to the territorial waters of the for- eign country or such possession and over which the foreign country (or the United States in case of such possession) has exclu- sive rights, in accordance with international law, with respect to the exploration and ex- ploitation of natural resources, but this para- graph shall apply in the case of a foreign country only if it exercises, directly or indi- rectly, taxing Jurisdiction with respect to such exploration or exploitation. No foreign country shall, by reason of the ap- plication of this section, be treated as a country contiguous to the United States. (Added Pub. L. 91-172 title V, § 505(a), Dec. 30, 1969, 83 Stat. 634.) SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 1441 of this title. Subchapter J-Estates, Trusts, Beneficiaries, and Decedents Part I. Estates, trusts, and beneficiaries. II. Income in respect of decedents. SuBcHAPTER REFERRED TO IN OTHER SECTIONS This subchapter is referred to in sections 102, 511, 2055 of this title. PART I-ESTATES, TRUSTS, AND BENEFICIARIES Subpart A. General rules for taxation of estates and trusts. B. Trusts which distribute current income only. C. Estates and trusts which may accumulate income or which distribute corpus. D. Treatment of excess distributions by trusts. Subpart E. Grantors and others treated as substantial owners. F. Miscellaneous. PART REFERRJD TO IN OTHER SECTIONS This part is referred to in sections 543, 553 of this title. SUBPART A-GENERAL RULES FOR TAXATION OF ESTATES AND TRUSTS Sec. 641. Imposition of tax. 642. Special rules for credits and deductions. 643. Definitions applicable to subparts A, B, C, and D. 644. Special rule for gain on property transferred to trust at less than fair market value. AMENDmENTs 1976-Pub. L. 94-455, title VII, § 701(g)(2), Oct. 4, 1976, 90 Stat. 1580, added item 644. SUBPART REFEmuD TO IN OTHER SECTIONS This subpart is referred to in section 671 of this title. § 641. Imposition of tax (a) Application of tax The tax imposed by section l(d) shall apply to the taxable income of estates or of any kind of property held in trust, including- (1) income accumulated in trust for the benefit of unborn or unascertained persons or persons with contingent interests, and income accumulated or held for future distribution under the terms of the will or trust; (2) income which is to be distributed cur- rently by the fiduciary to the beneficiaries, and income collected by a guardian of an infant which is to be held or distributed as the court may direct; (3) income received by estates of deceased persons during the period of administration or settlement of the estate; and (4) income which, in the discretion of the fi- duciary, may be either distributed to the beneficiaries or accumulated. (b) Computation and payment The taxable income of an estate or trust shall be computed in the same manner as in the case of an individual, except as otherwise provided in this part. The tax shall be computed on such taxable income and shall be paid by the fidu- ciary. (c) Exclusion of includible gain from taxable income (1) General rule For purposes of this part, the taxable income of a trust does not include the amount of any includible gain as defined in section 644(b) reduced by any deductions properly allocable thereto. (2) Cross reference For the taxation of any includible gain, see section 644. (Aug. 16, 1954, ch. 736, 68A Stat. 215; Dec. 30, 1969, Pub. L. 91-172, title VIII, § 803(d)(3), 83 Stat. 684; Oct. 4, 1976, Pub. L. 94-455, title VII, § 701(e)(2), 90 Stat. 1579.) AMENDMENTS 1976-Subsec. (c). Pub. L. 94455 added subsec. (c). .1969-Subsec. (a). Pub. L. 91-172 substituted "The tax imposed by section l(d)", for "The Taxes imposed by this chapter on individuals". Page 458 § 638
TITLE 26-INTERNAL REVENUE CODE EFFECTIVE DATE OF 1976 AMENDMENT Enactment of subsec. (c) by Pub. L. 94-455 applica- ble to transfers in trust made after May 21, 1976, see section 701(h) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 667 of this title. EFFECTxVE DATE OF 1969 AMENDMENT Amendment by Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1970, see section 803(f) of Pub. L. 91-172, set out as an Effective Date of 1976 Amendment note under section 1 of this title. CROSS REFERENCES Charitable trusts subject to tax, see section 511 of this title. Income from an interest In an estate or trust as gross income, see section 61 of this title. Rates of tax on individuals, see section 1 of this title. Returns- Estates and trusts, see section 6012 of this title. Joint fiduciaries, see section 6012 of this title. Taxable income defined, see section 63 of this title. § 642. Special rules for credits and deductions (a) Credits against tax (1) Foreign taxes An estate or trust shall be allowed the credit against tax for taxes imposed by for- eign countries and possessions of the United States, to the extent allowed by section 901, only in respect of so much of the taxes de- scribed in such section as is not properly allo- cable under such section to the beneficiaries. (2) Political contributions An estate or trust shall not be allowed the credit against tax for political contributions provided by section 41. (b) Deduction for personal exemption An estate shall be allowed a deduction of $600. A trust which, under its governing instru- ment, is required to distribute all of its income currently shall be allowed a deduction of $300. All other trusts shall be allowed a deduction of $100. The deductions allowed by this subsection shall be in lieu of the deductions allowed under section 151 (relating to deduction for personal exemption). (c) Deduction for amounts paid or permanently set aside for a charitable purpose (1) General rule In the case of an estate or trust (other then' a trust meeting the specifications of subpart B), there shall be allowed as a deduc- tion in computing its taxable income (in lieu of the deduction allowed by section 170(a), re- lating to deduction for charitable, etc., contri- butions and gifts) any amount of the gross income, without limitation, which pursuant to the terms of the governing instrument is, during the taxable year, paid for a purpose specified in section 170(c) (determined with- out regard to section 170(c)(2)(A)). If a chari- table contribution is paid after the close of such taxable year and on or before the last day of the year following the close of such taxable year, then the trustee or administra- tor may elect to treat such contribution as ISo in original. Probably should read "than". paid during such taxable year. The election shall be made at such time and in such manner as the Secretary prescribes by regula- tions. (2) Amounts permanently set aside In the case of an estate, and in the case of a trust (other than a trust meeting the specifi- cations of subpart B) required by the terms of its governing instrument to set aside amounts which was- (A) created on o: before October 9, 1969, if- (I) an irrevocable remainder interest is transferred to or for the use of an organi- zation described in section 170(c), or (i) the grantor is at all times after Oc- tober 9, 1969, under a mental disability to change the terms of the trust; or (B) established by a will executed on or before October 9, 1969, if- (i) the testator dies before October 9, 1972, without having republished the will after October 9, 1969, by codicil or other- wise, (ii) the testator at no time after October 9, 1969, had the right to change the por- tions of the will which pertain to the trust, or (iII) the will is not republished by codicil or otherwise before October 9, 1972, and the testator is on such date and at all times thereafter under a mental disability to republish the will by codicil or other- wise, there shall also be allowed as a deduction in computing its taxable income any amount of the gross income, without limitation, which pursuant to the terms of the governing in- strument is, during the taxable year, perma- nently set aside for a purpose specified in sec- tion 170(c). or is to be used exclusively for re- ligious, charitable, scientific, literary, or edu- cational purposes, or for the prevention of cruelty to children or animals, or for the es- tablishment, acquisition, maintenance, or op- eration of a public cemetery not operated for profit. In the case of a trust, the preceding sentence shall apply only to gross income earned with respect to amounts transferred to the trust before October 9, 1969, or trans- ferred under a will to which subparagraph (B) applies. (3) Pooled income funds In the case of a pooled income fund (as de- fined in paragraph (5)), there shall also be al- lowed as a deduction in computing its taxable income any amount of the gross income at- tributable to gain from the sale of a capital asset held for more than 9 months, without limitation, which pursuant to the terms of the governing instrument is, during the tax- able year, permanently set aside for a purpose specified in section 170(c). (4) Adjustments To the extent that the amount otherwise allowable as a deduction under this subsec- tion consists of gain from the sale or ex- change of capital assets held for more than 9 months, proper adjustment shall be made for any deduction allowable to the estate or trust under section 1202 (relating to deduction for Page 459 § 642
TITLE 26-INTERNAL REVENUE CODE excess of capital gains over capital losses). In the case of a trust, the deduction allowed by this subsection shall be subject to section 681 (relating to unrelated business income). (5) Definition of pooled income fund For purposes of paragraph (3), a pooled income fund is a trust- (A) to which each donor transfers proper- ty, contributing an irrevocable remainder interest in such property to or for the use of an organization described in section 170(b)(1)(A) (other than in clauses (vii) or (viii)), and retaining an income interest for the life of one or more beneficiaries (living at the time of such transfer), (B) in which the property transferred by each donor is commingled with property transferred by other donors who have made or make similar transfers, (C) which cannot have investments in se- curities which are exempt from the taxes imposed by this subtitle, (D) which includes only amounts received from transfers which meet the require- ments of this paragraph, (E) which is maintained by the organiza- tion to which the remainder interest is con- tributed and of which no donor or benefi- ciary of an income interest is a trustee, and (F) from which each beneficiary of an income interest receives income, for each year for which he is entitled to receive the income interest referred to in subparagraph (A), determined by the rate of return earned by the trust for such year. For purposes of determining the amount of any charitable contribution allowable by reason of a transfer of property to a pooled fund, the value of the income interest shall be determined on the basis of the highest rate of return earned by the fund for any of the 3 taxable years immediately preceding the taxable year of the fund in which the transfer is made. In the case of funds in exis- tence less than 3 taxable years preceding the taxable year of the fund in which a transfer is made the rate of return shall be deemed to be 6 percent per annum, except that the Sec- retary may prescribe a different rate of return. (6) Taxable private foundations In the case of a private foundation which is not exempt from taxation under section 501(a) for the taxable year, the provisions of this subsection shall not apply and the provi- sions of section 170 shall apply. (d) Net operating loss deduction The benefit of the deduction for net operat- ing losses provided by section 172 shall be al- lowed to estates and trusts under regulations prescribed by the Secretary. (e) Deduction for depreciation and depletion An estate or trust shall be allowed the deduc- tion for depreciation and depletion only to the extent not allowable to beneficiaries under sec- tion 167(h) and 611(b). (f) Amortization deductions The benefit of the deductions for amortiza- tion provided by sections 169, 184, 187, 188, and 191 shall be allowed to estates and trusts in the same manner as in the case of an individual. The allowable deduction shall be apportioned between the income beneficiaries and the fidu- ciary under regulations prescribed by the Secre- tary. (g) Disallowance of double deductions Amounts allowable under section 2053 or 2054 as a deduction in computing the taxable estate of a decedent shall not be allowed as a deduc- tion (or as an offset against the sales price of property in determining gain or loss) in com- puting the taxable income of the estate or of any other person, unless there is filed, within the time and in the manner and form pre- scribed by the Secretary, a statement that the amounts have not been allowed as. deductions under section 2053 or 2054 and a waiver of the right to have such amounts allowed at any time as deductions under section 2053 or 2054. This subsection shall not apply with respect to de- ductions allowed under part II (relating to income in respect of decedents). (h) Unused loss carryovers and excess deductions on termination available to beneficiaries If on the termination of an estate or trust, the estate or trust has- (1) a net operating loss carryover under sec- tion 172 or a capital loss carryover under sec- tion 1212, or (2) for the last taxable year of the estate or trust deductions (other than the deductions allowed under subsections (b) or (c)) in excess of gross income for such year, then such carryover or such excess shall be al- lowed as a deduction, in accordance with regu- lations prescribed by the Secretary, to the beneficiaries succeeding to the property of the estate or trust. (I) Political contributions An estate or trust shall not be allowed the de- duction for contributions to candidates for public office provided by section 218. (j) Certain distributions by cemetery perpetual care funds In the case of a cemetery perpetual care fund which- (1) was created pursuant to local law by a taxable cemetery corporation for the care and maintenance of cemetery property, and (2) is treated for the taxable year as a trust for purposes of this subchapter, any amount distributed by such fund for the care and maintenance of gravesites which have been purchased from the cemetery corporation before the beginning of the taxable year of the trust and with respect to which there is an obli- gation to furnish care and maintenance shall be considered to be a distribution solely for pur- poses of sections 651 and 661, but only to the extent that the aggregate amount so distribut- ed during the taxable year does not exceed $5 multiplied by the aggregate number of such gravesites. (k) Cross references (1) For disallowance of standard deduction in case of estates and trusts, see section 142(b)(4). (2) For special rule for determining the time of receipt of dividends by a beneficiary under section 652 or 662, see section 116(c)(3). § 642 Page 460
TITLE 26-INTERNAL REVENUE CODE (Aug. 16, 1954, ch. 736, 68A Stat. 215; Oct. 16, 1962, Pub. L. 87-834, § 13(c)(2)(A), 76 Stat. 1034; Feb. 26, 1964, Pub. L. 88-272, title II, § 201(d)(6) (A), (B), 78 Stat, 32; Oct. 4, 1966, Pub. L. 89-621, § 2(a), 80 Stat. 872; Dec. 30, 1969, Pub. L. 91-172, title II, § 201(b), title VII, § 704(b)(2), 83 Stat. 558, 669; Dec. 10, 1971, Pub. L. 92-178, title III, § 303(c)(4), title VII, §§ 701(b), 702(b), 85 Stat. 522, 561, 562; Oct. 4, 1976, Pub. L. 94-455, title XIV, § 1402(b)(1)(J), title 71XX, §§ 1901(b)(1) (H)(i), 1906(b)(13)(A), 1951(c)(2)(B), title XX, § 2009(d), title XXI, § 2124(a)(3)(B), 90 Stat. 1732, 1791, 1834, 1840, 1896, 1917; Oct. 17, 1976, Pub. L. 94-528, § 1(a), 90 Stat. 2483.) TAXABL2 YEARS APTER 1977 Subsecs. (c)(3), (4) of this section amended by Pub. L. 94-455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, effective for tax- able years beginning after Dec. 31, 1977, by substituting "I year"for "9 months". AmzNDMENTs 1976-Subsec. (a). Pub. L. 94-455, j 1901(b)(1)(H)(i), redesignated former pars. (2) and (3) as (1) and (2), re- spectively. Former par. (1), relating to the credit against tax for partially tax-exempt interest, was struck out. Subsec. (c)(1). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c)(3), (4). Pub. L. 94-455, § 1402(b)(1)(J), provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977. Subsec. (c)(5). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. d). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. Cf). Pub. L. 94-455, f§ 1906(b)(13)(A), 1951(c)(2)(B), 2124(a)(3)(B), substituted "sections 169, 184, 187, 188, and 191" for "sections 168, 169, 184, 187, and 188", and struck out "or his delegate" following "Secretary". Subsec. (g). Pub. L. 94-455, §§ 1906(b)(13)(A), 2009(d), added "(or as an offset against the sales price of property in determining gain or loss)" following "shall not be allowed as a deduction", and struck out "or his delegate" following "Secretary". Subsec. h). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. CW. Pub. L. 94-528 added subsec. (j). Former subsec. (j) redesignated as k). Subsec. k). Pub. L. 94-528 redesignated former subsec. (j) as (k). 1971-Subsec. (a)(3). Pub. L. 92-178, § 701(b), added par. (3). Subsec. f). Pub. L. 92-178, § 303(c)(4), included ref- erence to section 188. Subsec. i). Pub. L. 92-178, § 702(b), added subsec. Ci). Former subsec. (i) redesignated (j). Subsec. CJ). Pub. L. 92-178, 1702(b), redesignated former subsec. Ci) as CJ). 1969-Subsec. (c). Pub. L. 91-172, § 201(b), designated existing provisions, with minor changes, as par. (1) and added pars. (2) to (6). Subsec. f). Pub. L. 91-172, § 704(b)(2), removed ref- erence to emergency or grain storage facilities both in subsec. catchline and in text, and added reference to sections 184 and 187 in text. 1966-Subsec. (g). Pub. L. 89-621 inserted "or of any other person" after "shall not be allowed as a deduc- tion in computing the taxable income of the estate". 1964-Subsec. (a)(3). Pub. L. 88-272, § 201(d)(6)(A), deleted par. (3) which related to dividends received by individuals. Subsec. (i). Pub. L. 88-272, § 201(d)(6)(B), designated existing provisions as par. (1), and added par. (2). 1962-Subsec. (e). Pub. L. 87-834 substituted a refer- ence to section 167(h) for a reference to section 167(g). EFrscTivE DATE OF 1976 AMENDMEmTs Section 1402(b)(1) of Pub. L. 94-455 provided in part that the substitution of "9 months" for "6 months" in subsec. (c)(3), (4) of this section by section 1402(b)(1)(J) of Pub. L. 94-455 is effective with respect to taxable years beginning in 1977. Amendment of subsec. (a) by section 1901(b)(1)(H)(i) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment not under section 2 of this title. Amendment of subsec. f) by section 1951(c)(2)(B) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1952(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 72 of this title. Section 2009(e)(4) of Pub. L. 94-455 provided that: "The amendment made by subsection (d) [amending subsec. (g) of this section] shall apply to taxable years ending after the date of the enactment of this Act [Oct. 4, 1976]." Amendment of subsec. f) by section 2124(a)(3)(B) of Pub. L. 94-455 applicable with respect to additions to capital account made after June 14, 1976, and before June 15, 1981, see section 2124(a)(4) of Pub. L. 94-455 set out as an Effective Date note under section 191 of this title. Section 1(b) of Pub. L. 94-528 provided that: "The amendments made by subsection (a) [enacting subsec. QJ) of this section] shall take effect on October 1, 1977, and shall apply to amounts distributed during taxable years ending after December 31, 1963." EF EcTxvE DATE OF 1971 AMENDMENT Enactment of subsecs. (a)(3) and (i) of this section by Pub. L. 92-178 applicable to taxable years ending after Dec. 31, 1971, but only with respect to political contributions, payment of which is made after such date, see section 703 of Pub. L. 92-178, set out as an Effective Date note under section 41 of this title. Amendment of subsec. (f) of this section by Pub. L. 92-178 applicable to taxable years ending after Dec. 31, 1971, see section 303(d) of Pub. L. 92-178, set out as an Effective Date note under section 188 of this title. EFEcTivE DATE OF 1969 AMENDMENT Amendment of subsec. Cc) of this section by section 201(b) of Pub. L. 91-172 applicable with respect to amounts paid, permanently set aside, or to be used for a charitable purpose in taxable years beginning after Dec. 31, 1969, except that subsec. (c)(5), as amended, applicable to transfers in trust made after July 31, 1969, see section 201(g) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 170 of this title. Amendment of subsec. Cf) by section 704(b)(2) of Pub. L. 91-172 applicable to taxable years ending after Dec. 31, 1968, see section 704(c) of Pub. L. 91-172, set out as an Effective Date note under section 169 of this title. EFc'rvE DATE OF 1966 AMENDMENT Section 2(b) of Pub. L, 89-621 provided that: "The amendment made by subsection Ca) famending subsec. (g) of this section] shall apply to taxable years ending after the date of the enactment of this Act [Oct. 4, 1966], but only with respect to amounts paid or in- curred, and losses sustained, after such date." EFFCTIVE DATE OF 1964 AMENDMENT Section 201(e) of Pub. L. 88-272 provided that: "The amendments made by subsection (a) [to section 34 of this title] shall apply with respect to taxable years ending after December 31. 1963. The amendment made by subsection (b) [repealing section 34 of this title] shall apply with respect to taxable years ending after December 31, 1964. The amendment made by subsection (c) [to section 116(a) of this title] shall apply with respect to taxable years beginning after December 31, 1963. The amendments made by subsec- § 642 Page 461
TITLE 26-INTERNAL REVENUE CODE tion (d) [to the analysis preceding section 31, and sec- tions 35, 37, 46, 116(c)(3), 584, 642, 702, 854, 857, 871, 1375 and 6014 of this title] shall apply with respect to dividends received after December 31, 1964, in taxable years ending after such date." EFrEcTivE DATE OF 1962 ALmmMENr Amendment of subsec. e) of this section by Pub. L. 87-834 applicable to taxable years beginning after Dec. 31, 1961, and ending after Oct. 16, 1962, see section 13(g) of Pub. L. 87-834, set out as an Effective Date note under section 1245 of this title. CRoss REYmENcxs Deductions- Estates and trusts accumulating income or distrib- uting corpus, see section 661 of this title. Trusts distributing current income only, see sec- tion 651 of this title. Value of gross estate, see section 2053 et seq. of this title. Limitation on charitable deductions, see section 681 of this title. Returns by trust claiming charitable deduction under subsection c) of this section, see section 6034 of this title. SECTION REFERRD TO IN OTmE SECTIONS This section is referred to in sections 57, 153, 170, 218, 507, 508. 542, 643, 644, 651, 661, 662, 663. 681, 683, 901, 904, 2055, 2522, 4947, 4948, 6034 of this title. § 643. Definitions applicable to subparts A, B, C, and D (a) Distributable net income For purposes of this part, the term "distribu- table net income" means, with respect to any taxable year, the taxable income of the estate or trust computed with the following modifica- tions- (1) Deduction for distributions No deduction shall be taken under sections 651 and 661 (relating to additional deduc- tions). (2) Deduction for personal exemption No deduction shall be taken under section 642(b) (relating to deduction for personal ex- emptions). (3) Capital gains and losses Gains from the sale or exchange of capital assets shall be excluded to the extent that such gains are allocated to corpus and are not (A) paid, credited, or required to be distribut- ed to any beneficiary during the taxable year, or (B) paid, permanently set aside, or to be used for the purposes specified in section 642(c). Losses from the sale or exchange of capital assets shall be excluded, except to the extent such losses are taken into account in determining the amount of gains from the sale or exchange of capital assets which are paid, credited, or required to be distributed to any beneficiary during the taxable year. The deduction under section 1202 (relating to de- duction for excess of capital gains over capital losses) shall not be taken into account. (4) Extraordinary dividends and taxable stock divi- dends For purposes only of subpart B (relating to trusts which distribute current income only), there shall be excluded those Items of gross income constituting extraordinary dividends or taxable stock dividends which the fidu- clary, acting in good faith, does not pay or credit to any beneficiary by reason of his de- termination that such dividends are allocable to corpus under the terms of the governing instrument and applicable local law. (5) Tax-exempt interest There shall be included any tax-exempt In- terest to which section 103 applies, reduced by any amounts which would be deductible In respect of disbursements allocable to such in- terest but for the provisions of section 265 (relating to disallowance of certain deduc- tions). (6) Income of foreign trust In the case of a foreign trust- (A) There shall be included the amounts of gross income from sources without the United States, reduced by any amounts which would be deductible in respect of dis- bursements allocable to such income but for the provisions of section 265(1) (relating to disallowance of certain deductions). (B) Gross income from sources within the United States shall be determined without regard to section 894 (relating to Income exempt under treaty). (C) Paragraph (3) shall not apply to a for- eign trust. In the case of such a trust, (I) there shall be included gains from the sale or exchange of capital assets, reduced by losses from such sales or exchanges to the extent such losses do not exceed gains from such sales or exchanges, and (ii) the deduc- tion under section 1202 (relating to deduc- tion for excess of capital gains over capital losses) shall not be taken into account. (D) Effective for distributions made in taxable years beginning after December 31, 1975, the undistributed net income of each foreign trust for each taxable year begin- ning on or before December 31, 1975, re- maining undistributed at the close of the last taxable year beginning on or before De- cember 31, 1975, shall be redetermined by taking Into account the deduction allowed by section 1202, (7) Dividends There shall be included the amount of any dividends excluded from gross income pursu- ant to section 116 (relating to partial exclu- sion of dividends received). If the estate or trust is allowed a deduction under section 642(c), the amount of the modifi- cations specified in paragraphs (5) and (6) shall be reduced to the extent that the amount of income which is paid, permanently set aside, or to be used for the purposes specified in section 642(c) is deemed to consist of items specified in those paragraphs. For this purpose, such amount shall (in the absence of specific provi- sions in the governing Instrument) be deemed to consist of the same proportion of each class of items of income of the estate or trust as the total of each class bears to the total of all classes. (b) Income For purposes of this subpart and subparts B, C, and D, the term "income", when not preced- ed by the words "taxable", "distributable net", "undistributed net", or "gross", means the Page 462 § 643
TITLE 26-INTERNAL REVENUE CODE amount of income of the estate or trust for the taxable year determined under the terms of the governing instrument and applicable local law. Items uf grosa income constituting extraordi- nary dividends or taxable stock dividends which the fiduciary, acting in good faith, determines to be allocable to corpus under the terms of the governing instrument and applicable local law shall not be considered income. (c) Beneficiary For purposes of this part, the term "benefi- ciary" includes heir, legatee, devisee. (Aug. 16, 1954, ch. 736, 68A Stat. 217; Oct. 16, 1962, Pub. L. 87-834, § 7(a), 76 Stat. 985; Oct. 4, 1976, Pub. L. 94-455, title X, § 1013(c), (e)(2), 90 Stat. 1615, 1616.) AmzNDMENTS 1976-Subsec. Ca)(6)CC). Pub. L. 94-455, § 1013(c)(1), struck out "created by a United States person" follow- ing "foreign trust". Subsec. Ca)(6)CD). Pub. L. 94-455, § 1013(c)C2), added subpar. (D). Subsec. d). Pub. L. 94-455, § 1013(e)(2), struck out subsec. (a) which defined a foreign trust created by a United States person. 1962-Subsec. (a)(6). Pub. L. 87-834, § 7Ca)C1), substi- tuted "Income of foreign trust" for "Foreign income" in the subsection catchline, designated existing provi- sions as subpar. CA), and added subpars. (B) cnd (C). Subsec. d). Pub. L. 87-834, § 7(a)(2), added subsec. (d). Ec'ivE DATE oF 1976 AEmNDmNT For effective date of amendment of subsec. Cd) by section 1013(e)(2) of Pub. L. 94-455, see section 1013(f)(1) of Pub. L. 94-455, set out as an Effective Date note under section 679 of this title. Section 1013(f)(2) of Pub. L. 94-455 provided that: "The amendments made by subsection Cc) (amending subsec. (a)(6)(C), CD) of this section] shall apply to t.xable years beginning after December 31, 1975". EFFEcTIVE DATE or 1962 AmwMomzT Section 7J) of Pub. L. 87-834 provided that: "The amendments made by this section [amending sections 643, 665, 666 and 668 of this title and adding section 669 of this title] (other than by subsections f), (g) and (h) [adding sections 6048, 6677 and 7701Ca)(30), (31) of this title]), shall apply with respect to distributions made after December 31, 1962." SECrON REFERJED TO IN OTmE SECTIONS This section is referred to in sections 2613, 6166, 6166A of this title. § 644. Special rule for gain on property transferred to trust at less than fair market value (a) Imposition of tax (1) In general If- (A) a trust (or another trust to which the property is distributed) sells or exchanges property at a gain not more than 2 years after the date of the initial transfer of the property in trust by the transferor, and (B) the fair market value of such property at the time of the initial transfer in trust by the transferor exceeds the adjusted basis of such property immediately after such trans- fer, there is hereby imposed a tax determined in accordance with paragraph (2) on the includi- ble gain realized on such sale or exchange. (2) Amount of tax The amount of the tax imposed by para- graph (1) on any includible gain realized on the sale or exchange of any property shall be equal to the sum of- (A) the excess of- (i) the tax which would have been im- posed under this chapter for the taxable year of the transferor in which the sale or exchange of such property occurs had the amount of the includible gain realized on such sale or exchange, reduced by any de- ductions properly allocable to such gain, been included in the gross income of the transferor for such taxable year, over (i) the tax actually imposed under this chapter for such taxable year on the transferor, plus (B) if such sale or exchange occurs in a taxable year of the transferor which begins after the beginning of the taxable year of the trust in which such sale or exchange occurs, an amount equal to the amount de- termined under subparagraph (A) multi- plied by the annual rate established under section 6621. (3) Taxable year for which tax imposed The tax imposed by paragraph (1) shall be imposed for the taxable year of the trust which begins with or within the taxable year of the transferor in which the sale or ex- change occurs. (4) Tax to be in addition to other taxes The tax imposed by this subsection for any taxable year of the trust shall be in addition to any other tax imposed by this chapter for such taxable year. (b) Definition of includible gain For purposes of this section, the term "inclu- dible gain" means the lesser of- (1) the gain realized by the trust on the sale or exchange of any property, or (2) the excess of the fair market value of such property at the time of the initial trans- fer in trust by the transferor over the adjust- ed basis of such property immediately after such transfer. () Character of includible gain For purposes of subsection (a)- (1) The character of the includible gain shall be determined as if the property had ac- tually been sold or exchanged by the trans- feror, and any activities of the trust with re- spect to the sale or exchange of the property shall be deemed to be activities of the trans- feror, and (2) the portion of the includible gain sub- ject to the provisions of section 1245 and sec- tion 1250 shall be determined in accordance with regulations prescribed by the Secretary. (d) Special rule for short sales If the trust sells the property referred to in subsection (a) in a short sale within the 2-year period referred to in such subsection, such 2- year period shall be extended to the date of the closing of such short sale. (e) Exceptions Subsection (a) shall not apply to property- § 644 Page 463
TITLE 26-INTERNAL REVENUE CODE (1) acquired by the trust from a decedent or which passed to a trust from a decedent (within the meaning of section 1014), or (2) acquired by a pooled income fund (as de- fined in section 642(c)(5)), or (3) acquired by a charitable remainder an- nuity trust (as defined in section 664(d)(1)) or a charitable remainder unitrust (as defined in sections 664(d)(2) and (3)), or (4) if the sale or exchange of the property occurred after the death of the transferor. (f) Special rule for installment sales If the trust elects to report income under sec- tion 453 on any sale or exchange to which sub- section (a) applies, under regulations prescribed by the Secretary- (1) subsection (a) shall be applied as if each installment were a separate sale or exchange of property to which such subsection applies, and (2) the term "includible gain" shall not in- clude any portion of an installment received by the trust after the death of the transferor. (Added Pub. L. 94-455, title VII, § 701(e)(1), Oct. 4, 1976, 90 Stat. 1578.) CODIFICATION Amendments of this section which were directed by section 1402(b)(1)(K), (2) of Pub. L. 94-455 could not be executed to the text since they purported to amend provisions of this section which were not enacted. E rIvE DATE Section applicable to transfers in trust made after May 21, 1976, see section 701(h) of Pub. L. 94-455, set out as an Effective of 1976 Amendment note under section 667 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 641, 6103 of this title. SUBPART B-TRusTs WHICH DISTRIBUTE CURRENT INCOME ONLY Sec. 651. Deduction for trusts distributing current income only. 652. Inclusion of amounts in gross income of benefi- ciaries of trusts distributing current income only. SUBPART RqREDuis TO IN OTHER SECTIONS This subpart is referred to in section 671 of this title. § 651. Deduction for trusts distributing current income only (a) Deduction In the case of any trust the tc-ns of which- (1) provide that all of its income is required to be distributed currently, and (2) do not provide that any amounts are to be paid, permanently set aside, or used for the purposes specified in section 642(c) (relat- ing to deduction for charitable, etc., pur- poses), there shall be allowed as a deduction in com- puting the taxable income of the trust the amount of the income for the taxable year which is required to be distributed currently. This section shall not apply in any taxable year in which the trust distributes amounts other than amounts of income described in paragraph (1). (b) Limitation on deduction If the amount of income required to be dis- tributed currently exceeds the distributable net income of the trust for the taxable year, the de- duction shall be limited to the amount of the distributable net income. For this purpose, the computation of distributable net income shall not include items of income which are not in- cluded in the gross income of the trust and the deductions allocable thereto. (Aug. 16, 1954, ch. 736, 68A Stat. 219.) CRoss RDrEx±cEs Deduction for estates and trusts accumulating income or distributing copies, see section 661 of this title. SECTION RmRE TO IN OTHER SECTIONS This section is referred to in sections 57, 643, 652, 663 of this title. § 652. Inclusion of amounts In gross Income of bene- ficiaries of trusts distributing current income only (a) Inclusion Subject to subsection (b), the amount of income for the taxable year required to be dis- tributed currently by a trust described in sec- tion 651 shall be included in the gross income of the beneficiaries to whom the income is re- quired to be distributed, whether distributed or not. If such amount exceeds the distributable net income, there shall be included in the gross income of each beneficiary an amount which bears the same ratio to distributable net income as the amount of income required to be distrib- uted to such beneficiary bears to the amount of income required to be distributed to all benefi- ciaries. (b) Character of amounts The amounts specified in subsection (a) shall have the same character in the hands of the beneficiary as in the hands of the trust. For this purpose, the amounts shall be treated as consisting of the same proportion of each class of items entering into the computation of dis- tributable net income of the trust as the total of each class bears to the total distributable net income of the trust, unless the terms of the trust specifically allocate different classes of Income to different beneficiaries. In the appli- cation of the preceding sentence, the items of deduction entering into the computation of dis- tributable net income shall be allocated amorg the items of distributable net income in accor- dance with regulations prescribed by the Secre- tary. (c) Different taxable years If the taxable year of a beneficiary is differ- ent from that of the trust, the amount which the beneficiary is required to include in gross income in accordance with the provisions of this section shall be based upon the amount of income of the trust for any taxable year or years of the trust ending within or with his tax- able year. (Aug. 16, 1954, ch. 736, 68A Stat. 219; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) Page 464
TITLE 26-INTERNAL REVENUE CODE AMENDMENTS 1976-Subsec. (b). Pub. L. 94-455 struck out "or his delegate" following "Secretary". CRoss REFERENCES Computation of deduction for capital gains in case of estate or trust, see section 1202 of this title. Inclusion of amounts in gross income of beneficiaries of estates and trusts accumulating income or distribut- ing corpts, see section 662 of this title. SECTION REFERIED TO IN OTHER SECTIONS This section is referred to in sections 116, 642. 643, 1202 of this title. SUBPART C-ESTATES AND TRUSTS WHICH MAY ACCUMULATE INCOME OR WHICH DISTRIBUTE CORPUS See. 661. Deductions for estates and trusts accumulating income or distributing corpus. ' 662. Inclusion of amounts in gross income of benefi- ciaries of estates and trusts accumulating income or distributing corpus. 663. Special rules applicable to sections 661 and 662. 664. Charitable remainder trusts. AMENDMENTS 1969-Pub. L. 91-172, title II, § 201(e)(2), Dec. 30. 1969, 83 Stat. 564, added item 664. SUBPART REFERRED TO IN OTHER SECTIONS This subpart is referred to in section 671 of this title. § 661. Deduction for estates and trusts accumulating income or distributing corpus (a) Deduction In any taxable year there shall be allowed as a deduction in computing the taxable income of an estate or trust (other than a trust to which subpart B applies), the sum of- (1) any amount of income for such taxable year required to be distributed currently (in- cluding any amount required to be distributed which may be paid out of income or corpus to the extent such amount is paid out of income for such taxable year); and (2) any other amounts properly paid or credited or required to be distributed for such taxable year; but such deduction shall not exceed the distri- butable net income of the estate or trust. (b) Character of amounts distributed The amount determined under subsection (a) shall be treated as consisting of the same pro- portion of each class of items entering into the computation of distributable net income of the estate or trust as the total of each class bears to the total distributable net income of the estate or trust in the absence of the allocation of dif- ferent classes of income under the specific terms of the governing instrument. In the ap- plication of the preceding sentence, the items of deduction entering into the computation of distributable net income (including the deduc- tion allowed under section 642(c)) shall be allo- cated among the Items of distributable net income in accordance with regulations pre- scribed by the Secretary. 'So in original. Does not conform to section catch- line. (c) Limitation on deduction No deduction shall be allowed under subsec- tion (a) in respect of any portion of the amount allowed as a deduction under that subsection (without regard to this subsection) which is treated under subsection (b) as consisting of any item of distributable net income which is not included in the gross iticome of the estate or trust. (Aug. 16, 1954, ch. 736, 68A Stat. 220; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (b). Pub. L. 94-455 struck out "or his delegate" following "Secretary". CRoss REFERENCRS Deduction for trusts distributing current income only, see section 651 of this title. SECTION REFRED TO IN OTHER SECTIONS This section is referred to in sections 57, 642, 643, 662, 663, 665. 666, 677, 678, 6166, 6166A of this title. § 662. Inclusion of amounts in gross income of bene- ficiaries of estates and trusts accumulating income or distributing corpus (a) Inclusion Subject to subsection (b), there shall be in- cluded in the gross income of a beneficiary to whom an amount specified in section 661(a) is paid, credited, or required to be distributed (by an estate or trust described in section 661), the sum of the following amounts: (1) Amounts required to be distributed currently The amount of income for the taxable year required to be distributed currently to such beneficiary, whether distributed or not. If the amount of income required to be distributed currently to all beneficiaries exceeds the dis- tributable net income (computed without the deduction allowed by section 642(c), relating to deduction for charitable, etc., purposes) of the estate or trust, then, in lieu of the amount provided in the preceding sentence, there shall be included in the gross income of the beneficiary an amount which bears the same ratio to distributable net income (as so computed) as the amount of income required to be distributed currently to such beneficia- ry bears to the amount required to be distrib- uted currently to all beneficiaries. For pur- poses of this section, the phrase "the amount of income for the taxable year required to be distributed currently" includes any amount required to be paid out of income or corpus to the extent such amount is paid out of income for such taxable year. (2) Other amounts distributed All other amounts properly paid, credited, or required to be distributed to such benefi- ciary for the taxable year. If the sum of- (A) the amount of income for the taxable year required to be distributed currently to all beneficiaries, and (B) all other amounts properly paid, cred- ited, or required to be distributed to all beneficiaries exceeds the distributable net income of the estate or trust, then, in lieu of the amount Page 465 § 662
TITLE 26-INTERNAL REVENUE CODE provided in the preceding sentence, there shall be included in the gross income of the beneficiary an amount which bears the same ratio to distributable net income (reduced by the amounts specified in (A)) as the other amounts properly paid, credited or required to be distributed to the beneficiary bear to the other amounts properly paid, credited, or required to be distributed to all beneficiaries. (b) Character of amounts The amounts determined under subsection (a) shall have the same character in the hands of the beneficiary as in the hands of the estate or trust. For this purpose, the amounts shall be treated as consisting of the same proportion of each class of items entering into the computa- tion of distributable net income as the total of each class bears to the total distributable net income of the estate or trust unless the terms of the governing instrument specifically allo- cate different classes of income to different beneficiaries. In the application of the preced- ing sentence, the items of deduction entering into the computation of distributable net income (including the deduction allowed under section 642(c)) shall be allocated among the items of distributable net income in accordance with regulations prescribed by the Secretary. In the application of this subsection to the amount determined under paragraph (1) of sub- section (a), distributable net income shall be computed without regard to any portion of the deduction under section 642(c) which is not at- tributable to income of the taxable year. (c) Different taxable years If the taxable year of a beneficiary is differ- ent from that of the estate or trust, the amount to be included in the gross income of the bene- ficiary shall be based on the distributable net income of the estate or trust and th6 amounts properly paid, credited, or required to be dis- tributed to the beneficiary during any taxable year or years of the estate or trust ending within or with his taxable year. (Aug. 16, 1954, ch. 736, 68A Stat. 220; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDmENTS 1976--Subsec. (b). Pub. L. 94-455 struck out "or his delegate" following "Secretary". CRoss RzmrxNcEs Computation of deduction for capital gains in cases of estate or trust, see section 1202 of this title. Inclusion of amounts in gross income of beneficiaries of trusts distributing current income only, see section 652 of this title. SECTION REMURE TO IN OTMx SECTIONS This section is referred to in sections 57, 116, 642, 663, 667, 677, 678, 1202 of this title. § 663. Special rules applicable to sections 661 and 662 (a) Exclusions There shall not be included as amounts fall- ing within section 661(a) or 662(a)- (1) Gifts, bequests, etc. Any amount which, under the terms of the governing instrument, is properly paid or credited as a gift or bequest of a specific sum of money or of specific property and which is paid or credited all at once or in not more than 3 installments. For this purpose an amount which can be paid or credited only from the income of the estate or trust shall not be considered as a gift or bequest of a spe- cific sum of money. (2) Charitable, etc., distributions Any amount paid or permanently set aside or otherwise qualifying for the deduction pro- vided in section 642(c) (computed without regard to sections 508(d), 681, and 4948(c)(4)). (3) Denial of double deduction Any amount paid, credited, or distributed in the taxable year, if section 651 or section 661 applied to such amount for a preceding tax- able year of an estate or trust because cred- ited or required to be distributed in such pre- ceding taxable year. (b) Distributions in first sixty-five days of taxable year (1) General rule If within tne first 65 days of any taxable year of a trust, an amount is properly paid or credited, such amount shall be considered paid or credited on the last day of the preced- ing taxable year. (2) Limitation Paragraph (1) shall apply with respect to any taxable year of a trust only if the fidu- ciary of such trust elects, in such manner and at such time as the Secretary prescribes by regulations, to have paragraph (1) apply for such taxable year. (c) Separate shares treated as separate trusts For the sole purpose of determining the amount of distributable net income in the ap- plication of sections 661 and 662, in the case of a single trust having more than one beneficia- ry, substantially separate and independent shares of different beneficiaries in the trust shall be treated as separate trusts. The exis- tence of such substantially separate and inde- pendent shares and the manner of treatment as separate trusts, including the application of subpart D, shall be determined in accordance with regulations prescribed by the Secretary. (Aug. 16, 1954, ch. 736, 68A Stat. 222; Dec. 30, 1969, Pub. L. 91-172, title I, § 101(j)(17), title III, § 331(b), 83 Stat. 528, 598; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AmENDMzNTS 1976-Subsecs. (b)(2), (c). Pub. L. 94-455 struck out "or his delegate" following "secretary". 1969-Subsec. (a)(2). Pub. L. 91-172. § 101(J)(17), sub- stituted "sections 508(d), 681, and 4948(c)(4)", for "sec- tion 681". Subsec. (b)(2). Pub. L. 91-172, § 331(b), incorporated existing provisions of subpar. (C) of former first sen- tence making subsec. (b) applicable only to a trust where the fiduciary elected to have the subsec. apply and part of former second sentence making the u'lec- tion applicable in accordance with prescribed relfula- tions; substituted provisions for regulations to spell out manner and time of election for part of former second sentence requiring the election to be male not later than the time prescribed by law for filifig the return for the year, including any extension; and omit- ted: subpars. (A) and (B) of former first sentence § 663 Page 46
TITLE 26-INTERNAL REVENUE CODE which had provided for application of subsec. (b) only to a trust "(A) which was in existence prior to January 1, 1954" and "(B) which, under the terms of its govern- ing instrument, aay not distribute in any taxable year amounts in excess of the income of the preceding tax- able year"; part of former second sentence which re- quired the election to be made for first taxable year to which this part is applicable; and the third sentence that "If such election is made with respect to a tax- able year, this subsection shall apply to all amounts properly paid or credited within the first 65 days of all subsequent taxable years of such trust." Erxcrivz DATE OF 1969 ANDMENT Amendment of subsec. (a)(2) by section 101(j)(17) of Pub. L. 91-172 to take effect on Jan. 1, 1970, see sec- tion 101(k)(1) of Pub. L. 91-172, set out as an Effective Date note under section 4940 of this title. Amendment of subsec. (b)(2) of this section by sec- tion 331(b) of Pub. L. 91-172 applicable to taxable years beginning before Jan. 1, 1970, see section 331(d) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 665 of this title. § 664. Charitable remainder trusts (a) General rule Notwithstanding any other provision of this subchapter, the provisions of this section shall, in accordance with regulations prescribed by the Secretary, apply in the case of a charitable remainder annuity trust and a charitable re- mainder unitrust. (b) Character of distributions Amounts distributed by a charitable remain- der annuity trust or by a charitable remainder unitrust shall be considered as having the fol- lowing characteristics in the hands of a benefi- ciary to whom is paid the annuity described in subsection (d)(1)(A) or the payment described in subsection (d)(2)(A): (1) First, as amounts of income (other than gains, and amounts treated as gains, from the sale or other disposition of capital assets) in- cludible in gross income to the extent of such income of the trust for the year and such un- distributed income of the trust for prior years; (2) Second, as a capital gain to the extent of the capital gain of the trust for the year and the undistributed capital gain of the trust for prior years; (3) Third, as other income to the extent of such income of the trust for the year and such undistributed income of the trust for prior years; and (4) Fourth, as a distribution of trust corpus. For purposes of this section, the trust shall de- termine the amount of its undistributed capital gain on a cumulative net basis. (c) Exemption from income taxes A charitable remainder annuity trust and a charitable remainder unitrust shall, for any taxable year, not be subject to any tax imposed by this subtitle, unless such trust, for such year, has unrelated business taxable income (within the meaning of section 512, determined as if part III of subehapter F applied to such trust). (d) Definitions (1) Charitable remainder annuity trust For purposes of this section, a charitable re- mainder annuity trust is a trust- (A) from which a sum certain (which is not less than 5 percent of the initial net fair market value of all property placed in trust) is to be paid, not less often than annually, to one or more persons (at least one of which is not an organization described in section 170(c) and, in the case of individ- uals, only to an individual who is living at the time of the creation of the trust) for a term of years (not in excess of 20 years) or for the life or lives of such individual or in- dividuals, (B) from which no amount other than the payments described in subparagraph (A) may be paid to or for the use of any person other than an organization described in sec- tion 170(c), and (C) following the termination of the pay- ments described in subparagraph (A), the remainder interest in the trust is to be transferred to, or for the use of, an organi- zation described in section 170(c) or is to be retained by the trust for such a use. (2) Charitable remainder unitrust For purposes of this section, a charitable re- mainder unitrust is a trust- (A) from which a fixed percentage (which is not less than 5 percent) of the net fair market value of its assets, valued annually, is to be paid, not less often than annually, to one or more persons (at least one of which is not an organization described in section 170(c) and, in the case of individ- uals, only to an individual who is living at the time of the creation of the trust) for a term of years (not in excess of 20 years) or for the life or lives of such individual or in- dividuals, (B) from which no amount other than the payments described in subparagraph (A) may be paid to or for the use of any person other than an organization described in sec- tion 170(c), and (C) following the termination of the pay- ments described in subparagraph (A), the remainder interest in the trust is to be transferred to, or for the use of, an organi- zation described in section 170(c) or is to be retained by the trust for such a use. (3) Exception Notwithstanding the provisions of para- graphs (2)(A) and (B), the trust instrument may provide that the trustee shall pay the income beneficiary for any year- (A) the amount of the trust income, if such amount is less than the amount re- quired to be distributed under paragraph (2)(A), and (B) any amount of the trust income which is in excess of the amount required to be distributed under paragraph (2)(A), to the extent that (by reason of subparagraph (A) the aggregate of the amounts paid in prior years was less than the aggregate of such required amounts. (e) Valuation for purposes of charitable contribution For purposes of determining the amount of any charitable contribution, the remainder in- terest of a charitable remainder annuity trust or charitable remainder unitrust shall be com- puted on the basis that an amount equal to 5 Page 467 § 664
TITLE 26-INTERNAL REVENUE CODE percent of the net fair market value of its assets (or a greater amount, If required under the terms of the trust instrument) is to be dis- tributed each year. (Added Pub. L. 91-172, title II, § 201(e)(1), Dec. 30, 1969, 83 Stat. 562, and amended Pub. L. 94- 455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) AMENDMEntS 1976-Subset. (a). Pub. L. 94-455 struck out "or his delegate" following "secretary". EFFECTIVE DATE Section applicable to transfers In trust made after July 31, 1969, see section 201(g)(5), set out as an Effec- tive Date of 1969 Amendment note under section 170 of this title. SECTIcN RzuED TO IN OTMM SECTIONS This section is referred to in sections 170, 644, 2055, 2522 of this title. SUBPART D-TRATMENT OF EXCESS DISTRIBUTIONS BY TRUSTS Sec. 665. 666. 667. 668. [669. Definitions applicable to subpart D. Accumulation distribution allocated to preced- ing years. Treatment of amounts deemed distributed by trust in preceding years. Interest charge on accumulation distributions from foreign trusts. Repealed.] AMENDmrmurrs 1976-Pub. L. 94-455, title VII, §701(g)(1), title X, § 1014(c), Oct. 4, 1976, P0 Stat. 1580, 1617, substituted in item 667 "Treatmer.. of amounts deemed distribut- ed by trust in preceding years" for "Deniaj of refund to trusts: authorization of credit to beneficiaries", in item 668 "Interest charge on accumulation distribu- tions from foreign trusts" for "Treatment of amounts deemed distributed in preceding years", and struck out Item 669 "Treatment of capital gain deemed distribut- ed in preceding years". 1969-Pub. L. 91-172, title III, §331(a), Dec. 30, 1969, 83 Stat. 592, deleted "5" following "allocated to" in item 666, inserted "authorization of credit to benefi- ciaries" in item 667, and substituted "Treatment of capital gain deemed distributed in preceding years" for "Special rules applicable to certain foreign trusts" in item 669. 1962-Pub. L. 87-834, §7()(1), Oct. 16, 1962, 76 Stat. 988, added item 669. SUBPART RzMMns TO IN OTHER SECTIONS This subpart is referred to in section 671 of this title. § 665. Definitions applicable to subpart D (a) Undistributed net income For purposes of this subpart, the term "undis- tributed net income" for any taxable year means the amount by which distributable net income of the trust for such taxable year ex- ceeds the sum of- (1) the amounts for such taxable year speci- fied in paragraphs (1) and (2) of section 661(a), and (2) the amount of taxes imposed on the trust attributable to such distributable net income. (b) Accumulation distribution For purposes of this subpart, the term "accu- mulation distribution" means, for any taxable year of the trust, the amount by which- (1) the amounts specified in paragraph (2) of section 661(a) for such taxable year, exceed (2) distributable net income for such year reduced (but not below zero) by the amounts specified in paragraph (1) of section 661(a). For purposes of section 667 (other than subsec- tion (c) thereof, relating to multiple trusts), the amounts specified in paragraph (2) of section 661(a) shall not include amounts properly paid, credited, or required to be distributed to a bene- ficiary from a trust (other than a foreign trust) as income accumulated before the birth of such beneficiary or before such beneficiary attains the age of 21. If the amounts properly paid, credited, or required to be distributed by the trust for the taxable year do not exceed the income of the trust for such year, there shall be no accumulation distribution for such year. (c) Special rule applicable to distributions by certain foreign trusts For purposes of this subpart, any amount paid to a United States person which is from a payor who is not a United States person and which is derived directly or indirectly from a foreign trust created by a United States person shall be deemed in the year of payment to have been directly paid by the foreign trust. (d) Taxes imposed on the trust For purposes of this subpart, the term "taxes imposed on the trust" means the amount of the taxes which are imposed for any taxable year of the trust under this chapter (without regard to this subpart) and which, under regulations prescribed by the Secretary, are properly allo- cable to the undistributed portions of distribu- table net income and gains in excess of losses from sales or exchanges of capital assets. The amount determined in the preceding sentence shall be reduced by any amount of such taxes deemed distributed under section 666(b) and (c) or 669(d) and (e) to any beneficiary. (e) Preceding taxable year For purposes of this subpart- (1) in the case of a trust (other than a for- eign trust created by a United States person), the term "preceding taxable year" does not include any taxable year of the trust- (A) which precedes by more than 5 years the taxable year of the trust in which an ac- cumulation distribution is made, if it Is made in a taxable year beginning before January 1, 1974, or (B) which begins before January 1, 1969, in the case of an accumulation distribution made during a taxable year beginning after Decembr-r 31, 1973, and (2) in t.Le case of a foreign trust created by a United States person, such term does not in- clude any taxable year of the trust to which this part does not apply. In the case of a preceding taxable year with re- spect to which a trust qualifies (without regard to this subpart) under the provisions of subpart B, for purposes of the application of this sub- part to such trust for such taxable year, such trust shall, in accordance with regulations pre- § 665 Page 468
TITLE 26-INTERNAL REVENUE CODE scribed by the Secretary, be treated as a trust to which subpart C applies. (Aug. 16, 1954, ch. 736, 68A Stat. 223; Oct. 16, 1962, Pub. L. 87-834, § 7(b), 76 Stat. 985; Dec. 30, 1969, Pub. L. 91-172, title III, § 331(a), 83 Stat. 592; Dec. 10, 1971, Pub. L. 92-178, title III, § 306(a), 85 Stat. 524; Oct. 4, 1976, Pub. L. 94- 455, title VII, §§ 701(b), (c), (d)(2), (3), title XIX, § 1906(b)(13)(A), 90 Stat. 1577, 1578, 1834.) REFERENCES IN TEXT Section 669, referred to in subsec. (d), was repealed by Pub. L. 94-455, title VII, § 701(d)(1), Oct. 4, 1976, 90 Stat. 1578. AMENDMENTS 1976-Subsec. (b). Pub. L. 94-455, § 701(b), (c), added provisions that for purposes of sec. 667 the amounts specified in par. (2) of sec. 661(a) not include amounts paid, credited, or required to be distributed to a bene- ficiary from a trust as income accumulated before the birth of such beneficiary or before such beneficiary reaches 21, and that if the amounts paid, credited, or required to be distributed by the trust for the taxable year do not exceed the income of the trust for such year, there be no accumulation distribution for such year. Subsec. (d). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (e). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" in provi- sions following subsec. (e)(2). Subsec. (e)(1). Pub. L. 94-455, § 701(d)(2), struck out provision that preceding taxable year does not include any taxable year of the trust which begins before Jan. 1, 1969, in the case of a capital gain distribution made during a taxable year beginning after Dec. 31, 1968. Subsecs. (f), (g). Pub. L. 94-455, § 701(d)(3), struck out subsec. Cf) which related to undistributed capital gains and subsec. (g) which related to capital gain dis tribution. 1971--Subsec. (g). Pub. L. 92-178 struck out "for such taxable year" following "undistributed capital gain" in the introductory text. 1969-Subsec. (a). Pub. L. 91-172 inserted "attribut- able to such distributable net income" following "on the trust" in par. (2). Subsec. (b). Pub. L. 91-172 substituted "Accumula- tion distribution" for "Accumulation distributions of trusts other than certain foreign trusts" as subsec. heading, combined existing provisions of subsecs. (b) and (c) defining "accumulation distribution" in the case of a trust (other than a foreign trust created by a United States person) and of a foreign trust created by a United States person, respectively, in provisions now designated as pars. (1) and (2), deleting "the amount (if in excess of $2,000)" preceding "by which" in the introductory text and inserting "(but not below zero)" in par. (2), and deleted the second sentence providing that for purposes of this subsection, the amount speci- fied in par. (2) of section 661(a) shall be determined without regard to section 666 and excepting from "ac- cumulation distributions": accumulations before birth or attainment of age 21; distributions for emergency needs; distributions, where beneficiary attained speci- fied age or ages and there were not more than 4 distri- butions, at intervals of 4 or more years; and final dis- tribution of trust was made more than 9 years after date of last transfer to the trust. Subsee. c). Pub. L. 91-172 substituted "Special rule applicable to distributions by certain foreign trusts" for "Accumulation distribution of certain foreign trusts" as subsec. heading, inserted introductory phrase "For purposes of this subpart", reenacted pro- visions of former third sentence as the subsection, de- leted the first sentence which defined in the case of a foreign trust created by a United States person the term "accumulation distribution", now covered by subsec. (b) of this section, and deleted the second sen- tence which stated that "For purposes of this subsec- tion, the amount specified in paragraph (2) of section 661(a) shall be determined without regard to section 66B." Subsec. d). Pub. L. 91-172 substituted "taxable year of the trust" for "taxable year on the trust", "alloca. ble to the undistributed portions of distributable net income and gains to excess of losses from sales or ex- changes of capital assets" for "allocable to the undis- tributed portion of the distributable net income", and "reduced by any amount of such taxes deemed distrib- uted under section 666(b) and c) or 669(d) and Ce) to any beneficiary" for "reduced by any amount of such taxes allowed, under sections 667 and 668, as a credit to any beneficiary on account of any accumulation dis- tribution determined for any taxable year". Subsec. e). Pub. L. 91-172 substituted provisions of the first sentence contained in pars. 1(A) to (C) and (2) for prior first sentence which read "For purposes of this subpart, the term 'preceding taxable year' does not include any taxable year of the trust to which this part does not apply" and reenacted the provisions of the second sentence. Subsecs. (f), (g). Pub. L. 91-172 added subsecs. f) and (g). 1962-Subsec. (b). Pub. L. 87-834, § 7(b)(1), substitut- ed "Accumulation distributions of trusts other than certain foreign trusts" for "Accumulation distribu- tion" in the subsection catchline, and inserted "in the case of a trust (other than a foreign trust created by a United States person)," following "purposes of this subpart,". Subsec. (c). Pub. L. 87-834, §7(b)(2), added subsec. (c) and redesignated former subsec. Cc) as Cd). Subsecs. (d), Ce). Pub. L. 87-834, § 7(b)(2), redesignat- ed former subsecs. (c) and (d) as Cd) and (e), respec- tively. EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (b), (e)(1), f), (g) by section 701(b), (c), (d)(2), (3), of Pub. L. 94-455 applicable to distributions made in taxable years beginning after Dec. 31, 1975, see section 701(h), set out as an Effec- tive Date of 1976 Amendment note under section 667 of this title. EFFECTIVE DATE OF 1971 AMENDmENT Section 306(a) of Pub. L. 92-178 provided in part that amendment of subsec. (g) of this section by Pub. L. 92-178 shall be effective with respect to taxable years beginning after Dec. 31, 1968. EFFECTIVE DATE OF 1969 AMENDMENT Section 331(d) of Pub. L. 91-172, as amended by Pub. L. 92-178, title III, § 306(b), Dec. 10, 1971, 85 Stat. 524, provided that: "Cl) General Rule.-Except as otherwise provided in this subsection, the amendments made by this section [to sections 663(b)(2), 665 to 669, and 6401(b) of this title] shall apply to taxable years beginning after De- cember 31, 1968. "(2) Exceptions.- "(A) Amounts paid, credited, or required to be dis- tributed by a trust (other than a foreign trust cre- ated by a United States person) on or before the last day of a taxable year of the trust beginning before January 1, 1974, shall not be deemed to be accumula- tion distributions to the extent that such amounts were accumulated by a trust in taxable years of such trust beginning before January 1, 1969, and would have been excepted from the definition of an accu- mulation distribution by reason of paragraph (1), (2), (3), or (4) of section 665(b) of the Internal Rev- enue Code of 1954, as in effect on December 31, 1968 [subsec. (b)(1), (2). (3), or (4) of this section], if they had been distributed on the last day of the last tax- able year of the trust beginning before January 1, 1969. "(B) For taxable years of a trust beginning before January 1, 1970, the first sentence of section 666(a) of the Internal Revenue Code of 1954 (as amended 71-999 0 - 78 - 32 (Vol. 7) Page 469 § 665
TITLE 26-INTERNAL REVENUE CODE by this section) [section 666(a) of this title] shall not apply, and the amount of the accumulation distribu- tion of the trust for such taxable years shall be deemed to be an amount within the meaning of paragraph (2) of section 661(a) [section 661(a)(2) of this title] distributed on the last day of each of the preceding taxable years to the extent that such amount exceeds the total of any undistributed net income for any taxable years Intervening between the taxable year with respect of which the accumu- lation distribution is determined and such preceding taxable year. "(C) In the case of a trust which was in existence on December 31, 1969, section 669 of the Internal Revenue Code of 1954, as amended by this section [section 669 of this title], shall not apply to capital gain distributions made to a beneficiary before Janu- ary 1, 1973. If the beneficiary receives capital gain distributions from more than one such trust before January 1, 1973, the preceding sentence shall apply to capital gain distributions from only one such trust, such one to be designated by the taxpayer in accordance with regulations prescribed by the Secre- tary or his delegate. For purposes of the preceding sentence, capital gain distributions received from a trust qualifying under section 2056(b)(5) of the In- ternal Revenue Code of 1954 [section 2056(b)(5) of this title] by a surviving spouse (who is the benefi- ciary of only one such trust) shall be disregarded." ErFEcTivE DAT OF 1962 AmENDuMNT Amendment of section by Pub. L. 87-834 applicable with respect to distributions made after Dec. 31, 1962, see section 7(j) of Pub. L. 87-834, set out as an Effec- tive Date of 1962 Amendment note under section 643 of this title § 666. Accumulation distribution allocated to preced. ing years (a) Amount allocated In the case of a trust which is subject to sub- part C, the amount of the accumulation distri- bution of such trust for a taxable year shall be deemed to be an amount within the meaning of paragraph (2) of section 661(a) distributed on the last day of each of the preceding taxable years, commencing with the earliest of such years, to the extent that such amount exceeds the total of any undistributed net income for all earlier preceding taxable years. The amount deemed to be distributed in any such preceding taxable year under the preceding sentence shall not exceed the undistributed net. income for such preceding taxable year. For purposes of this subsection, undistributed net income for each of such preceding taxable years shall be computed without regard to such accumulation distribution and without regard to any accumu- lation distribution determined for any succeed- ing taxable year. (b) Total taxes deemed distributed If any portion of an accumulation distribu- tion for any taxable year is deemed under sub- section (a) to be an amount within the meaning of paragraph (2) of section 661(a) distributed on the last day of any preceding taxable year, and such portion of such distribution is not less than the undistributed net income for such pre- ceding taxable year, the trust shall be deemed to have distributed on the last day of such pre- ceding taxable year an additional amount within the meaning of paragraph (2) of section 661(a). Such additional amount shall be equal to the taxes imposed on the trust for such pre- ceding taxable year attributable to the undistri- buted net income. For purposes of this subsec- tion, the undistributed net income and the taxes imposed on the trust for such preceding taxable year attributable to such undistributed net income shall be computed without regard to such accumulation distribution and without regard to any accumulation distribution deter- mined for any succeeding taxable year. (c) Pro rata portion of taxes deemed distributed If any portion of an accumulation distribu- tion for any taxable year is deemed under sub- section (a) to be an amount within the meaning of paragraph (2) of section 661(a) distributed on the last day of any preceding taxable year and such portion of the accumulation distribu- tion is less than the undistributed net income for such preceding taxable year, the trust shall be deemed to have distributed on the last day of such preceding taxable year an additional amount within the meaning of paragraph (2) of section 661(a). Such additional amount shall be equal to the taxes imposed on the trust for such taxable year attributable to the undistri- buted net income multiplied by the ratio of the portion of the accumulation distribution to the undistributed net income of the trust for such year. For purposes of this subsection, the undis- tributed net income and the taxes imposed on the trust for such preceding taxable year at- tributable to such undistributed net income shall be computed without regard to the accu- mulation distribution and without regard to any accumulation distribution determined for any succeeding taxable year. (d) Rule when information is not available If adequate records are not available to deter- mine the proper application of this subpart to an amount distributed by a trust, such amount shall be deemed to be an accumulation distribu- tion consisting of undistributed net income earned during the earliest preceding taxable year of the trust in which it can be established that the trust was in existence. (e) Denial of refund to trusts and beneficiaries No refund or credit shall be allowed to a trust or a beneficiary of such trust for any preceding taxable year by reason of a distribution deemed to have been made by such. trust In such year under this section. (Aug. 16, 1954, ch. 736, 68A Stat. 224; Oct. 16, 1962, Pub. L. 87-834, § 7(c), 76 Stat. 986; Dec. 30, 1969, Pub. L. 91-172, title III,§ 331(a), 83 Stat. 593; Oct. 4, 197Q, Pub. L. 94-455, title VII, § 701(a)(2), 90 Stat. 1577.) AmmDMEtrrs 1978-Subsec. (e). Pub. L. 94-455 added subsec. (e). 1969-Subsec. (a). Pub. L. 91-172 substituted in the first sentence "In the case of a trust which is subject to subpart (C)" for "In the case of a trust (other than a foreign trust created by a United States person) which for a taxable year beginning after December 31, 1953, is subject to subpart (C)", "for a taxable year" for "for such taxable year", and "undistributed net income for all earlier preceding taxable years" for "undistributed net incomes for any taxable years in- tervening between the taxable year with respect to which the accumulation distribution is determined and such preceding taxable year" and in the second sentence "for such" for "of such", inserted in the first sentence ", commencing with the earliest of such years," following "preceding taxable years", deleted § 666 Page 470
TITLE 26-IINTERNAL REVENUE CODE "5" preceding "preceding taxable years" in the first and third sentences and the last sentence reading "In the case of a foreign trust created by a United States person, this subsection shall apply to the preceding taxable years of the trust without regard to any provi- sion of the preceding sentences which would (but for this sentence) limit its application to the 5 preceding taxable years," Subsec. (b). Pub. L. 91-172 inserted "attributsble to the undistributed net Income" following "taxable year" in the second sentence and "attributable to such undistributed net income" preceding "shall be comput- ed" in the third sentence. Subsec. (c). Pub. L. 91-172 inserted "attributable to the undistributed net Income" preceding "multiplied by the ratio" in the second sentence and "attributable to such undistributed net income" preceding "shall be computed" in the third sentence. Subsec. (d). Pub. L. 91-172 added subsec. (d). 1962-Subsec. (a). Pub. L. 87-834 insei ted words "(other than a foreign trust created by a United States person)" following "In the case of a trust", and insert- ed sentence making this subsection applicable, in the case of a foreign trust created by a United States person, to the preceding taxable years of the trust without regard to any provision of the preceding sen- tences of this subsection which would (but for this sentence) limit its application to the 5 preceding tax- able years. Emc'rxvE DATE oF 1976 AMEDMENT Enactment of subsec. (e) by Pub. L. 94-455 applica- ble to distributions made in taxable years beginning after Dec. 31, 1975, see section 701(h) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 667 of this title. EFscTxvE DATE OF 1969 AMENDMENT Amendment by Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1968, except that for taxable years of a trust beginning before Jan. 1, 1970, first sentence of subsec. (a) not applicable and amount of accumulation distribution stated, see section 331(d)(1) and (2)(B) of Pub. L. 91-172, set out as an Ef- fective Date of 1969 Amendment note under section 665 of this title. EFcTIvE DATE or 1962 AMENDMENT Amendment by Pub. L. 87-834 applicable with re- spect to distributions made after Dec. 31, 1962, see sec- tion 7(j) of Pub. L. 87-834, set out as an Effective Date of 1962 Amendment note under section 643 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is ref en ed to in sections 665, 667, 668 of this title. § 667. Treatment of amounts deemed distributed by trust in preceding years (a) General rule The total of the amounts which are treated under section 666 as having been distributed by a trust in a preceding taxable year shall be in- cluded in the income of a beneficiary of the trust when paid, credited, or required to be dis- tributed to the extent that such total would have been included n the Income of such bene- ficiary under section 662(a)(2) (and, with re- spect to any tax-exempt interest to which sec- tion 103 applies, under section 662(b)) If such total had been paid to such beneficiary on the last day of such preceding taxable year. The tax imposed by this subtitle on a beneficiary for a taxable year in which any such amount Is included in his income shall be determined only as provided in this section and shall consist of the sum of- (1) a partial tax computed on the taxable income reduced by an amount equal to the total of nuch amounts, at the rate and in the manner as if this section had not been en- acted, (2) a partial tax determined as provided in subsection (b) of this section, and (3) in the case of a foreign trust, the inter- est charge determined as provided in section 668. (b) Tax on distribution (1) In general The partial tax imposed by subsection (a)(2) shall be determined- (A) by determining the number of preced- ing taxable years of the trust on the last day of which an amount is deemed under section 666(a) to have been distributed, (B) by taking from the 5 taxable years im- mediately preceding the year of the accu- mulation distribution the 1 taxable year for which the beneficiary's taxable income was the highest and the 1 taxable year for which his taxable income was the lowest, (C) by adding to the beneficiary's taxable income for each of the 3 taxable years re- maining after the app)ication of subpara- graph (B) an amount determined by divid- ing the amount deemed distributed under section 666 and required to be included in income under subsection (a) by the number of preceding taxable years determined under subparagraph (A), and (D) by determining the average increase in tax for the 3 taxable years referred to in subparagraph (C) resulting from the appli- cation of such subparagraph. The partial tax imposed by subsection (a)(2) shall be the excess (if any) of the average in- crease in tax determined under subparagraph (D), multiplied by the number of preceding taxable years determined under subpara- graph (A), over the amount of taxes deemed distributed to the beneficiary under sections 666(b) and (c). (2) Treatment of loss years For purposes of paragraph (1), the taxable income of the beneficiary for any taxable year shall be deemed not to be less than zero. (3) Certain preceding taxable years not taken into account For purposes of paragraph (1), if the amount of the undistributed net income deemed distributed in any preceding taxable year of the trust is less than 25 percent of the amount of the accumulation distribution di- vided by the number of preceding taxable years to which the accumulation distribution is allocated under section 666(a), the number of preceding taxable years of the trust with respect to which an amount is deemed distrib- uted to a beneficiary under section 666(a) shall be determined without regard to such year. (4) Effect of other accumulation distributions In computing the partial tax under para- graph (1) for any beneficiary, the income of such beneficiary for each of his prior taxable Page 47/1
TITLE 26-INTERNAL REVENUE CODE years shall include amounts previously deemed distributed to such beneficiary in such year under section 666 as a result of prior accumulation distributions (whether from the same or another trust). (5) Multiple distributions in the same taxable year In the case of accumulation distributions made from more than one trust which are in- cludible in the income of a beneficiary in the same taxable year, the distributions shall be deemed to have been made consecutively in whichever order the beneficiary shall deter- mine. (c) Special rule for multiple trusts (1) In general If, in the same prior taxable year of the beneficiary in which any part of the accumu- lation distribution from a trust (hereinafter in this paragraph referred to as "third trust") is deemed under section 666(a) to have been distributed to such beneficiary, some part of prior distributions by each of 2 or more other trusts is deemed under section 666(a) to have been distributed to such beneficiary, then subsections (b) and c) of section 666 shall not apply with respect to such part of the accu- mulation distribution from such third trust. (2) Accumulation distributions from trust not taken Into account unless they equal or exceed $1,000 For purposes of paragraph (1), an accumu- lation distribution from a trust to a beneficia- ry shall be taken into account only if such distribution, when added to any prior accu- mulation distributions from such trust which are deemed under section 666(a) to have been distributed to such beneficiary for the same prior taxable year of the beneficiary, equals or exceeds $1,000. (Aug. 16, 1954, ch. 736, 68A Stat. 225; Dec. 30, 1969, Pub. L. 91-172, title III, § 331(a), 83 Stat. 594; Oct. 4, 1976, Pub. L. 94-455, title VII, §701(a)(1), title X, §1014(a), 90 Stat. 1575, 1617.) AMENDMENTS 1976-Pub. L. 94-455, §§ 701(a)(1), 1014(a), substitut- ed provisions relating to the treatment of amounts deemed distributed by trust in preceding years for pro- visions that no refund or credit be allowed to a trust for any preceding taxable year by reason of a distribu- tion deemed to have been made by such trust in such year under section 666 or 669 and that there be al- lowed as a credit against the tax imposed by this subti- tle on the beneficiary an amount equal to the amount of the taxes deemed distributed to such beneficiary by the trust under sections 666(b) and (c) and 669(d) and (e) during preceding taxable years of the trust on the last day of which the beneficiary was in being, reduced by the amount of the taxes deemed distributed to such beneficiary for such preceding taxable years to the extent that such taxes are taken into account under sections 668(b)(1) and 669(b) in determining the amount of the tax Imposed by section 668. See section 666(e) of this title. 1969-Subsec. (a). Pub. L. 91-172 incorporated exist- ing provisions of first sentence in provisions designat- ed as subsec. (a), included distributions made under section 669 uf this title, and eliminated provisions for credit of taxes imposed on the trust against tax of beneficiary, now covered in subsec. (b) of this section. Subsec. (b). Pub. L. 91-172 incorporated provision of first sentence for credit of taxes imposed on the trust against tax of beneficiary, and provided for interest free credit and method of computation of its amount. The second sentence had provided that the amount of taxes which may not be refunded or credited to the trust shall be an amount equal to the excess of (1) the taxes imposed on the trust for any preceding taxable year (computed without regard to the accumulation distribution for the taxable year) over (2) the amount of taxes for such preceding taxable year imposed on the undistributed portion of distributable net income of the trust for such preceding taxable year after the application of this subpart on account of the accumu- lation distribution determined for such taxable year. ErncT-zv DATE OF 1976 AmEN'mz Section 701(h) of Pub. L. 94-455 provided that: "The amendments made by subsections (a), (b), (c), (d), and (f) of this section [amending sections 665(b), (e)(1), 666(e), 667, 1302(a)(5), (b)(2), and 6401(b) of this title, and repealing sections 665(f), (g), 668 and 669 of this title] shall apply to distributions made in taxable years beginning after December 31, 1975. The amend- ments made by subsection (e) of this section [enacting section 644 of this title and amending section 641(c) of this title] shall apply to transfers in trust made after May 21, 1976.11 EFrECTIVE DATE OF 1969 AMENDMENT Amendment by Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1968, see section 331(d) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 665 of this title. SEcrioN REiRuM TO IN OTHER SECTIONS This section is referred to in sections 665, 668 of this title. § 668. Interest charge on accumulation distributions from foreign trusts (a) General rule For purposes of the tax determined under section 667(a), the interest charge is an amount equal to 6 percent of the partial tax computed trnder section 667(b) multiplied by a fraction- (1) the numerator of which is the sum of the number of taxable years between each taxable year to which the distribution is allo- cated under section 666(a) and the taxable year of the distribution (counting in et ch case the taxable year to which the distribu- tion is allocated but not counting the taxable year of the distribution), and (2) the denominator of which is the number of taxable years to which the distribution is allocated under section 666(a). (b) Limitation The total amount of the interest charge shall not, when added to the total partial tax com- puted under section 667(b), exceed the amount of the accumulation distribution (other than the amount of tax deemed distributed by sec- tion 666(b) or (c)) in respect of which such par- tial tax was determined. (c) Special rules (1) Interest charge not deductible The interest charge determined under this section shall not be allowed as a deduction for purposes of any tax imposed by this title. (2) Transitional rule For purposes of this section, undistributed net income existing in a trust as of January 1, 1977, shall be treated as allocated under sec- tion 666(a) to the first taxable year beginning after December 31, 1976. § 668 Page 472
TITLE 26-INTERNAL REVENUE CODE (Added Pub. L. 94-455, title X, § 1014(b), Oct. 4, 1976, 90 Stat. 1617.) PRIOR PROVISIONS A prior section 668, acts Aug. 16, 1954, ch. 736, 68A Stat. 225; Oct. 16, 1962, Pub. L. 87-834, § 7(d), 76 Stat. 986; Dec. 30, 1969, Pub. L. 91-172, title III, § 33 1(a), 83 Stat. 594, which related to treatment of amounts deemed distributed in preceding years, was repealed by Pub. L. 94-455, title VII, § 701(a)(3), Oct. 4, 1976, 90 Stat. 1577. See section 667 of this title. EFrECTIVE DATE Section 1014(d) of Pub. L. 94-455 provided that: "The amendments made by this section [enacting this section and amending section 667(a) of this title] shall apply to taxable years beginning after December 31, 1976." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 667 of this title. [§ 669. Repealed. Pub. L. 94-455, title VII, § 701(d)(1), Oct. 4, 1976, 90 Stat. 1578] Section, acts Oct. 16, 1962, Pub. L. 87-834, § 7(e), 76 Stat. 986; Dec. 30, 1969, Pub. L. 91-172, title III, § 331(a), 83 Stat. 596, related to the treatment of cap- ital gain deemed distributed in preceding years. EFFECTIVE DATE OF REPEIAL Repeal of section applicable to distributions made in taxable years beginning after Dec. 31, 1975, see section 701(h) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 667 of this title. SUBPART E-GRANTORS AND OTHERS TREATED AS SUBSTANTIAL OWNERS Sec. 671. Trust income, deductions, and credits attribut- able to grantors and others as substantial owners. 672. Definitions and rules. 673. Reversionary interests. 674. Power to control beneficial enjoyment. 675. Administrative powers. 676. Power to revoke. 677. Income for benefit of grantor. 678. Person other than grantor treated as substantial owner. 679. Foreign trusts having one or more United States beneficiaries. AMENDMENTS 1976-Pub. L. 94-455, title X, § 1013(e)(1), Oct. 4, 1976, 90 Stat. 1616, added item 679. SUBPART REFERRED TO IN OTHER SECTIONS This subpart is referred to in sections 402, 1371 of this title. § 671. Trust income, deductions, and credits attribut- able to grantors and others as substantial owners Where it is specified in this subpart that the grantor or another person shall be treated as the owner of any portion of a trust, there shall then be included in computing the taxable income and credits of the grantor or the other person those items of income, deductions, and credits against tax of the trust which are attrib- utable to that portion of the trust to the extent that such items would be taken into account under this chapter in computing taxable income or credits against the tax of an individ- ual. Any remaining portion of the trust shall be subject to subparts A through D. No items of a trust shall be included in computing the tax- able income and credits of the grantor or of any other person solely on the grounds of his do- minion and control over the trust under section 61 (relating to definition of gross income) or any other provision of this title, except as speci- fied in this subpart. (Aug. 16, 1954, ch. 736, 68A Stat. 226.) SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 170, 678 of this title. § 672. Definitions and rules (a) Adverse party For purposes of this subpart, the term "ad- verse party" means any person having a sub- stantial beneficial interest in the trust which would be adversely affected by the exercise or nonexercise of the power which he possesses re- specting the trust. A person having a general power of appointment over the trust property shall be deemed to have a beneficial interest in the trust. (b) Nonadverse party For purposes of this subpart, the term "non- adverse party" means any person who is not an adverse party. (c) Related or subordinate party For purposes of this subpart, the term "relat- ed or subordinate party" means any nonadverse party who is- (1) the grantor's spouse if living with the grantor; (2) any one of the following: The grantor's father, mother, issue, brother or sister; an employee of the grantor; a corporation or any employee of a corporation in which the stock holdings of the grantor and the trust are sig- nificant from the viewpoint of voting control; a subordinate employee of a corporation in which the grantor is an executive. For purposes of sections 674 and 675, a related or subordinate party shall be presumed to be subservient to the grantor in respect of the ex- ercise or nonexercise of the powers conferred on him unless such party is shown not to be subservient by a preponderance of the evidence. (d) Rule where power is subject to condition prece- dent A person shall be considered to have a power described in this subpart even though the exer- cise of the power is subject to a precedent giving of notice or takes effect only on the expi- ration of a certain period after the exercise of the power. (Aug. 16, 1954, ch. 736, 68A Stat. 226.) SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 678 of this title. § 673. Reversionary interests (a) General rule The grantor shall be treated as the owner of any portion of a trust in which he has a rever- sionary interest in either the corpus or the income therefrom if, as of the inception of that portion of the trust, the interest will or may reasonably be expected to take effect in posses- Page 473 §673
TITLE 26-INTERNAL REVENUE CODE sion or enjoyment within 10 years commencing with the date of the transfer of that portion of the trust. [(b) Repealed. Pub. L. 91-172, title II, § 201(c), Dec. 30, 1969, 83 Stat. 560] (c) Reversionary interest taking effect at death of income beneficiary The grantor shall not be treated under sub- section (a) as the owner of any portion of a trust where his reversionary interest in such portion is not to take effect in possession or en- joyment until the death of the person or per- sons to whom the income therefrom is payable. (d) Postponement of date specified for reacquisition Any postponement of the date specified for the reacquisition of possession or enjoyment of the reversionary interest shall be treated as a new transfer in trust commencing with the date on which the postponement is effected and ter- minating with the date prescribed by the post- ponement. However, income for any period shall not be included in the income of the gran- tor by reason of the preceding sentence if such income would not be so includible in the ab- sence of such postponement. (Aug. 16, 1954, ch. 736, 68A Stat. 227; Dec. 30, 1969, Pub. L. 91-172, title II, § 201(c), 83 Stat. 560.) AMENDmENTs 1969-Subsec. (b). Pub. L. 91-172 struck out provi- sions relating to trusts where the income was payable to a charitable beneficiary for at least a two-year period. EFFEcTIVE DATE OF 1969 AMENDMNT Repeal of subsec. (b) of this section applicable to transfers in trust made after April 22, 1969, see section 201(g) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 170 of this title. SECTION RERIUM, TO IN OTHEn SECTIONS This section is referred to in sections 674, 676, 677, 678 of this title. § 674. Power to control beneficial enjoyment (a) General rule The grantor shall be treated as the owner of any portion of a trust in respect of which the beneficial enjoyment of the corpus or the income therefrom is subject to a power of dis- position, exercisable by the grantor or a nonad- verse party, or both, without the approval or consent of any adverse party. (b) Exceptions for certain powers Subsection (a) shall not apply to the follow- ing powers regardless of by whom held: (1) Power to apply income to support of a depen- dent A power described in section 677(b) to the extent that the grantor would not be subject to tax under that section. (2) Power affecting beneficial enjoyment only after expiration of 10-year period A power, the exercise of which can only affect the beneficial enjoyment of the income for a period commencing after the expiration of a period such that a grantor would not be treated as the owner under section 673 if the power were a reversionary interest; but the grantor may be treated as the owner after the expiration of the period unless the power is relinquished. (3) Power exercisable only by will A power exercisable only by will, other than a power in the grantor to. appoint by will the income of the trust where the income is accu- mulated for such disposition by the grantor or may be so accumulated in the discretion of the grantor or a nonadverse party, or both, without the approval or consent of any ad- verse party. (4) Power to allocate among charitable beneficia. ries A power to determine the beneficial enjoy- ment of the corpus or the income therefrom if the corpus or income is irrevocably payable for a purpose specified in section 170(c) (re- lating to definition of charitable contribu- tions). (5) Power to distribute corpus A power to distribute corpus either- (A) to or for a beneficiary or beneficiaries or to or for a class of beneficiaries (whether or not income beneficiaries) provided that the power is limited by a reasonably defi- nite standard which is set forth in the trust instrument; or (B) to or for any current income benefi- ciary, provided that the distribution of corpus must be chargeable against the pro- portionate share of corpus held in trust for the payment of income to the beneficiary as if the corpus constituted a separate trust. A power does not fall within the powers de- scribed in this paragraph if any person has a power to add to the beneficiary or beneficia- ries or to a class of beneficiaries designated to receive the income or corpus, except where such action is to provide for after-born or after-adopted children. (6) Power to withhold income temporarily A power to distribute or apply income to or for any current income beneficiary or to accu- mulate the income for him, provided that any accumulated income must ultimately be pay- able- (A) to the beneficiary from whom distri- bution or application is withheld, to his estate, or to his appointees (or persons named as alternate takers in default of ap- pointment) provided that such beneficiary possesses a power of appointment which does not exclude from the class of possible appointees any person other than the bene- ficiary, his estate, his creditors, or the credi- tors of his estate, or (B) on termination of the trust, or in con- junction with a distribution of corpus which is augmented by such accumulated income, to the current income beneficiaries in shares which have been irrevocably speci- fied in the trust instrument. Accumulated income shall be considered so payable although it is provided that if any beneficiary does not survive a date of distri- bution which could reasonably have been ex- pected to occur within the beneficiary's life- time, the share of the deceased beneficiary is § 674 Page 474
TITLE 26-INTERNAL REVENUE CODE to be paid to his appointees or to one or more designated alternate takers (other than the grantor or the grantor's estate) whose shares have been irrevocably specified. A power does not fall within the powers described in this paragraph if any person has a power to add to the beneficiary or beneficiaries or to a class of beneficiaries designated to receive the income or corpus except where such action is to provide for after-born or after-adopted children. (7) Power to withhold income during disability of a beneficiary A power exercisable only during- (A) the existence of a legal disability of any current income beneficiary, or (B) the period during which any income beneficiary shall be under the age of 21 years, to distribute or apply income to or for such beneficiary or to accumulate and add the income to corpus. A power does not fall within the powers described in this paragraph if any person has a power to add to the bene- ficiary or beneficiaries or to a class of benefi- ciaries designated to receive the income or corpus, except where such action is to provide for after-born or after-adopted children. (8) Power to allocate between corpus and income A power to allocate receipts and disburse- ments as between corpus and income, even though expressed in broad language. (c) Exception for certain powers of independent trustees Subsection (a) shall not apply to a power solely exercisable (without the approval or con- sent of any other person) by a trustee or trust- ees, none of whom is the grantor, and no more than half of whom are related or subordinate parties who are subservient to the wishes of the grantor- (1) to distribute, apportion, or accumulate income to or for a beneficiary or beneficiaries, or to, for, or within a class of beneficiaries; or (2) to pay out corpus to or for a beneficiary or beneficiaries or to or for a class of benefi- ciaries (whether or not income beneficiaries). A power does not fall within the powers de- scribed in this subsection If any person has a power to add to the beneficiary or beneficiaries or to a class of beneficiaries designated to re- ceive the income or corpus, except where such action is to provide for after-born or after- adopted children. (d) Power to allocate income if limited by a standard Subsection (a) shall not apply to a power solely exercisable (without the approval or con- sent of any other person) by a trustee or trust- ees, none of whom is the grantor or spouse living with the grantor, to distribute, apportion, or accumulate income to or for a beneficiary or beneficiaries, or to, for, or within a class of beneficiaries, whether or not the conditions of paragraph (6) or (7) of subsection (b) are satis- fied, if such power is limited by a reasonably definite external standard which is set forth in the trust instrument. A power does not fall within the powers described in this subsection if any person has a power to add to the benefi- ciary or beneficiaries or to a class of beneficia- ries designated to receive the income or corpus except where such action is to provide for after- born or after-adopted children. (Aug. 16, 1954, ch. 736, 68A Stat. 227.) SECTIN RMERREM TO IN OTHER SECTIONS This section Is referred to in sections 672, 677, 678 of this title. § 675. Administrative powers The grantor shall be treated as the owner of any portion of a trust in respect of which- (1) Power to deal for less than adequate and full consideration A power exercisable by the grantor or a nonadverse party, or both, without the ap- proval or consent of any adverse party en- ables the grantor or any person to purchase, exchange, or otherwise deal with or dispose of the corpus or the income therefrom for less than an adequate consideration in money or money's worth. (2) Power to borrow without adequate interest or security A power exercisable by the grantor or a nonadverse party, or both, enables the gran- tor to borrow the corpus or income, directly or indirectly, without adequate interest or without adequate security except where a trustee (other than the grantor) is authorized under a general lending power to make loans to any person without regard to interest or security. (3) Borrowing of the trust funds The grantor has directly or indirectly bor- rowed the corpus or income and has not com- pletely repaid the loan, including any inter- est, before the beginning of the taxable year. The preceding sentence shall not apply to a loan which provides for adequate interest and adequate security, If such loan is made by a trustee other than the grantor and other than a related or subordinate trustee subser- vient to the grantor. (4) General powers of administration A power of administration is exercisable in a nonfiduciary capacity by any person with- out the approval or consent of any person in a fiduciary capacity. For purposes of this paragraph, the term "power of administra- tion" means any one or more of the following powers: (A) a power to vote or direct the voting of stock or other securities of a corpo- ration in which the holdings of the grantor and the trust are significant from the view- point of voting control; (B) a power to control the investment of the trust funds either by directing investments or reinvestments, or by vetoing proposed investments or reinvest- ments, to the extent that the trust funds con- sist of stocks or securities of corporations in which the holdings of the grantor and the trust are significant from the viewpoint of voting control; or (C) a power to reacquire the trust corpus by substituting other property of an equivalent value. (Aug. 16, 1954, ch. 736, 68A Stat. 229.) Page 475 § 675
TITLE 26-INTERNAL REVENUE CODE SECTION REFERRED TO IN OTIM SECTIONS This section is referred to in sections 672, 678 of this title. § 676. Power to revoke (a) General rule The grantor shall be treated as the owner of any portion of a trust, whether or not he is treated as such owner under any other provi- sion of this part, where at any time the power to revest in the grantor title to such portion is exercisable by the grantor or a non-adverse party, or both. (b) Power affecting beneficial enjoyment only after expiration of 10-year period Subsection (a) shall not apply to a power the exercise of which can only affect the beneficial enjoyment of the income for a period commenc- ing after the expiration of a period such that a grantor would not be treated as the owner under section 673 if the power were a reversion- ary interest. But the grantor may be treated as the owner after the expiration of such period unless the power is relinquished. (Aug. 16, 1954, ch. 736, 68A Stat. 230.) CROSS REFERENCES Nonadverse party defined, see section 672 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 673 of this title. § 677. Income for benefit of grantor (a) General rule The grantor shall be treated as the owner of any portion of a trust, whether or not he is treated as such owner under section 674, whose income without the approval or consent of any adverse party is, or, in the discretion of the grantor or a nonadverse party, or both, may be- (1) distributed to the grantor or the gran- tor's spouse; (2) held or accumulated for future distribu- tion to the grantor or the grantor's spouse; or (3) applied to the payment of premiums on policies of insurance on the life of the grantor or the grantor's spouse (except policies of in- surance irrevocably payable for a purpose specified in section 170(c) (relating to defini- tion of charitable contributions)). This subsection shall not apply to a power the exercise of which can only affect the beneficial enjoyment of the income for a period commenc- ing after the expiration of a period such that the grantor would not be treated as the owner under section 673 if the power were a reversion- ary interest; but the grantor may be treated as the owner after the expiration of the period unless the power is relinquished. (b) Obligations of support Income of a trust shall not be considered tax- able to the grantor under subsection (a) or any other provision of this chapter merely because such income in the discretion of another person, the trustee, or the grantor acting as trustee or co-trustee, may be applied or distrib- uted for the support or maintenance of a bene- ficiary (other than the grantor's spouse) whom the grantor is legally obligated to support or maintain, except to the extent that such income is so applied or distributed. In cases where the amounts so applied or distributed are paid out of corpus or out of other than income for the taxable year, such amounts shall be considered to be an amount paid or credited within the meaning of paragraph (2) of section 661(a) and shall be taxed to the grantor under section 662. (Aug. 16, 1954, ch. 736, 68A Stat. 230; Dec. 30, 1969, Pub. L. 91-172, title III, § 332(a), 83 Stat. 599.) AMENDMENTS 1969-Subsec. (a)(1)-(3). Pub. L. 91-172, § 332(a)(1), inserted "or the grantor's spouse" followin6 "the gran- tor" in pars. (1), (2). and (3). Subsec. (b). Pub. L. 91-172, §332ta)(2), inserted "(other than the grantor's spouse)" following "benefi- ciary". EFrEcTiv. DATE OF 1969 AMENDMENT Section 332(b) of Pub. L. 91-172 provided that: "The amendments made by subsection (a) [to subsecs. (a)(1) to (3) and (b) of this section] shall apply in respect of property transferred in trust after October 9, 1969." CROSS REnacs Definitions- Adverse party, see section 672 of this title. Non-adverse party, see section 672(b) of this title. Income from interest in an estate or trust as gross income. in section 61 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 674, 678, 1246 of this title. § 678. Person other than grantor treated as substan. tial owner (a) General rule A person other than the grantor shall be treated as the owner of any portion of a trust with respect to which: (1) such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself, or (2) such person has previously partially re- leased or otherwise modified such a power and after the release or modification retains such control as would, within the principles of sections 671 to 677, inclusive, subject to grantor of a trust to treatment as the owner thereof. (b) Exception where grantor is taxable Subsection (a) shall not apply with respect to a power over income, as originally granted or thereafter modified, if the grantor of the trust or a transferor (to whom section 679 applies) is otherwise treated as the owner under the provi- sions of this subpart other than this section. (c) Obligations of support Subsection (a) shall not apply to a power which enables such person, in the capacity of trustee or cotrustee, merely to apply the income of the trust to the support or mainte- nance of a person whom the holder of the power is obligated to support or maintain except to the extent that such income is so ap- plied. In cases where the amounts so applied or distributed are paid out of corpus or out of other than income of the taxable year, such § 676 Page 476
TITLE 26-INTERNAL REVENUE CODE amounts shall be considered to be an amount paid or credited within the meaning of para- graph (2) of section 661(a) and shall be taxed to the holder of the power under section 662. (d) Effect of renunciation or disclaimer Subsection (a) shall not apply with respect to a power which has been renounced or dis- claimed within a reasonable time after the holder of the power first became aware of its existence. (Aug. 16, 1954, ch. 736, 68A Stat. 231; Oct. 4, 1976, Pub. L. 94-455, title X, § 1013(b), 90 Stat. 1615.) AMENDMENTS 1976-Subsec. (b). Pub. L. 94-455 substituted "if the grantor of the trust or a transferor (to whom section 679 applies) is otherwise treated as the owner under the provisions of this subpart other than this section" for "if the grantor of the trust is otherwise treated as the owner under sections 671 to 677, inclusive". EFFECTIVE DATE OF 1976 AMENDMENT For effective date of amendment of subsec. (b) by Pub. L. 94-455, see section 1013(f)(1) of Pub. L. 94-455, set out as an Effective Date note under section 679 of this title, § 679. Foreign trusts having one or more United States beneficiaries (a) Transferor treated as owner (1) In general A United States person who directly or indi- rectly transfers property to a foreign trust (other than a trust described in section 404(a)(4)) shall be treated as the owner for his taxable year of the portion of such trust attributable to such property if for such year there is a United States beneficiary of any portion of such trust. (2) Exceptions Paragraph (1) shall not apply- (A) Transfers by reason of death To any transfer by reason of the death of the transferor. (B) Transfers where gain is recognized to trans- feror To any sale or exchange of the property at its fair market value in a transaction in which all of the gain to the transferor is re- alized at the time of the transfer and is rec- ognized either at such time or is returned as provided in section 453. (b) Trusts acquiring United States beneficiaries If- (1) subsection (a) applies to a trust for the transferor's taxable year, and (2) subsection (a) would have applied to the trust for his immediately preceding taxable year but for the fact that for such receding taxable year there was no United States bene- ficiary for any portion of the trust, then, for purposes of this subtitle, the transfer- or shall be treated as having income for the taxable year (in addition to his other income for such year) equal to the undistributed net income (at the close of such immediately pre- ceding taxable year) attributable to the portion of the trust referred to in subsection (a). (c) Trusts treated as having a United States bene- ficiary (1) In general For purposes of this section, a trust shall be treated as having a United States beneficiary for the taxable year unless- (A) under the terms of the trust, no part of the income or corpus of the trust may be paid or accumulated during the taxable year to or for the benefit of a United States person, and (B) if the trust were terminated at any time during the taxable year, no part of the income or corpus of such trust could be paid to or for the benefit of a United States person. (2) Attribution of pwnership For purposes of paragraph (1), an amount shall be treated as paid or accumulated to or for the benefit of a United States person if such amount is paid to or accumulated for a foreign corporation, foreign partnership, or foreign trust or estate, and- (A) in the case of a foreign corporation, more than 50 percent of the total combined voting power of all classes of stock entitled to vote of such corporation is owned (within the meaning of section 958(a)) or is consid- ered to be owned (within the meaning of section 958(b)) by United States sharehold- ers (as defined in section 951(b)), (B) in the case of a foreign partnership, a United States person is a partner of such partnership, or (C) in the case of a foreign trust or estate, such trust or estate has a United States beneficiary (within the meaning of para- graph (1)). (Added Pub. L. 94-455, title X, § 1013(a), Oct. 4, 1976, 90 Stat. 1614.) EFFECTIVE DATE Section 1013(f)(1) of Pub. L. 94-455 provided that: "In General.-The amendments made by this section (other than subsection (c)) [enacting this section, amending sections 678(b), 6048(c), (d) and 6678(a) of this title, and repealing section 643(d) of this title] shall apply to taxable years ending after December 31, 1975, but only in the case of- "(A) foreign trusts created after May 21, 1974, and "(B) transfers of property to foreign trusts after May 21, 1974." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 678 of this title. SUBPART F-MISCELLANEOUS Sec. 681. Limitation on charitable deduction. 682. Income of an estate or trust in case of divorce, etc. ' 683. Use of trust as an exchange fund. AMENDMENTS 1976-Pub. L. 94-455, title XXI, § 2131(e)(2), Oct. 4, 1976, 90 Stat. 1924, substituted in item 683 "Use of trust as an exchange fund" for "Applicability of provi- sions". § 679 Page 477
TITLE 26-INTERNAL REVENUE CODE § 681. Limitation on charitable deduction (a) Trade or business income In computing the deduction allowable under section 642(c) to a trust, no amount otherwise allowable under section 642(c) as a deduction shall be allowed as a deduction with respect to income of the taxable year which is allocable to its unrelated business income for such year. For purposes of the preceding sentence, the term "unrelated business income" means an amount equal to the amount which, if such trust were exempt from tax under section 501(a) by reason of section 501(c)(3), would be computed as its unrelated business taxable income under sec- tion 512 (relating to income derived from cer- tain business activities and from certain proper- ty acquired with borrowed funds). (b) Cross reference For disallowance of certain charitable, etc., deductions otherwise allowable under section 642(c), see sections 508(d) and 4948(c)(4). (Aug. 16, 1954, ch. 736, 68A Stat. 232; Oct. 22, 1968, Pub. L. 90-630, § 6(b), 82 Stat. 1330; Dec. 30, 1969, Pub. L. 91-172, title I, §§ 101(j)(18), (19), 121(d)(2)(B), 83 Stat. 528, 547.) AmENDMNTS 1969-Subsec. (a). Pub. L. 91-172, § 121(d)(2)(B), sub. stituted reference to certain property acquired with borrowed funds for reference to certain leases. Subsec. (b). Pub. L. 91-172, § 1010)(18), (19), redesig- nated former subsec. (d) as subsec. (b), and, in subsec. (b), as so redesignated, substituted "sections 518(d) and 4948(c)(4)" for section 503(e). Former subsec. (b) dealing generally with the operation of trusts, was stricken. Subsec. (c). Pub. L. 91-172, § 101(j)(18), struck out former subsec. (c) dealing with accumulated income. Subsec. (d). Pub. L. 91-172, § 101(j)(19) redesignated former subsec. (d) as subsec. (b). 1968-Subsec. (c). Pub. L. 90-630 added provision that par. (1) does not apply to income attributable to property transferred to a trust before January 1, 1951, by the creator thereof if the trust was irrevocable on such date and if the income is required to be accumu. lated pursuant to the mandatory terms of the instru- ment creating the trust. EmrEcTivE DATE or 1969 AmENDMENT Amendment of subsec. (a) by section 121(d)(2)(B) of Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1969, see section 121(g) of Pub. L. 91- 172, set out as an Effective Date of 1969 Amendment note under section 511 of this title. Amendment -of subsecs. (b) to d) by section 101(j) (18), (19) of Pub. L. 91-172 to take effect on Jan. 1, 1970, see section 101(k)(1) of Pub. L. 91-172, set out as an Effective Date note under section 4940 of this title. ErFEcrrvE DATE OF 1968 AMENDMENT Section 6(c) of Pub. L. 90-630 provided that: "The amendments made by subsection (a) [amending sec- tion 504(a) of this title] and (b) [amending subsec. (c) of this section] shall apply with respect to taxable years beginning after December 31, 1953, and ending after August 16, 1954. For purposes of sections 3814 and 162(g)(4) of the Internal Revenue Code of 1939, provisions having the same effect as such amendments shall be treated as included in such sections effective with respect to taxable years beginning after Decem- ber 31, 1950." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 513, 642, 663 of this title. § 682. Income of an estate or trust in case of divorce, etc. (a) Inclusion in gross income of wife There shall be included in the gross income of a wife who is divorced or legally separated under a decree of divorce or of separate mainte- nance (or who is separated from her husband under a written separation agreement) the amount of the income of any trust which such wife is entitled to receive and which, except for this section, would be includible in the gross income of her husband, and such amount shall not, despite any other provision of this subtitle, be includible in the gross income of such hus- band. This subsection shall not apply to that part of any such income of the trust which the terms of the decree, written separation agree- ment, or trust instrument fix, in terms of an amount of money or a portion of such income, as a sum which is payable for the support of minor children of such husband. In case such income is less than the amount specified in the decree, agreement, or instrument, for the pur- pose of applying the preceding sentence, such income, to the extent of such sum payable for such support, shall be considered a payment for such support. (b) Wife considered a beneficiary For purposes of computing the taxable income of the estate or trust and the taxable income of a wife to whom subsection (a) or sec- tion 71 applies, such wife shall be considered as the beneficiary specified in this part. A periodic payment under section 71 to any portion of which this part applies shall be included in the gross income of the beneficiary in the taxable year in which under this part such portion is required to be included. (c) Cross reference For definitions of "husband" and "wife," as used in this section, see section 7701(a)(17). (Aug. 16, 1954, ch. 736, 68A Stat. 234.) CROSS REFEREcNCs Deductions for payments under this section not al- lowed, see section 215 of this title. Definition of husband and wife, see section 7701 of this title. Payment under this section not treated as payment for support of defendant, see section 152 of this title. Wife taxable on alimony and separate maintenance payments received, see section 71 of this title. SECTION REnanzD TO IN OTHE SrCroNs This section is referred to in sections 71, 72, 101, 152, 215, 7701 of this title. § 683. Use of trust as an exchange fund (a) General rule Except as provided in subsection (b), if prop- erty is transferred to a trust in exchange for an interest in other trust property and if the trust would be an investment company (within the meaning of section 351) if it were a corporation, then gain shall be recognized to the transferor. (b) Exception for pooled income funds Subsection (a) shall not apply to any transfer to a pooled income fund (within the meaning of section 642(c)(5)). Page 478
TITLE 26-INTERNAL REVENUE CODE (Aug. 16, 1954, ch. 736, 68A Stat. 235; Oct. 4, 1976, Pub. L. 94-455, title XXI, § 2131(e)(1), 90 Stat. 1924.) AMENDMENTS 1976-Pub. L. 94-455 substituted provisions relating to use of trust as an exchange fund for provisions set- ting forth rule that this part applies only to taxable years beginning after Dec. 31, 1953, and ending after the date of the enactment of this title and exceptions thereto. EFFcTivE DATE OF 1976 AmENDMENT Amendment of section by Pub. L. 94-455 effective on Apr. 8, 1976. in taxable years ending on or after such date, see section 2131(f)(6) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under sec- tion 584 of this title. PART II-INCOME IN RESPECT OF DECEDENTS Sec. 691. Recipients of income in respect of decedents. 692. Income taxes of members of Armed Forces on death. § 691. Recipients of Income in respect of decedents (a) Inclusion in gross income (1) General rule The amount of all items of gross income in respect of a decedent which are not properly includible in respect of the taxable period in which falls the date of his death or a prior period (including the amount of all items of gross income in respect of a prior decedent, if the right to receive such amount was acquired by reason of the death of the prior decedent or by bequest, devise, or inheritance from the prior decedent) shall be included in the gross income, for the taxable year when received, of: (A) the estate of the decedent, if the right to receive the amount is acquired by the de- cedent's estate from the decedent; (B) the person who, by reason of the death of the decedent, acquires the right to receive the amount, if the right to receive the amount is not acquired by the dece- dent's estate from the decedent; or (C) the person who acquires from the de- cedent the right to receive the amount by bequest, devise, or inheritance, if the amount is received after a distribution by the decedent's estate of such right. (2) Income In case of sale, etc. If a right, described in paragraph (1), to re- ceive an amount is transferred by the estate of the decedent or a person who received such right by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent, there shall be included in the gross income of the estate or such person, as the case may be, for the taxable period in which the transfer occurs, the fair market value of such right at the time of such transfer plus the amount by which any consideration for the transfer exceeds such fair market value. For purposes of this paragraph, the term "transfer" includes sale, exchange, or other disposition, or the satisfaction of an install- ment obligation at other than face value, but does not include transmission at death to the estate of the decedent or a transfer to a person pursuant to the right of such person to receive such amount by reason of the death of the decedent or by bequest, devise, or inheritance from the decedent. (3) Character of income determined by reference to decedent The right, described in paragraph (1), to re- ceive an amount shall be treated, in the hands of the estate of the decedent or any person who acquired such right by reason of the death of the decedent, or by bequest, devise, or inheritance from the decedent, as if it had been acquired by the estate or such person in the transaction in which the right to receive the Income was originally derived and the amount includible in gross income under paragraph (1) or (2) shall be considered in the hands of the estate or such person to have the character which it would have had in the hands of the decedent if the decedent had lived and received such amount. (4) Installment obligations acquired from decedent In the case of an installment obligation re- ceived by a decedent on the sale or other dis- position of property, the income from which was properly reportable by the decedent on the installment basis under section 453, if such obligation is acquired by the decedent's estate from the decedent or by any person by reason of the death of the decedent or by be- quest, devise, or inheritance from the dece- dent- (A) an amount equal to the excess of the face amount of such obligation over the basis of the obligation in the hands of the decedent (determined under section 453(d)) shall, for the purpose of paragraph (1), be considered as an item of gross income in re- spect of the decedent; and (B) such obligation shall, for purposes of paragraphs (2) and (3), be considered a right to receive an item of gross income in respect of the decedent, but the amount in- cludible in gross income under paragraph (2) shall be reduced by an amount equal to the basis of the obligation in the hands of the decedent (determined under section 453(d)). (b) Allowance of deductions and credit The amount of any deduction specified in sec- tion 162, 163, 164, 212, or 611 (relating to 4educ- tions for expenses, interest, taxes, and deple- tion) or credit specified in section 33 (relating to foreign tax credit), in respect of a decedent which is not properly allowable to the decedent in respect of the taxable period in which falls the date of his death, or a prior period, shall be allowed: (1) Expenses, interest, and taxes In the case of a deduction specified in sec- tions 162, 163, 164, or 212 and a credit speci- fied in section 33, in the taxable year when paid- (A) to the estate of the decedent; except that (B) if the estate of the decedent is not liable to discharge the obligation to which the deduction or credit relates, to the person who, by reason of the death of the decedent or by bequest, devise, or inheri- Page 479
TITLE 26-INTERNAL REVENUE CODE tance acquires, subject to such obligation, from the decedent an interest in property of the decedent. (2) Depletion In the case of the deduction specified in sec- tion 611, to the person described in subsection (a)(1)(A), (B), or (C) who, in the manner de- scribed therein, receives the income to which the deduction relates, in the taxable year when such income is received. (c) Deduction for estate tax (1) Allowance of deduction (A) General rule A person who includes an amount in gross income under subsection (a) shall be al- lowed, for the same taxable year, as a de- duction an amount which bears the same ratio to the estate tax attributable to the net value for estate tax purposes of all the Items described in subsection (a)(1) as the value for estate tax purposes of the items of gross income or portions thereof in respect of which such person included the amount in gross income (or the amount included in gross income, whichever is lower) bears to the value for estate tax purposes of all the items described in subsection (a)(1). (B) Estates and trusts In the case of an estate or trust, the amount allowed as a deduction under sub- paragraph (A) shall be computed by exclud- ing from the gross income of the estate or trust the portion (if any) of the items de- scribed in subsection (a)(1) which is proper- ly paid, credited, or to be distributed to the beneficiaries during the taxable year. (2) Method of computing deduction For purposes of. paragraph (1)- (A) The term "estate tax" means Federal and State estate taxes (within the meaning of section 1023(f)(3)). (B) The net value for estate tax purposes of all the items described in subsection (a)(1) shall be the excess of the value for estate tax purposes of all the items de- scribed in subsection (a)(1) over the deduc- tions from the gross estate in respect of claims which represent the deductions and credit described in subsection (b). Such net vajue 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 part II of sub- chapter D applies. (C) The estate tax attributable to such net value shall be an amount which bears the same ratio to the estate tax as such net value bears to the value of the gross estate. (3) Special rule for generation-skipping transfers For purposes of this section- (A) the tax imposed by section 2601 or any State inheritance tax described in sec- tion 2602(c)(5)(C) on any generation-skip- ping transfer shall be treated as a tax im- posed by section 2001 on the estate of the deemed transferor (as defined in section 2612(a)); (B) any property transferred in such a transfer shall be treated as if it were includ- ed in the gross estate of the deemed trans- feror at the value of such property taken into account for purposes of the tax im- posed by section 2601; and (C) under regulations prescribed by the Secretary, any item of gross income subject to the tax imposed under section 2601 shall be treated as income described in subsection (a) if such item is not properly includible in the gross income of the trust on or before the date of the generation-skip ping transfer (within the meaning of section 2611(a)) and if such transfer occurs at or after the death of the deemed transferor (as so defined). (d) Amounts received by surviving annuitant under joint and survivor annuity contract (1) Deduction for estate tax For purposes of computing the deduction under subsection (c)(1)(A), amounts received by a surviving annuitant- (A) as an annuity under a joint and survi- vor annuity contract where the decedent annuitant died after December 31, 1953, and after the annuity starting date (as defined in section 72(c)(4)), and (B) during the surviving annuitant's life expectancy period, shall, to the extent in- cluded in gross income under section 72, be considered as amounts included in gross income under subsection (a). (2) Net value for estate tax purposes In determining the net value for estate tax purposes under subsection (c)(2)(B) for pur- poses of this subsection, the value for estate tax purposes of the items described in para- graph (1) of this subsection shall be comput- ed- (A) by determining the excess of the value of the annuity at the date of the death of the deceased annuitant over the total amount excludable from the gross income of the surviving annuitant under section 72 during the surviving annuitant's life expec- tancy period, and (B) by multiplying the figure so obtained by the ratio which the value of the annuity for estate tax purposes bears to the value of the annuity at the date of the death of the deceased. (3) Definitions For purposes of this subsection-- (A) The term "life expectancy period" means the period beginning with the first day of the first period for which an amount is received by the surviving annuitant under the contract and ending with the close of the taxable year with or in which falls the termination of the life expectancy of the surviving annuitant. For purposes of this subparagraph, the life expectancy of the surviving annuitant shall be determined, as of the date of the death of the deceased an- nuitant, with reference to actuarial tables prescribed by the Secretary. (B) The surviving annuitant's expected return under the contract shall be comput- ed, as of the death of the deceased annu- itant, with reference to actuarial tables pre- scribed by the Secretary. § 691 Page 480
TITLE 26-INTERNAL REVENUE CODE (e) Cross reference For application of this section to income in respect of a deceased partner, see section 753. (Aug. 16, 1954, ch. 736, 68A Stat. 235; Feb. 26, 1964, Pub. L. 88-272, title II, § 221(c)(2), 78 Stat. 75; Sept. 2, 1964, Pub. L. 88-570, § 1, 78 Stat. 854; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(a)(91), 1906(b)(13)(A), 1951(b)(10)(A), title XX, §§ 2005(a)(4), 2006(b)(3), 90 Stat. 1779, 1834, 1839, 1876, 1889.) AMENDMENTS 1976--Subsec. (c)(1)(B). Pub. L. 94-455, § 1901(a)(91), struck out provision that this subparagraph applies to the same taxable years, and to the same extent, as is provided in section 683 of this title. Subsec. (c)(2)(A). Pub. L. 94-455. § 2005(a)(4)(A), sub- stituted "Federal and State estate taxes (within the meaning of section 1023(f)(3))" for "the tax imposed on the estate of the decedent or any prior decedent under section 2001 or 2101, reduced by the credits against such tax". Subsec. (c)(2)(C). Pub. L. 94-455, § 2005(a)(4)(B), sub- stituted "which bears the same ratio to the estate tax as such net value bears to the value of the gross estate" for "equal to the excess of the estate tax over the estate tax computed without including in the gross estate such net value". Subsec. (c)(3). Pub. L. 94-455, § 2006(b)(3), added par. (3). Subsec. (d)(3)(A), (B). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (e). Pub. L. 94-455, § 1951(b)C10)(A), redesig- nated subsec. f) as (e). Former subsec. (e), relating to certain installment obligations transmitted at death, was struck out. Subsec. f). Pub. L. 94-455, § 1951(b)(10)(A), redesig- nated subsec. f) as e). 1964-Subsec. (c)2)(B). Pub. L. 88-272 substituted "421(c)(2), relating to the deduction for estate tax with respect to stock options to which part II of sub- chapter D applies" for "421(d)(6)(B), relating to the deduction for estate tax with respect to restricted stock options". Subsec. Ce). Pub. L. 88-570 added subsec. (e) and re- designated former subsec. (e) as f). Subsec. f). Pub. L. 88-570 redesignated former subsec. (e) as Cf). EncTIVs DATE OF 1976 AP wDENT Amendment of subsec. (c)(1)(B) by section 1901(a)(91) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Amendment of subsecs. Ce) and (f) by section 1951(b)(10)(A) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31. 1976, see section 1951(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 72 of this title. Amendment of subsec. (c)(2)(A). (C) by .section 2005(a)(4)(A). (B) of Pub. L. 94-455 applicable in re- spect of decedents dying after Dec. 31, 1976, see sec- tion 2005(f)(1) of Pub. L. 94-455, set out as an Effec- tive Date note under section 1023 of this title. For effective date of amendment of subsec. (c)(3) by section 2006(b)(3) of Pub. L. 94-455, sec section 2006(c) of Pub. L. 94-455, set out as an Effective Date note under section 2601 of this title. ErrcTV DATE or 1964 AxNmxwr Amendment of section by Pub. L. 88-272 applicable to taxable years ending after Dec. 31, 1963, see section 221(e) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 421 of this title. SAVINGS PROVISIONS Section 1951(b)(10)(B) of Pub. L. 94-455 provided that: "Notwithstanding subparagraph (A) (repealing subsec. (e) of this section], any election made under section 691(e) to have subsection (a)(4) of such section apply in the case of an installment obligation shali continue to be effective with respect to taxable years beginning after December 31, 1976. Section 691(c) shall not apply in respect of any amount included in gross income by reason of the preceding sentence. The liability under bond filed under section 44(d) of the In- ternal Revenue Code of 1939 (or corresponding provi- sions of prior law) in respect of which such an election applies is hereby released with respect to taxable years to which such election applies." CROSS REFERENcES Basis of property acquired from decedent, inapplica- bility of section 1014 to this section, see section 1014 of this title. Income in respect of decedent as gross income, see section 61 of this title. Partner receiving income in respect of decedent, see section 753 of this title. Returns of decedents, see section 6012 of this title. SECTION REFERR TO IN OTHER SECTIONS This section is referred to in sections 57, 221, 421. 453, 753, 1014, 1023, 1245, 1250, 1251 of this title. § 692. Income taxes on members of Armed Forces on death (a) General rule In the case of any individual who dies while in active service as a member of the Armed Forces of the United States, if such death oc- curred while serving in a combat zone (as deter- mined under section 112) or as a result of wounds, disease, or injury incurred while so serving- (1) any tax imposed by this subtitle shall not apply with respect to the taxable year in which falls the date of his death, or with re- spect to any prior taxable year ending on or after the first day he so served in a combat zone after June 24, 1950; and (2) any tax under this subtitle and under the corresponding provisions of prior revenue laws for taxable years preceding those speci- fied in paragraph (1) which is unpaid at the date of his death (including interest, addi- tions to the tax, and additional amounts) shall not be assessed, and if assessed the as- sessment shall be abated, and if collected shall be credited or refunded as an overpay- ment. (b) Individuals in missing status For purposes of this section, in the case of an individual who was in a missing status within the meaning of section 6013(f)(3)(A), the date of his death shall be treated as being not earlier than the date on which a determination of his death is made under section 556 of title 37 of the United States Code. The preceding sen- tence shall not cause subsection (a)(1) to apply for any taxable year beginning- (1) after January 2, 1978, in the case of ser- vice in the combat zone designated for pur- poses of the Vietnam conflict, or (2) more than 2 years after the date desig- nated under section 112 as the date of termi- nation of combatant activities in that zone, in the case of any combat zone other than that referred to in paragraph (1). Page 481 § 692
TITLE 26-INTERNAL REVENUE CODE (Aug. 16, 1954, ch. 736, 68A Stat. 238; Jan. 2, 1975, Pub. L. 93-597, § 4(a), 88 Stat. 1952; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(a)(92), 90 Stat. 1780; Oct. 20, 1976, Pub. L. 94-569, § 3(c), 90 Stat. 2699.) AMENDMENTS 1976--Subsec. (b). Pub. L. 94-569 substituted "to apply for any taxable year beginning" for "to apply for any taxable year beginning more than 2 years after" in the provisions preceding par. (1). substituted "after January 2, 1978" for "the date of enactment of this subsection" in par. (1). and substituted "more than 2 years after the date designated" for "the date designated" in par. (2). Pub. L. 94-455 substituted in section heading "of members" for "on members". 1975-Subsec. (a). Pub. L. 93-597, § 4(a)(1), (2), desig. nated existing provisions as subsec. (a). added subsec. catchline, and in subsec. (a) as so designated, struck out "during an induction period (as defined in section 112(c)(5))", respectively. Subsec. (b). Pub. L. 93-597, § 4(a)(3), added subsec. (b). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of section catchline by Pub. L. 94-455 effective for tacable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under sec- tion 2 of this title. EFEcrIV DATE OF 1975 AM NDmT Section 4(b) of Pub. L. 93-597 provided that: "The amendments made by subsection (a) [amending this section] shall apply to taxable years ending on or after February 28. 1961." REFVNDS AND CREDITS OF OvEuAYMENTs FOR TAXABLE YEARS ENDING ON OR AFTER FEBRUARY 28, 1961, RE. SULTINO FROM APPLICATION OF PROVISIONS Section 4(c) of Pub. L 93-597 provided that: "If the refund or credit of any overpayment for any taxable year ending on or after February 28, 1961, resulting from the application of section 692 of the Internal Revenue Code of 1954 (as amended by subsection (a) of this section) [this section] is prevented at any time before the expiration of one year after the date of the enactment of this Act [Jan. 2, 1975] by the operation of any law or rule of law, but would not have been so prevented if claim for refund or credit therefor were made on the due date for the return for the taxable year of his death (or any later year), refund or credit of such overpayment may, nevertheless, be made or al- lowed if claim therefor is filed before the expiration of such one-year period." SECrION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 5, 6013 of this title. Subchapter K-Partners and Partnerships Part I. Determination of tax liability. II. Contributions, distributions, and transfers. III. Definitions. SUBcHAPTER REFERRED TO IN OTHER SECTIONs This subchapter is referred to in sections 1011, 1012, 1016 of this title; title 46 section 1177. PART I-DETERMINATION OF TAX LIABILITY Se. 701. Partners, not partnership, subject to tax. 702. Income and credits of partner. 703. Partnership computations. 704. Partner's distributive share. Sec. 705. Determination of basis of partner's interest. 706. Taxable years of partner and partnership. 707. Transactions between partner and partnership. 708. Continuation of partnership. 709. Treatment of organization and syndication fees. AMENDMENTS 1976-Pub. L. 94-455, title II, § 213(b)(2), title XIX, * 1901(b)(23), Oct. 4, 1976, 90 Stat. 1547, 1798, struck out Part IV "Effective date for subchapter" in the table of parts of subchapter K of chapter 1 and added item 709. § 701. Partners, not partnership, subject to tax A partnership as such shall not be subject to the income tax imposed by this chapter. Per- sons carrying on business as partners shall be liable for income tax only in their separate or individual capacities. (Aug. 16, 1954, ch. 736, 68A Stat. 239.) CRoss REFERENCES Definitions of partnership, see sections 761, 7701 of this title. Partnerships electing to be taxed as corporations, see section 1361 of this title. § 702. Income and credits of partner (a) General rule In determining his income tax, each partner shall take into account separately his distribu- tive share of the partnership's- (1) gains and losses from sales or exchanges of capital assets held for not more than 9 months, (2) gains and losses from sales or exchanges of capital assets held for more than 9 months, (3) gains and losses from sales or exchanges of property described in section 1231 (relating to certain property used in a trade or business and involuntary conversions), (4) charitable contributions (as defined in section 170(c)), (5) dividends with respect to which there is provided an exclusion under section 116 or a deduction under part VIII of subchapter B, (6) taxes, described in section 901, paid or accrued to foreign countries and to posses- sions of the United States, (7) other items of income, gain, loss, deduc- tion, or credit, to the extent provided by regu- lations prescribed by the Secretary, and (8) taxable income or loss, exclusive of items requiring separate computation under other paragraphs of this subsection. (b) Character of items constituting distributive share The. character of any item of income, gain, loss, deduction, or credit included in a partner's distributive share under paragraphs (1) through (7) of subsection (a) shall be deter- mined as if such item were realized directly from the source from which realized by the partnership, or incurred in the same manner as incurred by the partnership. (c) Gross income of a partner In any case where it is necessary to determine the gross income of a partner for purposes of this title, such amount shall include his distrib- utive share of the gross income of the partner- ship. Page 482
TITLE 26-INTERNAL REVENUE CODE (Aug. 16, 1954, ch. 736, 68A Stat. 239; Feb. 26, 1964, Pub. L. 88-272, title II, § 201(d)(7), 78 Stat. 32; Oct. 4, 1976, Pub. L. 94-455, title XIV, § 1402(b)(1)(L), title XIX, §§ 1901(b)(1)(I)(i), i), 1906(b)(13)(A), 90 Stat. 1732, 1791, 1834.) TAXABLE YEARS AFTER 1977 Subsec. (a)(1) and (2) of this section amended by Pub. L. 94-455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, effec- tive for taxable years beginning after Dec. 31, 1977, by substituting "1 year" for "9 months". AMZNDMENTS 1976-Subsec. (a)(1), (2). Pub. L. 94-455, § 1402(b)(1)(L), provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977. Subsec. (a)(7). Pub. L. 94-455, §§ 1901(b)(1)(I)(i), 1906(b)(13)(A), redesignated former subsec. (a)(8) as (a)(7), and as so redesignated, struck out "or his dele- gate" following "Secretary". Former subsec. (a)(7), which related partially tax.exempt interest on obliga- tions of the United States or its instrumentalities, was struck out. Subsec. (a)(8). Pub. L. 94-455, § 1901(b)(1)(I)(i), rede- signated former subsec. (a)(9) as (a)(8). Former subsec. (a)(8) redesignated (a)(7). Subsec. (a)(9). Pub. L. 94-455, § 1901(b)(1)(I)(i), subsec. (a)(9) was redesignated (a)(8). Subsec. (b). Pub. L. 94-455, § 1901(b)(1)(I)(ii), substi- tuted "paragraphs (1) through (7)" for "paragraphs (1) through (8)". 1964-Subsee. (a)(5). Pub, L. 88-272 deleted "a credit under section 34," preceding "an exclusion". EFFrXCVE DATE OF 1976 AmENDMENT Section 1402(b)(1) of Pub. L. 94-455 provided in part that the substitution of "9 months" for "6 months" in subsec. (a)(1) and (2) of this section by section 1402(b)(1)(L) of Pub. L. 94-455 is effective with respect to taxable years beginning in 1977. Amendment of subsecs. (a)(7), (8), (9), (b) by section 1901(b)(1)(I)(i), (ii) of Pub. L. 94-455 effective for tax- able years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272 applicable with re- spect to dividends received after Dec. 31, 1964, in tax- able years ending after such date, see section 201(e) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 37 of this title. CRoss RnnmcEs Computation of partnership income, see section 703 of this title. Partner's distributive share, see section 704 of this title. Self-employment income, see section 1402 of this title. Taxable years of partner and partnership, see sec- tion 706 of this title. SECTION REFEED TO IN OTHER SECTIONS This section is referred to in sections 170, 703, 704, 706, 1402 of this title; title 42 sections 403, 411. § 703. Partnership computations (a) Income and deductions The taxable income of a partnership shall be computed in the same manner as in the case of an individual except that- (1) the items described in section 702(a) shall be separately stated, and (2) the following deductions shall not be al- lowed to the partnership: (A) the standard deduction provided in section 141, (B) the deductions for personal exemp- tions provided in section 151, (C) the deduction for taxes provided in section 164(a) with respect to taxes, de- scribed in section 901, paid or accrued to foreign countries and to possessions of the United States, (D) the deduction for charitable contribu- tions provided in section 170, (E) the net operating loss deduction pro- vided in section 172, (F) the additional itemized deductions for individuals provided in part VII of sub- chapter B (see. 211 and following), and (G) the deduction for depletion under sec- tion 611 with respect to oil and gas wells. (b) Elections of the partnership Any election affecting the computation of taxable income derived from a partnership shall be made by the partnership, except that the election under section 901, relating to taxes of foreign countries and possessions of the United States, and any election under section 617 (relating to deduction and recapture of cer- tain mining exploration expenditures), under section 57(c) (relating to definition of net lease), or under section 163(d) (relating to limi- tation on interest on investment indebtedness), shall be made by each partner separately. (Aug. 16, 1954, ch. 736, 68A Stat. 240; Sept. 12, 1966, Pub. L. 89-570, § 2(b), 80 Stat. 764; Dec. 30, 1969, Pub. L. 91-172, title V, § 504(c)(3), 83 Stat. 633; Dec. 10, 1971, Pub. L. 92-178, title III, § 304(c), 85 Stat. 523; Mar. 29, 1975, Pub. L. 94- 12, title V, § 501(b)(3), 89 Stat. 53; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(b)(21)(F), title XXI, § 2115(c)(2), 90 Stat. 1798, 1909.) AMENDMENTs 1976-Subsec. (a)(2)(G). Pub. L. 94-455, § 2115(c)(2), substituted "wells" for "production subject to the pro- visions of section 613A(c)". Subsec. (b). Pub. L. 94-455, § 1901(b)(21)(F), struck out "under section 615 (relating to pre-1970 explora- tion expenditures)," following "of the United States, and any election". 1975-Subsec. (a)(2)(G). Pub. L. 94-12 added subpar. (0). 1971-Subsec. (b). Pub. L. 92-178 substituted "," for "or" after "(relating to pre-1970 exploration expendi- tures)" and inserted "under section 57(c) (relating to definition of net lease), or under section 163(d) (relat- ing to limitation on interest on investment indebted- ness)" after "(relating to deduction and recapture of certain mining exploration expenditures)". 1969-Subsec. (b). Pub. L. 91-172 substituted "(relat- ing to pre-1970 exploration expenditures) or under sec- tion 617 (relating to deduction and recapture of cer- tain mining exploration expenditures)" for "(relating to exploration expenditures) or under section 617 (re- lating to additional exploration expenditures in the case of domestic mining)". 1966-Subsec. (b). Pub. L. 89-570 provided for elec- tion under section 615 (relating to exploration expen- ditures) or under section 617 (relating to additional ex- ploration expenditures in the case of domestic mining). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (b) by section 1901(b)(21)(F) of Pub. L. 94-455 effective for taxable years beginning Page 483 § 703
TITLE 26-INTERNAL REVENUE CODE after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455. set out as an Effective Date of 1976 Amendment note under section 2 of this title. Amendment of subsec. (a)(2)(O) by section 2115(c)(2) of Pub. L. 94-455 effective on Jan. 1, 1975 and applicable to taxable years ending after Dec. 31, 1974, see section 2115(f) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under sec- tion 613A of this title. ErrEcrIVE DATE OF 1975 Aim:E wrr Amendment by Pub. L. 94-12 effective on Jan. 1, 1975, to apply to taxable years ending after Dec. 31, 1974, see section 501(c) of Pub. L. 94-12, set out as an Effective Date note under section 613A of this title. Er ncxvE DATE or 1969 AMmNDrNT Amendment by Pub. L. 91-172 applicable with re- spect to exploration expenditures paid or incurred after Dec. 31, 1969, see section 504(d)(1) of Pub. L. 91- 172, set out as an Effective Date note under section 243 of this title. E crIvT DATE OF 1966 AMEmmENT Amendment of section by Pub. L. 89-570 applicable to taxable years ending after Sept. 12, 1966, but only in respect of expenditures paid or incurred after such date, see section 3 of Pub. L, 89-570, set out as an Ef- fective Date note under section 617 of this title. CRoss REFERmNcEs Determination of basis of partner's interest, see sec- tion 705 of this title. SECTION REFERRED TO IN OTHE SECTIONS This section is referred to in section 705, 901 of this title. § 704. Partner's distributive share (a) Effect of partnership agreement A partner's distributive share of income, gain, loss, deduction, or credit shall, except as other- wise provided in this chapter, be determined by the partnership agreement. (b) Determination of distributive share A partner's distributive share of income, gain, loss, deduction, or credit (or item thereof) shall be determined in accordance with the partner's interest in the partnership (determined by taking into account all facts and circum- stances), if-- (1) the partnership agreement does not pro- vide as to the partner's distributive share of income, gain, loss, deduction, or credit (or item thereof), or (2) the allocation to a partner under the agreement of income, gain, loss, deduction, or credit (or item thereof) does not have sub- stantial economic effect. (c) Contributed property (1) General rule In determining a partner's distributive share of items described in section 702(a), de- preciation, depletion, or gain or loss with re- spect to property contributed to the partner- ship by a partner shall, except to the extent otherwise provided in paragraph (2) or (3), be allocated among the partners in the same manner as if such property had been pur- chased by the partnership. (2) Effect of partnership agreement If the partnership agreement so provides, depreciation, depletion, or gain or loss with respect to property contributed to the part- nership by a partner shall, under regulations prescribed by the Secretary, be shared among the partners so as to take account of the vari- ation between the basis of the property to the partnership and its fair market value at the time of contribution. (3) Undivided interests If the partnership agreement does not pro- vide otherwise, depreciation, depletion, or gain or loss with respect to undivided inter- ests in property contributed to a partnership shall be determined as though such undivided interests had not been contributed to the partnership. This paragraph shall apply only if all the partners had undivided interests in such property prior to contribution and their interests in the capital and profits of the partnership correspond with such undivided interests. (d) Limitation on allowance of losses A partner's distributive share of partnership loss (including capital loss) shall be allowed only to the extent of the adjusted basis of such partner's interest in the partnership at the end of the partnership year in which such loss oc- curred. Any excess of such loss over such basis shall be allowed as a deduction at the end of the partnership year in which such excess is repaid to the partnership. For purposes of this subsection, the adjusted basis of any partner's interest in the partnership shall not include any portion of any partnership liability with re- spect to which the partner has no personal li- ability. The preceding sentence shall not apply with respect to any activity to the extent that section 465 (relating to limiting deductions to amounts at risk in case of certain activities) ap- plies, nor shall it apply to any partnership the principal activity of which is investing in real property (other than mineral property). (e) Family partnerships (1) Recognition of interest created by purchase or gift A person shall be recognized as a partner for purposes of this subtitle if he owns a cap- ital interest in a partnership in which capital is a material income-producing factor, wheth- er or not such interest was derived by pur- chase or gift from any other person. (2) Distributive share of donee includible in gross income In the case of any partnership interest cre- ated by gift, the distributive share of the donee under the partnership agreement shall be includible in his gross income, except to the extent that such share is determined without allowance of reasonable compensa- tion for services rendered to the partnership by the donor, and except to the extent that the portion of such share attributable to do- nated capital is proportionately greater than the share of the donor attributable to the donor's capital. The distributive share of a partner in the earnings of the partnership shall not be diminished because of absence due to military service. (3) Purchase of interest by member of family For purposes of this section, an interest purchased by one member of a family from § 704 Page 484
TITLE 26-INTERNAL REVENUE CODE another shall be considered to be created by gift from the seller, and the fair market value of the purchased interest shall be considered to be donated capital. The "family" of any in- dividual shall include only his spouse, ances- tors, and lineal descendants, and any trusts for thn. primary benefit of such persons. (f) Cross reference For rules in the case of the sale, exchange, liquidation, or reduction of a partner's Interest, see section 706(c)(2). (Aug. 16, 1954, ch. 736, 68A Stat. 240; Oct. 4, 1976, Pub. L. 94-455, title II, § 213(c)(2), (3)(A), (d), (e), title XIX, § 1906(b)(13)(A), 90 Stat. 1548, 1834.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, § 213(c)(2), substi- tuted "except as otherwise provided in this chapter" for "except as otherwise provided in this section". Subsec. (b). Pub. L. 94-455, § 213(d), among other changes, substituted subsec. catchline "Determination of distributive share" for "Distributive share deter- mined by income or loss ratio" and in provisions pre- ceding par. (1) "the partner's interest in the partner- ship (determined by taking into account all facts and circumstances)" for "his distributive share of taxable income or loss of the partnership, as described in sec- tion 702(a)(9), for the taxable year" and in par. (2) provision relating to a lack of substantial economic effect in a partnership agreement for provisions relat- ing to the partnership agreement's purpose being the avoidance or evasion of taxes. Subsec. (c)(2). Pub. L. 94-455, § 1906(b)(13)(A) struck out "or his delegate" following "Secretary". Subsec. (d). Pub. L. 94-455, § 213(e), added provisions relating to the determination of the adjusted basis of a partner's liability where there is no personal liability and the applicability of such determination where sec- tion 465 of this title applies or the principal activity of the partnership is real estate investment. Subsec. (f). Pub. L. 94-455, § 213(c)(3)(A), added subsec. (f). EFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (a), (b), (f) by section 213(c)(2), (c)(3)(A), (d) of Pub. L. 94-455 applicable in the case of partnership taxable years beginning after Dec. 31, 1975, see section 213(f)(1) of Pub. L. 94-455, set out as an Effective Date note under section 709 of this title. Amendment of subsec. d) by section 213(e) of Pub. L. 94-455 applicable to liabilities incurred after Dec. 31, 1976, see section 213(f)(2) of Pub. L. 94-455, set out as an Effective Date note under section 709 of this title. CRoss REFERENCES Optional adjustment to basis of partnership proper- ty, see section 743 of this title. SECTION REFEmuD TO IN OTHER SECTIONS This section is referred to in sections 743, 761, 1251, 1375 of this title. § 705. Determination of basis of partner's interest (a) General rule The adjusted basis of a partner's interest in a partnership shall, except as provided in subsec- tion (b) be the basis of such interest deter- mined under section 722 (relating to contribu- tions to a partnership) or section 742 (relating to transfers of partnership interests)- (1) increased by the sum of his distributive share for the taxable year and prior taxable years of- (A) taxable income of the partnership as determined under section 703(a), (B) income of the partnership exempt from tax under this title, and (C) the excess of the deductions for deple- tion over the basis of the property subject to depletion; (2) decreased (but not below zero) by distri- butions by the partnership as provided in sec- tion 733 and by the sum of his distributive share for the taxable year and prior taxable years of- (A) losses of the partnership, and (B) expenditures of the partnership not deductible in computing its taxable income and not properly chargeable to capital ac- count; and (3) decreased (but not below zero), by the amount of the partner's deduction for deple- tion under section 611 with respect to oil and gas wells. (b) Alternative rule The Secretary shall prescribe by regulations the circumstances under which the adjusted basis of a partner's' interest in a partnership may be determined by reference to his propor- tionate share of the adjusted basis of partner- ship property upon a termination of the part- nership. (Aug. 16, 1954, ch. 736, 68A Stat. 242; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), title XXI, § 2115(c)(3), 90 Stat. 1834, 1909.) 1976-Subsec. (a)(3). Pub. L. 94-455, § 2115(c)(3), added subsec. (a)(3). Subsec. (b). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". EFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (a)(3) by section 2115(c)(3) of Pub. L. 94-455 effective on Jan. 1, 1975, and applicable to taxable years ending after Dec. 31, 1974, see section 2115(f) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 613A of this title. CROSS REFERENCES Effective date, see section 771 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 771 of this title. § 706. Taxable years of partner and partnership (a) Year in which partnership income is includible In computing the taxable income of a partner for a taxable year, the inclusions required by section 702 and section 707(c) with respect to a partnership shall be based on the income, gain, loss, deduction, or credit of the partnership for any taxable year of the partnership ending within or with the taxable year of the partner. (b) Adoption of taxable year (1) Partnership's taxable year The taxable year of a partnership shall be determined as though the partnership were a taxpayer. A partnership may not change to, or adopt, a taxable year other than that of all its principal partners unless it establishes, to the satisfaction of the Secretary, a business purpose therefor. 71-999 0 - 78 - 33 (Vol. 7) Page 485 § 706
TITLE 26-INTERNAL REVENUE CODE (2) Partner's taxable year A partner may not change to a taxable year other than that of a partnership in which he is a principal partner unless he establishes, to the satisfaction of the Secretary, a business purpose therefor. (3) Principal partner For the purpose of this subsection, a princi- pal partner is a partner having an interest of 5 percent or more in partnership profits or capital. (c) Closing of partnership year (1) General rule Except in the case of a termination of a partnership and except as provided in para- graph (2) of this subsection, the taxable year of a partnership shall not close as the result of the death of a partner, the entry of a new partner, the liquidation of a partner's interest in the partnership, or the sale or exchange of a partner's interest in the partnership. (2) Partner who retires or sells interest in partner- ship (A) Disposition of entire interest The taxable year of a partnership shall close- (i) with respect to a partner who sells or exchanges his entire interest in a partner- ship, and (ii) with respect to a partner whose in- terest is liquidated, except that the tax- able year of a partnership with respect to a partner who dies shall not close prior to the end of the partnership's taxable year. Such partner's distributive share of items described in section 702(a) for such year shall be determined, under regulations pre- scribed by the Secretary for the period ending with such sale, exchange, or liquida- tion. (B) Disposition of less than entire interest The taxable year of a partnership shall not close (other than at the end of a part- nership's taxable year as determined under subsection (b)(1)) with respect to a partner who sells or exchanges less than his entire interest in the partnership or with respect to a partner whose interest is reduced (whether by entry of a new partner, partial liquidation of a partner's interest, gift, or otherwise), but such partner's distributive share of items described in section 702(a) shall be determined by taking into account his varying interests in the partnership during the taxable year. (Aug. 16, 1954, ch. 736, 68A Stat. 242; Oct. 4, 1976, Pub. L. 94-455, title II, § 213(c)(1), title XIX, § 1906(b)(13)(A), 90 Stat. 1547, 1834.) AMENDMENTs 1976-Subsec. (b)(1), (2). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c)(2). Pub. L. 94-455, §§213(c)(1), 1906(b)(13)(A), substituted "or with respect to a part- ner whose interest is reduced (whether by entry of a new partner, partial liquidation of a partner's interest, gift, or otherwise)" for "or with respect to a partner whose interest is reduced", in par. (B), and struck out "or his delegate" following "Secretary" in par. (A). EFFEcTIvE DATE OF 1976 AMENDMENT Amendment of subsec. (c)(2)(B) by section 213(c)(1) of Pub. L. 94-455 applicable in the case of partnership taxable years beginning after Dec. 31, 1975, see section 213(f) of Pub. L. 94-455, set out as an Effective Date note under section 709 of this title. SECTION REFEuRD TO IN OTHER SECTIONS This section is referred to in sections 704, 761, 6110 of this title. § 707. Transactions between partner and partnership (a) Partner not acting in capacity as partner If a partner engages in a transaction with a partnership other than in his capacity as a member of such partnership, the transaction shall, except as otherwise provided in this sec- tion, be considered as occurring between the partnership and one who is not a partner. (b) Certain sales or exchanges of property with re- spect to controlled partnerships (1) Losses disallowed No deduction shall be allowed in respect of losses from sales or exchanges of property (other than an interest in the partnership), directly or indirectly, between- (A) a partnership and a partner owning, directly or indirectly, more than 50 percent of the capital interest, or the profits inter- est, in such partnership, or (B) two partnerships in which the same persons own, directly or indirectly, more than 50 percent of the capital interests or profits interests. In the case of a subsequent sale or exchange by a transferee described in this paragraph, section 267(d) shall be applicable as if the loss were disallowed under section 267(a)(1). (2) Gains treated as ordinary income In the case of a sale or exchange, directly or indirectly, of property, which in the hands of the transferee, is property other than a cap- ital asset as defined in section 1221- (A) between a partnership and a partner owning, directly or indirectly, more than 80 percent of the capital interest, or profits in- terest, in such partnership, or (B) between two partnerships in which the same persons own, directly or indirectly, more than 80 percent of the capital interest or profits interests, any gain recognized shall be considered as or- dinary income. (3) Ownership of a capital or profits interest For purposes of paragraphs (1) and (2) of this subsection, the ownership of a capital or profits interest in a partnership shall be de- termined in accordance with the rules for constructive ownership of stock provided in section 267(c) other than paragraph (3) of such section. (c) Guaranteed payments To the extent determined without regard to the income of the partnership, payments to a partner for services or the use of capital shall be considered as made to one who is not a member of the partnership, but only for the purposes of section 61(a) (relating to gross income) and, subject to section 263, for pur- Page 46
TITLE 26-INTERNAL REVENUE CODE poses of section 162(a) (relating to trade or business expenses). (Aug. 16, 1954, ch. 736, 68A Stat. 243; Oct. 4, 1976, Pub. L. 94-455, title II, § 213(b)(3), title XIX, § 1901(b)(3)(C), 90 Stat. 1547, 1792.) AMENDMENTS 1976--Subsec. (b)(2). Pub. L. 94-455, § 1901(b)(3)(C). substituted "as ordinary income" for "as gain from the sale or exchange of property other than a capital asset". Subsec. (c). Pub. L. 94-455, § 213(b)(3), substituted "and, subject to section 263, for purposes of section 162(a)" for "and section 162(a)". EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (c) by section 213(b)(3) of Pub. L. 94-455 applicable in the case of partnership taxable years beginning after Dec. 31, 1975, see section 213(f)(1) of Pub. L. 94-455, set out as an Effective Date note under section 709 of this title. Amendment of subsec. (b)(2) by section 1901(b)(3)(C) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. CROSS REFERENCES Payments to retiring partner or deceased partner's successor in interest, see section 736 of this title. SECTION RZFEIUiD TO IN OTHER SECTIONS This section is referred to in sections 44, 48, 103, 179, 613A, 631, 706, 736, 1402 of this title, title 42 section 411. § 708. Continuation of partnership (a) General rule For purposes of this subchapter, an existing partnership shall be considered as continuing if it is not terminated. (b) Termination (1) General rule For purposes of subsection (a), a partner- ship shall be considered as terminated only if- (A) no part of any business, financial op- eration, or venture of the partnership con- tinues to be carried on by any of its part- ners in a partnership, or (B) within a 12-month period there is a sale or exchange of 50 percent or more of the total interest in partnership capital and profits. (2) Special rules (A) Merger or consolidation In the case of the merger or consolidation of two or more partnerships, the resulting partnership shall, for purposes of this sec- tion, be considered the continuation of any merging or consolidating partnership whose members own an interest of more than 50 percent in the capital and profits of the re- sulting partnership. (B) Division of a partnership In the case of a division of a partnership into two or more partnerships, the resulting partnerships (other than any resulting part- nership the members of which had an inter- est of 50 percent or less in the capital and profits of the prior partnership) shall, for purposes of this section, be considered a continuation of the prior partnership. (Aug. 16, 1954, ch. 736, 68A Stat. 244.) § 709. Treatment of organization and syndication fees (a) General rule Except as provided in subsection (b), no de- duction shall be allowed under this chapter to the partnership or to any partner for any amounts paid or incurred to organize a partner- ship or to promote the sale of (or to sell) an in- terest in such partnership. (b) Amortization of organization fees (1) Deduction Amounts paid or incurred to organize a partnership may, at the election of the part- nership (made in accordance with regulations prescribed by the Secretary), be treated as de- ferred expenses. Such deferred expenses shall be allowed as a deduction ratably over such period of not less than 60 months as may be selected by the partnership (beginning with the month in which the partnership begins business), or if the partnership is liquidated before the end of such 60-month period, such deferred expenses (to the extent not deducted under this section) may be deducted to the extent provided in section 165. (2) Organizational expenses defined The organizational expenses to which para- graph (1) applies, are expenditures which- (A) are incident to the creation of the partnership; (B) are chargeable to capital account; and (C) are of a character which, if expended incident to the creation of a partnership having an ascertainable life, would be amor- tized over such life. (Added Pub. L. 94-455, title II, § 213(b)(1), Oct. 4, 1976, 90 Stat. 1547.) EFFECTIVE DATE Section 213(f) of Pub. L. 94-455 provided that: "(1) In General.-Except as otherwise provided in this subsection, the amendments made by this section [enacting sections 179(d)(8), 704(f), 709, and 761(e) of this title, and amending sections 704(a), (b), 706(c)(2)(B) and 707(c) of this title] shall apply in the case of partnership taxable years beginning after De- cember 31, 1975. "(2) Subsection (c).-The amendment made by sub- section (c) [to section 704(d) of this title] shall apply to liabilities incurred after December 31, 1976. "(3) Section 709(b) of the Code.-Section 709(b) of the Internal Revenue Code of 1954 (as added by the amendment made by subsection (b)(1) of this section) (subsec. (b) of this section] shall apply in the case of amounts paid or incurred in taxable years beginning after December 31, 1976." PART II-CONTRIBUTIONS, DISTRIBUTIONS AND TRANSFERS Subpart A. Contributions to a partnership. B. Distributions by a partnership. C. Transfers of interests in a partnership. D. Provisions common to other subparts. SUBPART A-CONTRIBUTIONS TO A PARTNERSHIP Sec. 721. Nonrecognition of gain or loss on contribution. 722. Basis of contributing partner's interest. 723. Basis of property contributed to partnership, Page 487 § 709
TITLE 26-INTERNAL REVENUE CODE 721. Nonrecognition of gain or loss on contribution (a) General rule No gain or loss shall be recognized to a part- nership or to any of its partners in the case of a contribution of property to the partnership in exchange for an nterest in the partnership. (b) Special rule Subsection (a) shall not apply to gain realized on a transfer of property to a partnership which would be treated as an investment com- pany (within the meaning of section 351) if the partnership were incorporated. (Auh;. 16, 1954, ch. 736, 68A Stat. 245; Oct. 4, 1976, Pub. L. 94-455, title XXI, §2131(b), 90 Stat. 1924.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455 designated existing provisions as subsec. (a) and added subsec. catchline "General rule". Subsec. (b). Pub. L. 94-455 added subsec. (b), EFFEcTivE DATE OF 1976 AMENDMENT Section 2131(f)(3) to (5) of Pub. L. 94-455 provided that: "(3) Except as provided in paragraph (4), the amend- ments made by subsections (b) and (c) [amending sec- tions 721, 722 and 723 of this title] shall apply to transfers made after February 17, 1976, in taxable years ending after such date. "(4) The amendments made by subsections (b) and (c) [amending sections 721, 722 and 723 of this title] shall not apply to transfers to a partnership made on or before the 90th day after the date of the enactment of this Act (Oct. 4, 1976] if- "(A) either- "(I) a ruling request with respect to such trans- fers was filed with the Internal Revenue Service before March 27, 1976, or "(ii) a registration statement with respect to such transfers was filed with the Securities and Exchange Commission before March 27, 1976, "(B) the securities transferred were deposited on or before the 60th day after the date of the enact- ment of this Act [Oct. 4, 1976], and "(C) either- "(1) the aggregate value (determined as of the close of the 60th day referred to in subparagraph (B), or, if earlier, the close of the deposit period) of the securities so transferred does not exceed $100,000,000, or "(i) the securities transferred were all on deposit on February 29, 1976, pursuant to a registration statement referred to in subparagraph (A)(lI). "(5) If no registration statement was required to be filed with the Securities and Exchange Commission with respect to the transfer of securities to any part- nership, then paragraph (4) shall be applied to such transfers- "(A) as if paragraph (4) did not contain subpara- graph (A)(ii) thereof, and "(B) by substituting '$25,000,000' for '$100,000,000' in subparagraph (C)(i) thereof." SECTION REEuiM TO IN OTHER SECrloNs This section is referred to in sections 48, 49, 1245, 1250, 1251 of this title. § 722. Basis of contributing partner's interest The basis of an interest in a partnership ac- quired by a contribution of property, including money, to the partnership shall be the amount of such money and the adjusted basis of such property to the contributing partner at the time of the contribution increased by the amount (if any) of gain recognized to the con- tributing partner at such time. (Aug. 16, 1954, ch. 736, 68A Stat. 245; Oct. 4, 1976, Pub. L. 94-455, title XXI, § 2131(c), 90 Stat. 1924.) AMENDMENTS 1976-Pub. L. 94-455 inserted "increased by the amount (if any) of gain recognized to the contributing partner at such time" following "at the time of the contribution". EmECTIvE DATE OF 1976 AMENDMENT For effective date of amendment of section by Pub. L. 94-455, see section 2131(f)(3) to (5) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 721 of this title. CRoss REFEmcs Determination of basis of partner's interest, see sec- tion 705 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 705 of this title. § 723. Basis of property contributed to partnership The basis of property contributed to a part- nership by a partner shall be the adjusted basis of such property to the contributing partner at the time of the contribution increased by the amount (if any) of gain recognized to the con- tributing partner at such time. (Aug. 16, 1954, c. 736, 68A Stat. 245; Oct. 4, 1976, Pub. L. 94-455, title XXI, §2131(c), 90 Stat. 1924.) AMEmMENTs 1976-Pub. L. 94-455 inserted "increased by the amount (if any) of gain recognized to the contributing partner at such time" following "at the time of the contribution". EFFECTIVE DATE OF 1976 AMENDMENT For effective date of amendment of section by Pub. L. 94455, see section 2131(f)(3) to (5) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 721 of this title. SUBPART B-DISTRIBUTIONS BY A PARTNERSHIP Sec. 731. Extent of recognition of gain or loss on distribu- tion. 732. Basis of distributed property other than money. 733. Basis of distributee partner's interest. 734. Optional adjustment to basis of undistributed partnership property. 735. Character of gain or loss on disposition of distrib- uted property. 736. Payments to a retiring partner or a deceased partner's successor in interest. § 731. Extent of recognition of gain or loss on distri- bution (a) Partners In the case of a distribution by a partnership to a partner- (1) gain shall not be recognized to such partner, except to the extent that any money distributed exceeds the adjusted basis of such partner's interest in the partnership immedi- ately before the distribution, and (2) loss shall not be recognized to such part- ner, except that upon a distribution in liqui- dation of a partner's interest in a partnership Page 488
TITLE 26-INTERNAL REVENUE CODE where no property other than that described in subparagraph (A) or (B) is distributed to such partner, loss shall be recognized to the extent of the excess of the adjusted basis of such partner's interest in the partnership over the sum of- (A) any money distributed, and (B) the basis to the distributee, as deter- mined under section 732, of any unrealized receivables (as defined in section 751(c)) and inventory (as defined in section 751(d)(2)). Any gain or loss recognized under this subsec- tion shall be considered as gain or loss from the sale or exchange of the partnership interest of the distributee partner. (b) Partnerships No gain or loss shall be recognized to a part- nership on a distribution to a partner of proper- ty, Including money. (c) Exceptions This section shall not apply to the extent otherwise provided by section 736 (relating to payments to a retiring partner or a deceased partner's successor in interest) and section 751 (relating to unrealized receivables and inven- tory items). (Aug. 16, 1954, ch. 736, 68A Stat. 245.) CROSS REFERENCES Effective date, see section 771 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 48, 49, 734, 751, 1245, 1250 of this title. § 732. Basis of distributed property other than money (a) Distributions other than in liquidation of a part- ner's interest (1) General rule The basis of property (other than money) distributed by a partnership to a partner other than in liquidation of the partner's in- terest shall, except as provided in paragraph (2), be its adjusted basis to the partnership immediately before such distribution. (2) Limitation The basis to the distributee partner of prop- erty to which paragraph (1) is applicable shall not exceed the adjusted basis of such partner's interest in the partnership reduced by any money distributed in the same trans- action. (b) Distributions in liquidation The basis of property (other than money) dis- tributed by a partnership to a partner in liqui- dation of the partner's interest shall be an amount equal to the adjusted basis of such partner's interest in the partnership reduced by any money distributed in the same transaction. (c) Allocation of basis The basis of distributed properties to which subsection (a)(2) or subsection (b) is applicable shall be allocated- (1) first to any unrealized receivables (as de- fined in section 751(c)) and inventory items (as defined in section 751(d)(2)) in an amount equal to the adjusted basis of each such prop- erty'to the partnership (or if the basis to be allocated is less than the sum of the adjusted bases of such properties to the partnership, in proportion to such bases), and (2) to the extent of any remaining basis, to any other distributed properties in proportion to their adjusted bases to the partnership. (d) Special partnership basis to transferee For purposes of subsections (a), (b), and (c), a partner who acquired all or a part of his Inter- est by a transfer with respect to which the elec- tion provided in section 754 is not in effect, and to whom a distribution of property (other than money) is made with respect to the transferred interest within 2 years after such transfer, may elect, under regulations prescribed by the Sec- retary, to treat as the adjusted partnership basis of such property the adjusted basis such property would have if the adjustment pro- vided in section 743(b) were in effect with re- spect to the partnership property. The Secre- tary may by regulations require the application of this subsection in the case of a distribution to a transferee partner, whether or not made within 2 years after the transfer, If at the time of the transfer the fair market value of the partnership property (other than money) ex- ceeded 110 percent of its adjusted basis to the partnership. (e) Exception This section shall not apply to the extent that a distribution is treated as a sale or ex- change of property under section 751(b) (relat- ing to unrealized receivables and inventory items). (Aug. 16, 1954, ch. 736, 68A Stat. 246; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (d). Pub. L. 94-455 struck out "or his delegate" following "Secretary", in two instances. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 613A, 731, 733, 734 of this title. § 733. Basis of distributee partner's interest In the case of a distribution by a partnership to a partner other than in liquidation of a part- ner's Interest, the adjusted basis to such part- ner of his Interest in the partnership shall be reduced (but not below zero) by- (1) the amount of any money distributed to such partner, and (2) the amount of the basis to such partner of distributed property other than money, as determined under section 732. (Aug. 16, 1954, ch. 736, 68A Stat. 247.) CROSS REFERENCES Determination of basis of partner's interest, see sec- tion 705 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 705 of this title. § 734. Optional adjustment to basis of undistributed partnership property (a) General rule The basis of partnership property shall not be adjusted as the result of a distribution of Page 489 § 734
TITLE 26-INTERNAL REVENUE CODE property to a partner unless the election, pro- vided in section 754 (relating to optional adjust- ment to basis of partnership property), is in effect with respect to such partnership. (b) Method of adjustment In the case of a distribution of property to a partner, a partnership, with respect to which the election provided in section 754 is in effect, shall- (1) increase the adjusted basis of partner- ship property by- (A) the amount of any gain recognized to the distributee partner with respect to such distribution under section 731(a)(1), and (B) in the case of distributed property to which section 732(a)(2) or (b) applies, the excess of the adjusted basis of the distribut- ed property to the partnership immediately before the distribution (as adjusted by sec- tion 732(d)) over the basis of the distributed property to the distributee, as determined under section 732, or (2) decrease the adjusted basis of partner- ship property by- (A) the amount of any loss recognized to the distributee partner with respect to such distribution under section 731(a)(2), and (B) in the case of distributed property to which section 732(b) applies, the excess of the basis of the distributed property to the distributee, as determined under section 732, over the adjusted basis of the distribut- ed property to the partnership immediately before such distribution (as adjusted by sec- tion 732(d)). (c) Allocation of basis The allocation of basis among partnership properties where subsection (b) is applicable shall be made in accordance with the rules pro- vided in section 755. (Aug. 16, 1954, ch. 736, 68A Stat. 247.) SECTION RsnERRuu TO IN OTIM SECTIONS This section is referred to in sections 754, 755 of this title. § 735. Character of gain or loss on disposition of dis- tributed property (a) Sale or exchange of certain distributed property (I) Unrealized receivables Gain or loss on the disposition by a distribu- tee partner of unrealized receivables (as de- fined in section 751(c)) distributed by a part- nership, shall be considered as ordinary income or as ordinary loss, as the case may be. (2) Inventory items Gain or loss on the sale or exchange by a distributee partner of inventory items (as de- fined in section 751(d)(2)) distributed by a partnership shall, if sold or exchanged within 5 years from the date of the distribution, be considered as ordinary income or as ordinary loss, as the case may be. (b) Holding period for distributed property In determining the period for which a part- ner has held property received in a distribution from a partnership (other than for purposes of subsection (a)(2)), there shall be included the holding period of the partnership, as deter- mined under section 1223, with respect to such property. (Aug. 16, 1954, ch. 763, 68A Stat. 247; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(b)(3)(D), 90 Stat. 1792.) AMENDmENTS 1976-Subsec. (a)(1), (2). Pub. L. 94-455 substituted "as ordinary income or as ordinary loss, as the case may be" for "gain or loss from the sale or exchange of property other than a capital asset". EFFECTIVE DATE or 1976 AMENDMENT Amendment of subsec. (a)(1), (2) by Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under sec- tion 2 of this title. § 736. Payments to a retiring partner or a deceased partner's successor In Interest (a) Payments considered as distributive share or guaranteed payment Payments made in liquidation of the interest of a retiring partner or a deceased partner shall, except as provided in subsection (b), be considered- (1) as a distributive share to the recipient of partnership income if the amount thereof is determined with regard to the income of the partnership, or (2) as a guaranteed payment described in section 707(c) if the amount thereof is deter- mined without regard to the income of the partnership. (b) Payments for Interest in partnership (1) General rule Payments made in liquidation of the inter- est of a retiring partner or a deceased partner shall, to the extent such payments (other than payments described in paragraph (2)) are determined, under regulations prescribed by the Secretary, to be made in exchange for the interest of such partner in partnership property, be considered as a distribution by the partnership and not as a distributive share or guaranteed payment under subsec- tion (a). (2) Special rules For purposes of this subsection, payments in exchange for an interest in partnership property shall not include amounts paid for- (A) unrealized receivables of the partner- ship (as defined In section 751(c)), or (B) good will of the partnership, except to the extent that the partnership agreement provides for a payment with respect to good will. (Aug. 16, 1954, ch. 736, 68A Stat. 248; Oct. 4, 1976, Pub. L, 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (b)(1). Pub. L. 94-455 struck out "or his delegate" following "Secretary". CROSS RzErFcEs Extent of recognition of gain or loss on distribution, see section 731 of this title. Partner receiving income in respect of decedent, see section 753 of this title. § 735 Page 490
TITLE 26-INTERNAL REVENUE CODE SECTION REFERRED TO IN OTHE SECTIONS This section is referred to in sections 731, 751, 753 of this title; title 29 sections 1051, 1081, 1101. SUBPART C-TRANSFERS OF INTERESTS IN A PARTNERSHIP Sec. 741. Recognition and character of gain or loss on sale or exchange. 742. Basis of transferee partner's interest. 743. Optional adjustment to basis of partnership property. § 741. Recognition and character of gain or loss on sale or exchange In the case of a sale or exchange of an inter- est in a partnership, gain or loss shall be recog- nized to the transferor partner. Such gain or loss shall be considered as gain or loss from the sale or exchange of a capital asset, except as otherwise provided in section 751 (relating to unrealized receivables and inventory items which have appreciated substantially in value). (Aug. 16, 1954, ch. 736, 68A Stat. 248.) SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 751 of this title. § 742. Basis of transferee partner's interest The basis of an interest in a partnership ac- quired other than by contribution shall be de- termined under part II of subehapter 0 (sec. 1011 and following). (Aug. 16, 1954, ch. 736, 68A Stat. 249.) CROSS RxrERENcEs Determination of basis of partner's interest, see sec- tion 705 of this title. SECTION RErsEuM TO IN OTHER SECTIONS This section is referred to in section 705 of this title. § 743. Optional adjustment to basis of partnership property (a) General rule The basis of partnership property shall not be adjusted as the result of a transfer of an in- terest in a partnership by sale or exchange or on the death of a partner unless the election provided by section 754 (relating to optional ad- Justment to basis of partnership property) is in effect with respect to such partnership. (b) Adjustment to basis of partnership property In the case of a transfer of an interest in a partnership by sale or exchange or upon the death of a partner, a partnership with respect to which the election provided in section 754 is in effect shall- (1) increase the adjusted basis of the part- nership property by the excess of the basis to the transferee partner of his interest in the partnership over his proportionate share of the adjusted basis of the partnership proper- ty, or (2) decrease the adjusted basis of the part- nership property by the excess of the trans- feree partner's proportionate share of the ad- justed basis of the partnership property over the basis of his interest in the partnership. Under regulations prescribed by the Secretary, such increase or decrease shall constitute an ad- justment to the basis of partnership property with respect to the transferee partner only. A partner's proportionate share of the adjusted basis of partnership property shall be deter- mined in accordance with his interest in part- nership capital an±d, in the case of an agree- ment described in section 704(c)(2) (relating to effect of partnership agreement on contributed property), such share shall be determined by taking such agreement into account. In the case of an adjustment under this subsection to the basis of partnership property subject to deple- tion, any depletion allowable shall be deter- mined separately for the transferee partner with respect to his interest in such property. (c) Allocation of basis The allocation of basis among partnership properties where subsection (b) is applicable shall be made in accordance with the rules pro- vided in section 755. (Aug. 16, 1954, ch. 736, 68A Stat. 249; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A;, 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (b). Pub. L. 94-455 struck out "or his delegate" following "Secretary". CROSS RFERE:NcEs Manner of electing optional adjustment to basis of partnership property, see section 754 of this title. Rules for allocation of basis, see section 755 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 732, 754, 755 of this title. SUBPART D-PRovSIONS.COMMON TO OTHER SUBPARTS Sec. 751. Unrealized receivables and inventory items. 752. Treatment of certain liabilities. 753. Partner receiving income in respect of decedent. 754. Manner of electing optional adjustment to basis of partnership property. 755. Rules for allocation of basis. § 751. Unrealized receivables and inventory items (a) Sale or exchange of interest in partnership The amount of any money, or the fair market value of any property, received by a transferor partner in exchange for all or a part of his in- terest in the partnership attributable to- (1) unrealized receivables of the partner- ship, or (2) inventory items of the partnership which have appreciated substantially in value, shall be considered as an amount realized from the sale or exchange of property other than a capital asset. (b) Certain distributions treated as sales or exchanges (1) General rule To the extent a partner receives in a distri- bution- (A) partnership property described in sub- section (a)(1) or (2) in exchange for all or a part of his interest in other partnership property (including money), cr (B) partnership property (including money) other than property described in Page 491 § 751
TITLE 26-INTERNAL REVENUE CODE subsection (a)(1) or (2) in exchange for all or a part of his interest in partnership prop- erty described in subsection (a)(1) or (2), such transactions shall, under regulations prescribed by the Secretary be considered as a sale or exchange of such property between the distributee and the partnership (as consti- tuted after the distribution). (2) Exceptions. Paragraph (1) shall not apply to- (A) a distribution of property which the distributee contributed to the partnership, or (B) payments, described in section 736(a), to a retiring partner or successor in interest of a deceased partner. (c) Unrealized receivables For purposes of this subchapter, the term "unrealized receivables" includes, to the extent not previously includible in income under the method of accounting used by the partnership, any rights (contractual or otherwise) to pay- ment for- (1) goods delivered, or to be delivered, to the extent the proceeds therefrom would be treated as amounts received from the sale or exchange of property other than a capital asset, or (2) services rendered, or to be rendered. For purposes of this section and sections 731, 736, and 741, such term also includes mining property (as defined in section 617(f)(2), stock in a DISC (as described in section 992(a)), sec- tion 1245 property (as defined in section 1245(a)(3)), stock in certain foreign corpora- tions (as described in section 1248), section 1250 property (as defined in section 1250(c)), farm recapture property (as defined in section 1251(e)(1)), farm land (as defined in section 1252(a)), franchises, trademarks, or trade names (referred to in section 1253(a)), and an oil or gas property (de.Lcribed in section 1254) but only to the exter. of the amount which would be treated as gain to which section 617(d)(1), 995(c), 1245(a), 1248(a), 1250(a), 1251(c), 1252(a), 1253(a), or 1254(a) would apply if (at the time of the transaction described in this section or sections 731, 736, or 741, as the case may be) such property had been sold by the partnership at its fair market value. (d) Inventory items which have appreciated substan. tially In value (1) Substantial appreciation Inventory items of the partnership shall be considered to have appreciated substantially in value if their fa!r market value exceeds- (A) 120 percent of the adjusted basis to the partnership of such property, and (B) 10 percent of the fair market value of all partnership property, other than money. (2) Inventory items For purposes of this subchapter the term "Inventory items" means- (A) property of the partnership of the kind described in section 1221(1), (B) any other property of the partnership which, on sale or exchange by the partner- ship, would be considered property other than a capital asset and other than proper- ty described in section 1231, (C) any other property of the partnership which, if sold or exchanged by the partner- ship, would result in a gain taxable under subsection (a) of section 1246 (relating to gain on foreign investment company stock), and (D) any other property held by the part- nership which, if held by the selling or dis- tributee partner, would be considered prop- erty of the type described in subparagraph (A), (B), or (C). (Aug. 16, 1954, ch. 736, 68A Stat. 250; Oct. 16, 1962, Pub. L. 87-834, §§ 13(f)(1), 14(b)(2), 76 Stat. 1035, 1041; Feb. 26, 1964, Pub. L. 88-272, title II, § 231(b)(6), 78 Stat. 105; Sept. 12, 1966, Pub. L. 89-570, § 1(c), 80 Stat. 762; Dec. 30, 1969, Pub. L. 91-172, title II, § 211(b)(6), 83 Stat. 570; Oct. 4, 1976, Pub. L. 94-455, title II, § 205(b), title X, § 1042(c)(2), title XI, § 1101(d)(2), title XIX, §§ 1901(a)(93), 1906(b)(13)(A), title XXI, §2110(a), 90 Stat. 1535, 1637, 1658, 1780, 1834, 1905.) AMENDMENTS 1976-Subsec. (b)(1). Pub. L. 94-455, § 1906(b)(13)(A). struck out "or his delegate" following "Secretary". Subsec. (c). Pub. L. 94-455, §§ 205(b), 1042(c)(2). 1101(d)(2), 1901(a)(93), 2110(a), added reference to stock in a DISC (as described in section 992(a)), refer- ence to stock in certain foreign corporations (as de- scribed in section 1248), and reference to farm land (as defined in section 1252(a)), franchises, trademarks or trade names (referred to in section 1253(a)), and an oil or gas property (described n section 1254). substituted "1252(a), 1253(a), or 1254(a)" for "or 1252(a)", and in- serted "1248(a)," following "1245(a)," and "995(c)," following "617(d)(1),". 1969-Subsec. (c). Pub. L. 91-172 substituted "section 1250 property (as defined in section 1250(c)), farm re- capture property (as defined in section 1251(e)(1)), and farm land (as defined in section 1252(a))", and "1250(a), 1251(c), or 1252(a)". for "and section 1250 property (as defined in section 1250(c))" and "1250(a)", respectively. 1966-Subsee. (c). Pub. L. 89-570 included reference to mining property (as defined in section 617(f)(2)) and to section 617(d)(1) in the last sentence. 1964-Subsec. (c). Pub. L. 88-272 inserted the refer- ence to section 1250. 1962-Subsec. (c). Pub. L. 87-834, § 13(f)(1), defined "unrealized receivables" for purposes of this section and section 731, 736, and 741, as including section 1245 property, but only to the extent of the amount which would be treated as gain to which section 1245(a) would apply if (at the time of the transaction de- scribed in this section or section 731, 736, or 741, as the case may be) such property had been sold by the partnership at Its fair market value. Subsec. (d)(2). Pub. L. 87-834, § 14(b)(2), added subpar. (C), and redesignated former subpar. (C) as (D) and substituted therein "subparagraph (A), (B), or (C)" for "subparagraph (A) or (B)". EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (c) by section 205(b) of Pub. L. 94-455 effective for taxable years ending after Dec. 31, 1975, see section 205(e) of Pub. L. 94-455, set out as an Effective Date note under section 1254 of this title. Amendment of subsec. (c) by section 1042(c)(2) of Pub. L. 94-455 applicable to transfers beginning after Oct. 9. 1975, and to sales, exchanges and distributions taking place after that date, see section 1042(e)(1) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 367 of this title. Amendment of subsec. (c) by section 1101(d)(2) of Pub. L. 94-455 applicable to sales, exchanges, or other -§ 761 Page 492
TITLE 26-INTERNAL REVENUE CODE dispositions after Dec. 31, 1975, in taxable years ending after such date, see section 1101(g)(4) of Pub. L. 94-455, set out as an Effective Date of 1976 Amend- ment note under section 995 of this title. Amendment of subsec. (c) by section 1901(a)(93) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Section 2110(b) of Pub. L. 94-455 provided that: "Subsection (a) [amending subsec. (c) of this section] shall apply to transactions described in sections 731, 736, 741, or 751 of the Internal Revenue Code of 1954 (sections 731, 736, 741, or 751 of this title] which occur after December 31, 1976, in taxable years ending after that date." EFFECTIVE DATE OF 1969 AmxrDamErr Amendment by Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1969, see section 211(c) of Pub. L. 91-172, set out as an Effective Date note under section 1251 of this title. EFFECTIVE DATE OF 1966 AmmDMENr Amendment by Pub. L. 89-570 applicable to taxable years ending after Sept. 12, 1966, but only in respect of expenditures paid or incurred after such date see section 3 of Pub. L. 89-570, set out as an Effective Date note under section 617 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272 applicable to disposi- tions after Dec. 31, 1963, in taxable years ending after such date, see section 231(c) of Pub. L. 88-272, set out as an Effective Date note under section 1250 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Amendment of subsec. (c) of this section by Pub. L. 87-834 applicable to taxable years beginning after Dec. 31, 1962, see section 13(g) of Pub. L. 87-834, set out as an Effective Date note under section 1245 of this title. Amendment of subsec. (d)(2) of this section by Pub. L. 87-834 applicable with respect to taxable years be- ginning after Dec. 31, 1962, see section 14(c) of Pub. L. 87-834, set out as an Effective Date note under section 1246 of this title. CROSS REFERENCES Extent of recognition of gain or loss on distribution, see section 731 of this title. Recognition and character of gain or loss on sale or exchange, see section 741 of this title. SECTION REERRED TO IN OTHER SECTIONS This section is referred to in sections 617, 731, 732, 735, 736, 741, 1245, 1250 of this title. § 752. Treatment of certain liabilities (a) Increase in partner's liabilities Any increase in a partner's share of the liabil- ities of a partnership, or any increase in a part- ner's individual liabilities by reason of the as- sumption by such partner of partnership liabil- ities, shall be considered as a contribution of money by such partner to the partnership. (b) Decrease in partner's liabilities Any decrease in a partner's share of the li- abilities of a partnership, or any decrease in a partner's individual liabilities by reason of the assumption by the partnership of such individ- ual liabilities, shall be considered as a distribu- tion of money to the partner by the partner- ship. (c) Liability to which property is subject For purposes of this section, a liability to which property is subject shall, to the extent of the fair market value of such property, be con- sidered as a liability of the owner of the proper- ty. (d) Sale or exchange of an interest In the case of a sale or exchange of an inter- est in a partnership, liabilities shall be treated In the same manner as liabilities in connection with the sale or exchange of property not asso- ciated with partnerships. (Aug. 16, 1954, ch. 736, 68A Stat. 251.) § 753, Partner receiving income in respect of decedent The amount includible in the gross income of a successor in interest of a deceased partner under section 736(a) shall be considered income in respect of a decedent under section 691. (Aug. 16, 1954, ch. 736, 68A Stat. 251.) § 754. Manner of electing optional adjustment to basis of partnership property If a partnership files an election, in accor- dance with regulations prescribed by the Secre- tary, the basis of partnership property shall be adjusted, in the case of a distribution of proper- ty, in the manner provided in section 734 and, in the case of a transfer of a partnership inter- est, in the manner provided in section 743. Such an election shall apply with respect to all distri- butions of property by the partnership and to all transfers of interests in the partnership during the taxable year with respect to which such election was filed and all subsequent tax- able years. Such election may be revoked by the partnership, subject to such limitations as may be provided by regulations prescribed by the Secretary. (Aug. 16, 1954, ch. 736, 68A Stat. 251; Oct. 4, 1976, Pub. L. 94-455, title XIX, 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Pub. L. 94-455 struck out "or his delegate" fol- lowing "Secretary" in two places. CROSS REFERENCES Optional adjustment to basis of- Partnership property, see section 743 of this title. Undistributed partnership property, see section 734 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section referred to in sections 732, 734, 743 of this title. § 755. Rules for allocation of basis (a) General rule Any increase or decrease in the adjusted basis of partnership property under section 734(b) (relating to the optional adjustment to the basis of undistributed partnership property) or section 743(b) (relating to the optional adjust- ment to the basis of partnership property in the case of a transfer of an interest in a part- nership) shall, except as provided in subsection (b), be allocated- (1) in a manner which has the effect of re- ducing the difference between the fair Page 493 § 755
TITLE 26-INTERNAL REVENUE CODE market value and the adjusted basis of part- nership properties, or (2) in any other manner permitted by regu- lations prescribed by the Secretary. (b) Special rule In applying the allocation rules provided in subsection (a), increases or decreases in the ad- justed basis of partnership property arising from a distribution of, or a transfer of an inter- est attributable to, property consisting of- (1) capital assets and property described in section 1231(b), or (2) any other property of the partnership, shall be allocated to partnership property of a like character except that the basis of any such partnership property shall not be reduced below zero. If, in the case of a distribution, the adjustment to basis of property described in paragraph (1) or (2) is prevented by the absence of such property or by insufficient adjusted basis for such property, such adjustment shall be applied to subsequently acquired property of a like character in accordance with regulations prescribed by the Secretary. (Aug. 16, 1954, ch. 736, 68A Stat. 252; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Subsecs. (a), (b). Pub. L. 94-455 struck out "or his delegate" following "Secretary". SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 734, 743 of this title. PART III-DEFINITIONS Sec. 761. Terms defined. § 761. Terms defined (a) Partnership For purposes of this subtitle, the term "part- nership" includes a syndicate, group, pool, joint venture, or other unincorporated organization through or by means of which any business, fi- nancial operation, or venture is carried on, and which is not, within the meaning of this title, a corporation or a trust or estate. Under regula- tions the Secretary may, at the election of all the members of an unincorporated organiza- tion, exclude such organization from the appli- cation of all or part of this subchapter, if it is availed of- (1) for investment purposes only and not for the active conduct of a business, or (2) for the joint production, extraction, or use of property, but not for the purpose of selling services or property produced or ex- tracted, if the income of the members of the organiza- tion may be adequately determined without the computation of partnership taxable income. (b) Partner For purposes of this subtitle, the term "part- ner" means a member of a partnership. (c) Partnership agreement For purposes of this subchapter, a partner- ship agreement includes any modifications of the partnership agreoment made prior to, or at, the time prescribed by law for the filing of the partnership return for the taxable year (not in- cluding extensions) which are agreed to by all the partners, or which are adopted in such other manner as may be provided by the part- nership agreement. (d) Liquidation of a partner's Interest. For purposes of this subchapter, the term "liquidation of a partner's interest" means the termination of a partner's entire interest in a partnership by means of a distribution, or a series of distributions, to the partner by the partnership. (e) Cross reference For rules in the case of the sale, exchange, liquidation, or reduction of a partner's Interest, see sections 704(b) and 706(e)(2). (Aug. 16, 1954, ch. 736, 68A Stat. 252; Oct. 4, 1976, Pub. L. 94-455, title II, § 213(c)(3)(B), title XIX, § 1906(b)(13)(A), 90 Stat. 1548, 1834.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (e). Pub. L. 94-455, § 213(c)(3)(B), added subsec. (e). EmcTiVE DATE OF 1976 AMENDMENT Amendment of subsec. (e) by section 213(c)(3)(B) of Pub. L. 94-455 applicable in the case of partnership taxable years beginning after Dec. 31, 1975, see section 213(f)(1) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 709 of this title. [§ 771. Repealed. Pub. L. 94-455, title XIX, § 1901(a)(94), Oct. 4, 1976, 90 Stat. 1780] Section, act Aug. 16, 1954, ch. 736, 68A Stat. 253, re- lating to the effective date for this subchapter, was re- pealed along with the part heading and section analy- sis for item 771, which made up part IV of this sub. chapter. Subchapter L-Insurance Companies Part I. Life insurance companies. II. Mutual insurance companies (other than life and certain marine insurance companies and other than fire or flood insurance companies which operate on basis of perpetual policies or premi- um deposits). III. Other insurance companies. IV. Provisions of general application. AMENDMENTS 1962-Pub. L. 87-834, § 8(g)(4)(A), Oct. 18, 1962, 76 Stat. 999, substituted "and certain marine insurance companies and other than fire or flood insurance com- panies which operate on basis of perpetual policies or premium deposits" for "or marine or fire insurance companies issuing perpetual policies" in the heading of Part II. SuacHApn- REFERRED TO IN OTHER SECTIONS This subchapter is referred to in sections 6425, 6655 of this title. PART I-LIFE INSURANCE COMPANIES Subpart A. Definition' tax imposed. B. Investment income. C. Gain and loss from operations. D. Distributions to shareholders. E. Miscellaneous provisions. Page 494
TITLE 26-INTERNAL REVENUE CODE AMENDMENTS 1959-Pub. L. 86-69, § 2(a), June 25, 1959, 73 Stat. 112, amended analysis of Part I and subparts general- ly. PART REFERRED TO IN OTHER SECTIONS This part is referred to in section 1016 of this title. SUBPART A-DEFINITION; TAX IMPOSED Sec. 801. Definition of life insurance company. 802. Tax imposed. AMENDMENTS 1959-Pub. L. 86-69, § 2(a), June 25, 1959, 73 Stat. 112, amended analysis generally. 1958-Pub. L. 85-345, § 2(b), Mar. 17, 1958, 72 Stat. 37, eliminated "for 1955 and 1956" following the words "Tax imposed" in item 802. 1956-Act July 24, 1956, ch. 696, § 2(a), 70 Stat. 633, inserted "and 1956" in item 802. Act Mar. 13, 1956, ch. 83, § 2, 70 Stat. 36, amended analysis generally. § 801. Definition of life insurance company (a) Life insurance company defined For purposes of this subtitle, the term "life insurance company" means an insurance com- pany which is engaged in the business of issu- ing life insurance and annuity contracts (either separately or combined with health and acci- dent insurance), or noncancellable contracts of health and accident insurance, if- (1) its life insurance reserves (as defined in subsection (b)), plus (2) unearned premiums, and unpaid losses (whether or not ascertained), on noncancella- ble life, health, or accident policies not in- cluded in life insurance reserves, comprise more than 50 percent of its total re- serves (as defined in subsection (c)). (b) Life insurance reserves defined (1) In general For purposes of this part, the term "life in- surance reserves" means amounts- (A) which are computed or estimated on the basis of recognized mortality or morbid- ity tables and assumed rates of interests, and (B) which are set aside to mature or liqui- date, either by payment or reinsurance, future unaccrued claims arising from life in- surance, annuity, and noncancellable health and accident insurance contracts (including life insurance or annuity contracts com- bined with noncancellable health and acci- dent insurance) involving, at the time with respect to which the reserve is computed, life, health, or accident contingencies. (2) Reserves must be required by law Except- (A) in the case of policies covering life, health, and accident insurance combined in one policy issued on the weekly premium payment plan, continuing for life and not subject to cancellation, and (B) as provided in paragraph (3), in addition to the requirements set forth in paragraph (1), life insurance reserves must be required by law. (3) Assessment companies In the case of an assessment life insurance company or association, the term "life insur- ance reserves" includes- (A) sums actually deposited by such com- pany or association with State officers pur- suant to law as guaranty or reserve funds, and (B) any funds maintained, under the charter or articles of incorporation or asso- ciation (or bylaws approved by a State in- surance commissioner) of such company or association, exclusively for the payment of claims arising under certificates of member- ship or policies issued on the assessment plan and not subject to any other use. For purposes of this part, the rate of interest assumed in calculating the reserves described in subparagraphs (A) and (B) shall be 3 per- cent. (4) Deficiency reserves excluded The term "life insurance reserves" does not include deficiency reserves. For purposes of this subsection and subsection (c), the defi- ciency reserve for any contract is that portion of the reserve for such contract equal to the amount (if any) by which- (A) the present value of the future net premiums required for such contract, ex- ceeds (B) the present value of the future actual premiums and consideration charged for such contract. (5) Amount of reserves For purposes of this subsection, subsection (a), and subsection (c), the amount of any re- serve (or portion thereof) for any taxable year shall be the mean of such reserve (or portion thereof) at the beginning and end of the taxable year. (c) Total reserves defined For purposes of subsection (a), the term "total reserves" means- (1) life insurance reserves, (2) unearned premiums, and unpaid losses (whether or not ascertained), not included in life insurance reserves, and (3) all other insurance reserves required by law. The term "total reserves" does not include defi- ciency reserves (within the meaning of subsec- tion (b)(4)). (d) Adjustments in reserves for policy loans For purposes only of determining under sub- section (a) whether or not an insurance compa- ny is a life insurance company, the life insur- ance reserves, and the total reserves, shall each be reduced by an amount equal to the mean of the aggregates, at the beginning and end of the taxable year, of the policy loans outstanding with respect to contracts for which life insur- ance reserves are maintained. (e) Guaranteed renewable contracts For purposes of this part, guaranteed renew- able life, health, and accident insurance shall Page 495 § 801
TITLE 26-INTERNAL REVENUE CODE be treated in the same manner as noncancella- ble life, health, and accident insurance. (f) Burial and funeral benefit insurance companies. A burial or funeral benefit insurance compa- ny engaged directly in the manufacture of fu- neral supplies or the performance of funeral services shall not be taxable under this part but shall be taxable under section 821 or section 831. (g) Contracts with reserves based on segregated asset accounts (1) Definitions (A) Annuity contracts include variable annuity contracts For purposes of this part, an "annuity contract" includes a contract which pro- vides for the payment of a variable annuity computed on the basis of recognized mortal- ity tables and the investment experience of the company issuing the contract. (B) Contracts with reserves based on a segregated asset account For purposes of this part, a "contract with reserves based on a segregated asset account" is a contract- (I) which provides for the allocation of all or part of the amounts received under the contract to an account which, pursu- ant to State law or regulation, is segregat- ed from the general asset accounts of the company, (ii) which is described in subparagraph (A), (B), (C), (D), or (E) of section 805(d)(1) (other than a life, health or acci- dent, property, casualty, or liability insur- ance contract) or which provides for the payment of annuities, and (iii) under which the amounts paid in, or the amount paid out, reflect the invest- ment return and the market value of the segregated asset account. If a contract ceases to reflect current invest- ment return and current market value, such contract shall not be considered as meeting the requirements of clause (iii) after such cessation. (2) Life insurance reserves For purposes of subsection (b)(1)(A) of this section, the reflection of the investment return and the market value of the segregat- ed asset account shall be considered an as- sumed rate of interest. (3) Separate accounting For purposes of this part, a life insurance company which issues contracts with reserves based on segregated asset accounts shall sepa- rately account for the various income, exclu- sion, deduction, asset, reserve, and other li- ability items properly attributable to such segregated asset accounts. For such items as are not accounted for directly, separate ac- counting shall be made- (A) in accordance with the method regu- larly employed by such company, if such method is reasonable, and (B) in all other cases, in accordance with regulations prescribed by the Secretary. (4) Investment yield (A) In general For purposes of this part, the policy and other contract liability requirements, and the life insurance company's share of in- vestment yield, shall be separately comput- ed- (i) with respect to the items separately accounted for in accordance with para- graph (3). and (0i) excluding the items taken into ac- count under clause (i). (B) Capital gains and losses If, without regard to subparagraph (A), the net short-term capital gain exceeds the net long-term capital loss, such excess shall be allocated between clauses (i) and (ii) of subparagraph (A) in proportion to the re- spective contributions to such excess of the items taken into account under each such clause. (5) Policy and other contract liability requirements For purposes of this part- (A) with respect to life insurance reserves based on segregated asset accounts, the ad- justed reserves rate and the current earn- ings rate for purposes of section 805(b), and the rate of interest assumed by the taxpay- er for purposes of sections 805(c) and 809(a)(2), shall be a rate equal to the cur- rent earnings rate determined under section 805(b)(2) with respect to the items separate- ly accounted for in accordance with para- graph (3) reduced by the percentage ob- tained by dividing- (i) any amount retained with respect to such reserves by the life insurance compa- ny from gross investment income (as de- fined in section 804(b) on segregated assets, to the extent such retained amount exceeds the deductions allowable under section 804(c) which are attribut- able to such reserves, by (ii) the means of such reserves; and (B) with respect to reserves based on seg- regated asset accounts other than life insur- ance reserves, an amount equal to the prod- uct of- (i) the rate of interest assumed as de- fined in subparagraph (A), and (it) the means of such reserves, shall be included as interest paid within the meaning of section 805(e)(1). (6) Increases and decreases in reserves For purposes of subsections (a) and (b) of sec- tion 810, the sum of the items described in sec- tion 810(c) taken into account as of the close of the taxable year shall, under regulations pre- scribed by the Secretary, be adjusted- (A) by subtracting therefrom an amount equal to the sum of the amounts added from time to time (for the taxable year) to the re- serves separately accounted for in accordance with paragraph (3) by reason of appreciation in value of assets (whether or not the assets have been disposed of), and (B) by adding thereto an amount equal to the sum of the amounts subtracted from time to time (for the taxable year) from such re- serves by reason of depreciation in value of Page 496
TITLE 26-INTERNAL REVENUE CODE assets (whether or not the assets have been disposed of). The deduction allowable for items described in paragraphs (1) and (7) of section 809(d) with re- spect to segregated asset accounts shall be re- duced to the extent that the amount of such items is increased for the taxable year by ap- preciation (or increased to the extent that the amount of such items is decreased for the tax- able year by depreciation) not reflected in ad- justments under the preceding sentence. (7) Basis of assets held for qualified pension plan contracts In the case of contracts described in subpar- agraph (A), (B), (C), (D), or (E) of section 805(d)(1), the basis of each asset in a segre- gated asset account shall (in addition to all other adjustments to basis) be- (A) increased by the amount of any appre- ciation in value, and (B) decreased by the amount of any de- preciation in value, to the extent that such appreciation and depreciation are from time to time reflected in the increases and de- creases in reserves or other items in para- graph (6) with respect to such contracts. (8) Additional separate computations Under regulations prescribed by the Secre- tary, such additional separate computations shall be made, with respect to the items sepa- rately accounted for in accordance with para- graph (3), as may be necessary to carry out the purposes of this subsection and this part. (Added Pub. L. 86-69, § 2(a), June 25, 1959, 73 Stat. 112, and amended Pub. L. 87-858, § 3(a), Oct. 23, 1962, 76 Stat. 1134; Pub. L. 91-172, title I, § 121(b)(5)(B), Dec. 30, 1969, 83 Stat. 541; Pub, L. 93-406, title II, § 2002(g)(11), Sept. 2, 1974, 88 Stat. 970; Pub. L. 94-455, title XV, § 1505(a), title XIX, §§ 1901(c)(6), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1738, 1803, 1834.) PRIOR PROVISIONS A prior section 801, acts Aug. 16, 1954, ch. 736, 68A Stat. 255; Mar. 13, 1956, ch. 83, § 2. 70 Stat. 36, con- tained provisions similar to this section prior to the the general revision of this part by Pub. L. 86-69. AMENDMENTS 1976-Subsec. (b)(3)(A). Pub. L. 94-455, § 1901(c)(6), struck out "or Territorial" following "association with State". Subsec. (g)(1)(B). Pub. L. 94-455, § 1505(a), in cl. (if) added provision further defining contract with re- serves based on a segregated asset account as a con- tract which is described in section 805(d)(1)(A), (B), (C), (D), or (E) (other than a life, health or accident, property, casualty, or liability insurance contract) and in cl. (ti) substituted "out" for "as annuities". Subsecs. (g)(3), (6), (8). Pub. L. 94-455. § 1906(b)(13)(A) struck out "or his delegate" following "Secretary". 1974-Subsec. (g)(7). Pub. L. 93-406 inserted refer- ence in the provisions preceding subpar. (A) to subpar- agraph (E) of section 805(d)(1). 1969-Subsec. (b)(2). Pub. L. 91-172 redesignated former subpar. (C) as (B). Former subpar. (B), dealing with policies issued by organizations that substantially met the requirements of section 501(c)(9) of this title, was stricken. 1962-Subsee. (g). Pub. L. 87-858 substituted as the subsec. catchline "contracts with reserves based on segregated asset accounts" for "Variable annuities". Subsec. (g)(1). Pub. L. 87-858 substituted as par. (1) catchline "Definitions" for "In general", designated existing provisions as subpar. (A) and added subpar. (B). Subsec. (g)(2). Pub. L. 87-858 substituted provisions respecting life insurance reserves for provisions relat- ing to adjusted reserves rate and assumed rate. Subsec. (g)(3). Pub. L. 87-858 substituted provisions respecting separate accounting for provisions relating to current earnings rate. Subsec. (g)(4). Pub. L. 87-858 substituted provisions respecting investment yield for provisions relating to increases and decreases in reserves, incorporated in par. (6)(A) and (B). Subsec. (g)(5). Pub. L. 87-858 substituted provisions respecting policy and other contract liability require- ments for provisions relating to companies issuing variable annuities and other contracts. Subsec. (g)(6). Pub. L. 87-858 redesignntod furner par. (4) as (6) and added provision relating to reduc- tion of deduction allowed for certain items with re- spect to segregated asset accounts. Former par. (6) had provided that former pars. (1) to (5) would not apply with respect to any taxable year beginning after Dec. 31, 1962. Subsec. (g)(7). Pub. L. 87-858 added par. (7). Subsec. (g)(8). Pub. L. 87-858 redesignated subpar. (B) of former par. (5) as par. (8), substituting "with re- spect to the items separately accounted for in accor. dance with paragraph (3)" for "with respect to such annuity contracts and such other contracts". EFncTIv DATE OF 1976 AMENDMENT Section 1505(c) of Pub. L. 94-455 provided that: "The amendments made by this section [amending subsec. (g)(1)(B)(ii) of this section and section 401(f) of this title] apply for taxable years beginning after December 31, 1975." Amendment of subsec. (b)(3) by section 1901(c)(6) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1974 AMENDMENT Amendment by Pub. L. 93-406 effective on Jan. 1, 1975, see section 2002(t)(2) of Pub. L. 93-406, set out as an Effective Date note under section 4973 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Amendment by Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1969, see section 121(g) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 511 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Section 3(f) of Pub. L. 87-858 provided that: "Except as provided in subsection (d)(2) [set out as a note under section 812 of this title], the amendments made by this section [to sections 801, 802, 804, 809, 815, and 6501 of this title] shall apply with respect to taxable years beginning after December 31, 1961." EFFECTIVE DATE Section 4 of Pub. L. 86-69 provided that: "Except as otherwise provided in this Act, the amendments made by this Act [to this part and sections 381(c), (d), 841, 842, 891, 1016(a), 1201(a), (c), 1232(a), 1504(b), 4371(2) and 6501(c) of this title] shall apply only with respect to taxable years beginning after December 31, 1957." SHORT TITLE Section 1 of Pub. L. 86-69 provided that: "This Act [amending this part and sections 34(c), 116(b), 381(c), (d), 841, 842, 891, 1016(a), 1201(a), (c), 1232(a), 1504(b), 4371(2) and 6501(c) of this title, and enacting notes set out under sections 801, 6072 and 6655 of this title] may be cited as the 'Life Insurance Company Income Tax Act of 1959'." Page 497 § 801
TITLE 26-INTERNAL REVENUE CODE CROSS REFEmNCEs Certain exchanges of insurance policies, see section 1035 of this title. SECTION REFER]xD TO IN OTHER SECTIONS This section is referred to in sections 11, 243, 453, 594, 805, 810, 818, 819, 820, 832, 1035 of this title. § 802. Tax imposed (a) Tax imposed (1) In general A tax is hereby imposed for each taxable year on the life insurance company taxable income of every life insurance company. Such tax shall consist of a normal tax and surtax computed as provided in section 11 as though the life insurance company taxable income were the taxable income referred to in section 11. (2) Alternative tax in case of capital gains If for any taxable year any life insurance company has a net capital gain, then, in lieu of the tax imposed by paragraph (1), there is hereby imposed a tax (if such tax is less than the tax imposed by such paragraph) which shall consist of the sum of- (A) a partial tax, computed as provided by paragraph (1), on the life insurance compa- ny taxable income determined by reducing the taxable investment income, and the gain from operations, by the amount of such net capital gain, and (B) an amount determined as provided in section 1201(a) on such net capital gain. (b) Life insurance company taxable income defined For purposes of this part, the term "life in- surance company taxable income" means the sum of- (1) the taxable investment income (as de- fined in section 804) or, if smaller, the gain from operations (as defined in section 809), (2) if the gain from operations exceeds the taxable investment income, an amount equal to 50 percent of such excess, plus (3) the amount subtracted from the policy- holders surplus account for the taxable year, as determined under section 815. (Added Pub. L. 86-69, § 2(a), June 25, 1959, 73 Stat. 115, and amended Pub. L. 87-858, § 3(b)(1), Oct. 23, 1962, 76 Stat. 1136; Pub. L. 88-272, title II, § 235(c)(1), Feb. 26, 1964, 78 Stat. 126; Pub. L. 91-172, title V, §511(c)(1), Dec. 30, 1969, 83 Stat. 637; Pub. L. 94-455, title XIX, § 1901(a)(95), (b)(33)(E), Oct. 4, 1976, 90 Stat. 1780, 1801.) PRIOR PROVISIONS A prior section 802, acts Aug. 16, 1954, ch. 736, 68A Stat. 255; Mar. 13, 1956, ch. 83, § 2, 70 Stat. 38; July 24, 1956, ch. 696, §§ 1, 2(b), 70 Stat. 633; Mar. 17, 1958. Pub. L. 85-345, §§ 1, 2(a), 72 Stat. 36, contained provi- sion similar to this sect'un prior to the general revi- sion of this part by Pub. L. 86-69, § 2(a). A prior section 803, acts Aug, 16, 1954, ch. 736, 68A Stat. 256; Mar. 13, 1956, ch. 83, § 2, 70 Stat. 39, which related to income and deductions in the case of life in- surance companies, was omitted from this part by Pub. L. 86-69, § 2(a), June 25, 1959, 73 Stat. 112, which amended this part in its entirety. See section 804 of this title. AMENDMENTS 1976-Subsec. (a)(1). Pub. L. 94-455, § 1901(a)(95)(A), struck out "beginning after December 31, 1957," fol- lowing "for each taxable year". Subsec. (a)(2). Pub. L. 94-455, § 1901(a)(95)(B), (b)(33)(E), in provisions preceding subpar. (A) struck out "beginning after December 31, 1961" folloring "any taxable year" and substituted "any life insurance company has a net capital gain" for "the net long- term capital gain of any life insurance company ex- ceeds the net short-term capital loss" and in subpars. (A) and (B) substituted "such net capital gain" for "such excess". Subsec. (a)(3). Pub. L. 94-455. § 1901(a)(95)(C), struck out subsec. (a)(3) which related to a special rule for 1959 and 1960. 1969-Subsec. (a)(2)(B). Pub. L. 91-172 substituted "(B) an amount determined as provided in section 1201(a) on such excess" for "(B) an amount equal to 25 percent of such excess". 1964-Subsec. (a)(1). Pub. L. 88-272 substituted pro- visions that the tax shall consist of a normal tax and surtax computed as provided in section 11 as though the life insurance company taxable income were the income referred to in section 11, for provisions that it consist of a normal tax computed at the rate provided by section 11(b) and a surtax on the income which ex- ceeds $25,000 computed at the rate provided by section 11(c). 1962-Subsec. (a)(2). Pub. L. 87-858 added "Alterna- tive tax" to the heading of par. (2) and substituted in such par. (2) "1961" for "1958" and provisions impos- ing a tax consisting of the sum of "(A) a partial tax, computed as provided by paragraph (1), on the life in- surance company taxable income determined by re- ducing the taxable investment income, and the gain from operations, by the amount of such excess, and (B) an amount equal to 25 percent of such excess" for "there is hereby imposed a tax equal to 25 percent of such excess", EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (a)(1), (2), (3) by section 1901(a)(95)(A), (B), (C), (b)(33)(E) of Pub. L. 94-455 ef- fective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Amendment by Pub. L. 91-172 applicable with re- spect to taxable years beginning after Dec. 31, 1969, see section 511(d) of Pub. L. 91-172, set out as an Ef- fective Date note under section 1201 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272 applicable to taxable years ending after Dec. 31, 1963, see section 235(d) of Pub. L. 88-272 set out a an Effective Date of 1964 Amendment note under section 1551 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Amendnent by Pub. L. 87-858 applicable with re- spect to taxable years beginning after Dec. 31, 1961, see section 3(f) of Pub. L. 87-858, set out as an Effec- tive Date of 1962 Amendment note under section 801 of this title. EFFECTIVE DATE Section applicable only with respect to taxable years beginning after Dec. 31, 1957, see section 4 of Pub. L. 86-69, set out as an Effective Date note under section 801 of this title. FILING OF INCOME TAX RE'tuRNS FOR 1958 Every life insurance company subject to the tax im- posed by this section required to make a return after June 25, 1959, and on or before Sept. 15, 1959 for its taxable year beginning in 1958, see section 3(i) of Pub. § 802 Page 498
TITLE 26-INTERNAL REVENUE CODE L. 86-69, set out as a note under section 6072 of this title. SECTION REFEUVU TO IN OTHER SECTIONS This section is referred to in sections 80, 243, 542, 812, 815, 818, 819, 841, 891, 1351, 1503, 1504, 1563, 6501 of this title. SUBPART B-INVESTMENT INCOME Sec. 804. Taxable investment income. 805. Policy and other contract liability requirements. 806. Certain changes in reserves and assets. § 804. Taxable investment income (a) In general (1) Exclusion of policyholders' share of Investment yield The policyholders' share of each and every item of investment yield (including tax- exempt interest and dividends received) of any life insurance company shall not be in- cluded in taxable investment income. For pur- poses of the preceding sentence, the policy- holders' share of any item shall be that per- centage obtained by dividing the policy and other contract liability requirements by the investment yield; except that if the policy and other contract liability requirements exceed the investment yield, then the policy- holders' share of any item shall be 100 per- cent. (2) Taxable investment income defined For purposes of this part, the taxable in- vestment income for any taxable year shall be an amount (not less than zero) equal to the amount (if any) of the net capital gabn plus the sum of the life insurance company's share of each and every item of investment yield (including tax-exempt interest and dividends received), reduced by- (A) the sum of- (i) the life insurance company's share of interest which under section 103 is ex- cluded from gross income. (ii) the deductions for dividends re- ceived provided by sections 243, 244, and 245 (as modified by paragraph (4)) com- puted with respect to the life insurance company's share of the dividends re- ceived; and (B) the small business deduction provided by paragraph (3). For purposes of the preceding sentence, the life insurance company's share of any item shall be that percentage which, when added to the percentage obtained under the second sentence of paragraph (1), equals 100 percent. (3) Small business deduction For purposes of this part, the small busi- ness deduction is an amount equal to 10 per- cent of the investment yield for the taxable year. The deduction under this paragraph shall not exceed $25,000. (4) Application of section 246(b) In applying section 246(b) (relating to limi- tation on aggregate amount of deductions for dividends received) for purposes of this sub- section, the limit on the aggregate amount of the deductions allowed by sections 243(a)(1), 244(a), and 245 shall be 85 percent of the tax- able investment income computed without regard to the deductions allowed by such sec- tions. (b) Gross investment income For purposes of this part, the term "gross in- vestment income" means the sum of the follow- ing: (1) Interest, etc. The gross amount of income from- (A) interest, dividends, rents, and royal- ties, (B) the entering into of any lease, mort- gage, or other instrument or agreement from which the life insurance company de- rives interest, rents, or royalties, and (C) the alteration or termination of any instrument or agreement described in sub- paragraph (B). (2) Short-term capital gain The amount (if any) by which the net short-term capital gain exceeds the net long- term capital loss. (3) Trade or business Income The gross income from any trade or busi- ness (other than an insurance business) car- ried on by the life insurance company, or by a partnership of which the life insurance com- pany is a partner. In computing gross income under this paragraph, there shall be excluded any item described in paragraph (1). Except as provided in paragraph (2), in comput- ing gross investment income under this subsec- tion, there shall be excluded any gain from the sale or exchange of a capital asset, and any gain considered as gain from the sale or exchange of a capital asset. (c) Investment yield defined For purposes of this part, the term "invest- ment yield" means the gross investment income less the following deductions- (1) Investment expenses Investment expenses for the taxable year. If any general expenses are in part assigned to or included in the investment expenses, the total deduction under this paragraph shall not exceed the sum of- (A) one-fourth of one percent of the mean of the assets (as defined in section 805(b)(4)) held at the beginning and end of the taxable year, (B) the amount of the mortgage service fees for the taxable year, plus (C) whichever of the following is the greater: (i) one-fourth of the amount by which the investment yield (computed without any deduction for investment expenses al- lowed by this paragraph) exceeds 34 per- cent of the mean of the assets (as defined in section 805(b)(4)) held at the beginning and end of the taxable year, reduced by the amount described in subparagraph (B), or (ii) one-fourth of one percent of the mean of the value of mortgages held at the beginning and end of the taxable year for which there are no mortgage service fees for the taxable year. Page 499 § 804
TITLE 26-INTERNAL REVENUE CODE (2) Real estate expenses The amount of taxes (as provided in section 164), and other expenses, for the taxable year exclusively on or with respect to the real estate owned by the company. No deduction shall be allowed under this paragraph for any amount paid out for new buildings, or for per- manent improvements or betterments made to increase the value of any property. (3) Depreciation The deduction allowed by section 167. The deduction under this paragraph and para- graph (2) on account of any real estate owned and occupied for insurance purposes in whole or in part by a life insurance company shall be limited to an amount which bears the same ratio to such deduction (computed with- out regard to this sentence) as the rental value of the space not so occupied bears to the rental value of the entire property. (4) Depletion The deduction allowed by section 611 (relat- ing to depletion). (5) Trade or business deductions The deductions allowed by this subtitle (without regard to this part) which are attrib- utable to any trade or business (other than an insurance business) carried on by the life in- surance company, or by a partnership of which the life insurance company is a part- ner; except that in computing the deduction under this paragraph- (A) There shall be excluded losses- (i) from (or considered as from) sales or exchanges of capital assets, (ii) from sales or exchanges of property used in the trade or business (as defined in section 1231(b)), and (iii) from the compulsory or involuntary conversion (as a result of destruction, in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) of property used in the trade or business (as so defined). (B) Any item, to the extent attributable to the carrying on of the insurance busi- ness, shall not be taken into account. (C) The deduction for net operating losses provided in section 172, and the special de- ductions for corporations provided in part VIII of subehapter B, shall not be allowed. (d) Cross reference For reduction of the $25,000 amount provided in sub- section (a)(4) in the case of certain controlled corpora- tions, see sections 1561 and 1561. (Added Pub. L. 86-69, § 2(a), June 25, 1959, 73 Stat. 115, and amended Pub. L. 87-858, § 3(b)(2), Oct. 23, 1962, 76 Stat. 1137; Pub. L. 88-272, title II, § 214(b)(3), Feb. 26, 1964, 78 Stat. 55; Pub. L. 91-172, title IV, § 401(b)(2)(D), Dec. 30, 1969, 83 Stat. 602; Pub. L. 94-455, title XIX, § 1901(a)(96), (b)(1)(J)(i), (iii), (K), (M), (33)(F), Oct. 4, 1976, 90 Stat. 1780, 1791, 1801.) PRIOR PROVISIONS A prior section 804, acts Aug. 16, 1954, ch. 736, 68A Stat. 258; Mar. 13, 1956, ch. 83, § 2, 70 Stat. 41, related to reserve and other policy liability deductions prior to the general revision of this part by Pub. L. 86-69, § 2(a). Provisions similar to those comprising this section were contained in former section 803 of this title. AMENDMENTS 1976-Subsec. (a)(1). Pub. L. 94-455, § 1901(b)(1)(M), struck out ", partially tax-exempt interest," following "(including tax-exempt interest". Subsec. (a)(2). Pub. L. 94-455, § 1901(b)(1)(M), (33)(F), substituted "of the net capital gain" for "by which the net long-term capital gain exceeds the net short-term capital loss" and struck out ", partially tax- exempt interest," following "(including tax-exempt in- terest". Subsec. (a)(2)(A). Pub. L. 94-455, § 1901(b)(1)(J)(ii), (K), redesignated former cl. (iii) as (ii), and as so rede- signated, substituted "paragraph (4)" for "paragraph (5)". Former cl. (ii), which related to the deduction for partially tax-exempt interest provided by section 242 of this title. Subsec. (a)(2)(B). Pub. L. 94-455, § 1901(b)(1)(J)(ii), substituted "paragraph (3)" for "paragraph (4)". Subsecs. (a)(3), (4). Pub. L. 94-455, § 1901(b)(l)(J)(i), redesignated former subsec. (a)(4) and (5) as (a)(3) and (4). Former subsec. (a)(3), which related to partially tax-exempt interest, was struck out. Subsec. (al(5). Pub. L. 94-455, § 1901(b)(1)(J)(i), rede- signated subsec. (a)(5) as (a)(4). Subsec. (a)(6). Pub. L. 94-455, § 1901(a)(96)(A), struck out subsec. (a)(6) which related to exception to taxable investment income. Subsec. (b)(2). Pub. L. 94-455, § 1901(a)(96)(B), sub- stituted "The" for "In the case of a taxable year be- ginning after December 31, 1958, the". 1969-Subsec. d). Pub. L. 91-172 added subsec. (d. 1964-Subsec. (a)(5). Pub. L. 88-272 substituted "243(a)(1), 244(a)" for "243(a), 244". 1962-Subsec. (a)(2). Pub. L. 87-858 substituted "equal to the amount (if any) by which the net long- term capital gain exceeds the net short-term capital loss plus the sum" for "equal to the sum". EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (a) and (b) by section 1901 of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Subsec. (d) of this section applicable with respect to taxable years beginning after Dec. 31, 1969, see section 401(h)(2) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 1561 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272 applicable to divi- dends received in taxable years ending after Dec. 31, 1963, see section 214(c) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 243 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Amendment by Pub. L. 87-858 applicable with re- spect to taxable years beginning after Dec. 31, 1961, see section 3(f) of Pub. L. 87-858, set out as an Effec- tive Date of 1962 Amendment note under section 801 of this title. EFFECTIVE DATE Section applicable only with respect to taxable years beginning after Dec. 31, 1057, see section 4 of Pub. L. 86-69, set out as an Effective Date note under section 801 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 243, 801, 802, 1561, 1564 of this title. § 804 Page 500
TITLE 26-INTERNAL REVENUE CODE § 805. Policy and other contract liability requirements (a) In general For purposes of this part, the term "policy and other contract liability requirements" means, for any taxable year, the sum of- (1) the adjusted life insurance reserves, multiplied by the adjusted reserves rate, (2) the mean of the pension plan reserves at the beginning and end of the taxable year, multiplied by the current earnings rate, and (3) the interest paid. (b) Adjusted reserves rate and earnings rates (1) Adjusted reserves rate For purposes of this part, the adjusted re- serves rate for any taxable year is the average earnings rate or, if lower, the current earn- ings rate. (2) Current earnings rate For purposes of this part, the current earn- ings rate for any taxable year is the amount determined by dividing- (A) the taxpayer's investment yield for such taxable year, by (B) the mean of the taxpayer's assets at the beginning and end of the taxable year. (3) Average earnings rate (A) In general For purposes of this part, the average earnings rate for any taxable year is the average of the current earnings rates for such taxable year and for each of the 4 tax- able years immediately preceding such tax- able year (excluding any of such 4 taxable years for which the taxpayer was not an in- surance company). (B) Special rule For purposes of subparagraph (A), the current earnings rate for any taxable year of any company which, for such year, is an insurance company (but not a life insurance company) shall be determined as if this part applied to such company for such year. (4) Assets For purposes of this part, the term ".rssets" means all assets of the company (including nonadmitted assets), other than real and per- sonal property (excluding money) used by it in carrying on an insurance trade or business. For purposes of this paragraph, the amount attributable to- (A) real property and stock shall be the fair market value thereof, and (B) any other asset shall be the adjusted basis, of such asset for purposes of deter- mining gain on sale or other disposition. (c) Adjusted life insurance reserves (1) Adjusted life insurance reserves defined For purposes of this part, the term "adjust- ed life insurance reserves" means- (A) the mean of the life insurance re- serves (as defined in section 801(b)), other than pension plan reserves, at the begin- ning and end of the taxaole year, multiplied by (B) that percentage which equals 100 per- cent- (1) increased by that percentage which is 10 times the average rate of interest as- sumed by the taxpayer in calculating such reserves, and (i) reduced by that percentage which is 10 times the adjusted reserves rate. (2) Average interest rate assumed For purposes of this part, the average rate of interest assumed in calculating reserves shall be computed- (A) by multiplying each assumed rate of interest by the means of the amounts of such reserves computed at that rate at the beginning and end of the taxable year, and (B) by dividing (1) the sum of the products ascertained under subparagraph (A), by (ii) the mean of the total of such reserves at the beginning and end of the taxable year. d) Pension plan reserves For purposes of this part, the term "pension plan reserves" means that portion of the life in- surance reserves which is allocable to con- tracts- (1) purchased under contracts entered into with trusts which (as of the time the con- tracts were entered into) were deemed to be (A) trusts described in section 401(a) and exempt from tax under section 501(a), or (B) trusts exempt from tax under section 165 of the Internal Revenue Code of 1939 or the cor- responding provisions of prior revenue laws; (2) purchased under contracts entered into under plans which (as of the time the con- tracts were entered into) were deemed to be plans described in section 403(a), or plans meeting the requirements of paragraphs (3), (4), (5), and (6) of section 165(a) of the Inter- nal Revenue Code of 1939; (3) provided for employees of the life insur- ance company under a plan which, for the taxable year, meets the requirements of para- graphs (3), (4), (5). (6), (7), (8), (11), (12), (13), (14), (15), (16), (19), and (20) of section 401(a); (4) purchased to provide retirement annu- ities for its employees by an organization which (as of the time the contracts were pur- chased) was an organization described in sec- tion 501(c)(3) which was exempt from tax under section 501(a) or was an organization exempt from tax under section 101(6) of the Internal Revenue Code of 1939 or the corre- sponding provisions of prior revenue laws, or purchased to provide retirement annuities for employees described in section 403(b)(1)(A)(ii) by an employer which is a State, a political subdivision of a State, or an agency or instrumentality of any one or more of the foregoing; or (5) purchased under contracts entered into with trusts which (at the time the contracts were entered into) were individual retirement accounts described in section 408(a) or under contracts entered into with individual retire- ment annuities described in section 408(b). Ce) Interest paid For purposes of this part, the interest paid for any taxable year is the sum of- (1) Interest on indebtedness All interest for the taxable year on indebt- edness, except on indebtedness incurred or continued to purchase or carry obligations the interest on which is wholly exempt from taxation under this chapter. 71-999 0 - 78 - 34 (Vol. 7) Page 501 § 805
TITLE 26-INTERNAL REVENUE CODE (2) Amounts In the nature of interest All amounts in the nature of interest, whether or not guaranteed, for the taxable year on insurance or annuity contracts (in- cluding contracts supplementary thereto) which do not involve, at the time of accrual, life, health, or accident contingencies. (3) Discount on prepaid premiums All amounts accrued for the taxable year for discounts in the nature of interest, wheth- er or not guaranteed, on premiums or other consideration paid in advance on insurance or annuity contracts. (4) Interest on certain special contingency reserves Interest for the taxable year on special con- tingency reserves under contracts of group term life insurance or group health and acci- dent insurance which are established and maintained for the provision of insurance on retired lives, for premium stabilization, or for a combination thereof. (Added Pub. L. 86-69, § 2(a), June 25, 1959, 73 Stat. 118, and amended Pub. L. 87-792, §7(g), Oct. 10, 1962, 76 Stat. 829; Pub. L. 88-571, § 5(a), Sept. 2, 1964, 78 Stat. 860; Pub. L. 91-172, title IX, §907(a)(1), Dec. 30, 1969, 83 Stat. 715; Pub. L. 93-406, title II, §§ 1016(a)(6), 2002(g)(9), 2004(c)(3), Sept. 2, 1974, 88 Stat. 929, 970, 986; Pub. L. 94-267, § (1)(c)(4), Apr. 15, 1976, 90 Stat. 367; Pub. L. 94-455, title XIX, § 1901(a)(97), Oct. 4, 1976, 90 Stat, 1780.) REFERENCES IN TEXT Section 165 of the Internal Revenue Code of 1939, referred to in subsecs. (d)(1) and (2), was classified to section 165 of former Title 26, Internal Revenue Code. Section 101 of the Internal Revenue Code of 1939, re- ferred to in subsec. (d)(4), was classified to section 101 of former Title 26, Internal Revenue Code. Sections 101 and 165 were repealed by section 7851(a)(1)(A) of this title. For table of comparisons of the 1939 Code to the 1954 Code, see Table I preceding section 1 of this title. See, also, section 7851(e) of this title for provi- sion that references in the 1954 Code to a provision of the 1939 Code, not then applicable, shall be deemed a reference to the corresponding provision of the 1954 Code, which is then applicable. PRIOR PROVISIONS A prior section 805, acts Aug. 16, 1954, ch. 736, 68A Stat. 258; Mar. 13, 1956, ch. 83, § 2, 70 Stat. 43, autho- rized a special interest deduction pior to the general revision of this part by Pub. L. 86-69, § 2(a). AMENDMENTS 1976-Subsec. (b)(3)(B). Pub. L. 94-455, § 1901(a)(97)(A), substituted in subpar. catchline "Spe- cial rule" for "Special rules" and eliminated in text special rule relating to determination of the current earnings rate for any taxable year beginning before Jan. 1, 1958. Subsec. (b)(4)(B). Pub. L. 94-455, § 1901(a)(97)(B), struck out "(determined without regard to fair market value on December 31, 1958)" following "shall be the adjusted basis". Subsec. (d). Pub. L. 94-455, § 1901(a)(97)(C), among other changes, struck out provisions relating to a spe- cial transitional rule. Subsec. (d)(1)(C). Pub. L. 94-267 substituted "(19), and (20)" for "and (19)". 1974-Subsec. (d)(1)(C). Pub. L. 93-406, § 1016(a)(6) substituted "(8), (11), (12), (13), (14), and (15)" for "and (8)". Pub. L. 93-406 § 2004(c)(3), inserted references to section 401(a)(16) and (19). Subsec. (d)(1)(E). Pub. L. 93-406, § 2002(g)(9), added subsec. (d)(1)(E). 1969-Subsec. (e)(4). Pub. L. 91-172 made express reference to interest on special contingency reserves under specific insurance contracts established and maintained for the provision of insurance on retired lives and premium stabilization. 1964-Subsee. (d)(1)(D). Pub. L. 88-571 inserted ", or purchased to provide retirement annuities for employ- ees described in section 403(b)(1)(A)(ii) by an employ- er which is a State, a political subdivision of a State, or an agency or instrumentality of dny one or more of the foregoing". 1962-Subsec. (d)(1). Pub. L. 87-792 substituted "de- scribed in section 403(a), or plans meeting" for "meet- ing the requirements of section 401(a)(3), (4), (5), and (6) or" in subpar. (B). and "(5), (6), (7), and (8)" for "(5), and (6)" in subpar. (C). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (b)(3)(B), (4)(B), (d) by sec- tion 1901(a)(97)(A) to (C) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see sec- tion 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Amendment by Pub. L. 94-267 applicable with re- spect to payments made to an employee, on or after July 4, 1974, see section l(e) of Pub. L. 94-267, set out as a note under section 401 of this title. EFFECTIVE DATE OF 1974 AMENDMENT Amendment by section 1016(a)(6) of Pub. L. 93-406 applicable, except as otherwise provided in section 1017(c) through (h) of Pub. L. 93-406, for plan years beginning after Sept. 2, 1974, but, in the case of plans in existence on Jan. 1, 1974, amendment by Pub. L. 93- 406 applicable for plan years beginning after Dec. 31, 1975, see section 1017 of Pub. L. 93-406, set out as an Effective Date, Transitional Rules note under section 410 of this title. Amendment by section 2002(g)(9) of Pub. L. 93-406 effective on Jan. 1, 1975, see section 2002(i)(2) of Pub. L. 93-406, set out as an Effective Date note under sec- tion 4973 of this title. Amendment by section 2004(c)(3) of Pub. L. 93-406 applicable to years beginning after Dec. 31, 1975, see section 2004(d) of Pub. L. 93-406, set out as an Effec- tive Date, Transition Provisions note under section 415 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Section 907(d) of Pub. L. 91-172 provided that: "The amendments made by subsection (a) [amending this section and section 810(c) of this title] shall apply to taxable years beginning after December 31, 1957. The amendments made by subsection (b) (amending sec- tion 815 of this title] shall apply to taxable years be- ginning after December 31, 1968. The amendments made by subsection (c) [adding section 844 and amend- ing sections 809, 823. and 825 of this title] shall apply with respect to losses occurred in taxable years begin- ning after December 31, 1962, but shall not affect any tax liability for any taxable year beginning before January 1, 1967." EFFECTIVE DATE OF 1964 AMENDMENT Section 5(b) of Pub. L. 88-571 provided that: "The amendment made by subsection (a) [to this section] shall apply to taxable years beginning after December 31, 1963." EFFECTIVE DATE OF 1962 AMENDMENT Amendment by Pub. L. 87-792 applicable to taxable years beginning after Dec. 31, 1962, see section 8 of Pub. L. 87-792, set out as an Effective Date of 1962 Amendment note under section 37 of this title. § 805 Page 502
TITLE 26-INTERNAL REVENUE CODE EFFECTIVE DATE Section applicable only with respect to taxable years beginning after Dec. 31, 1957, see section 4 of Pub. L. 86-69, set out as an Effective Date note under section 801 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to In sections 801, 804, 811, 818, 819 of this title. § 806. Certain changes in reserves and assets (a) Adjustments to means for certain transfers of li- abilities For purposes of this part, if, during the tax- able year, there is a change in life insurance re- serves attributable to the transfer between the taxpayer and another person of liabilities under contracts taken into account in comput- ing such reserves, then, under regulations pre- scribed by the Secretary, the means of such re- serves, and the mean of the assets, shall be ap- propriately adjusted, on a daily basis, to reflect the amounts involved in such transfer. This subsection shall not apply to reinsurance ceded to the taxpayer or to another person. (M) Change of basis in computing reserves If the basis for determining the amount of any item referred to in section 810(c) as of the close of the taxable year differs from the basis for such determination as of the beginning of the taxable year, then for purposes of this sub- part the amount of such item- (1) as of the close of the taxable year shall be computed on the old basis, and (2) as of the beginning of the next taxable year shall be computed on the new basis. (Added Pub. L. 86-69, § 2(a), June 25, 1959, 73 Stat. 120, and amended Pub, L. 94-455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) PRIOR PROVISIONS A prior section 806, act Aug. 16, 1954, ch. 736, 68A Stat. 258, related to adjustment for certain reserves prior to the general revision of this part by Pub. L. 86- 69, § 2(a). A prior section 807, act Aug. 16, 1954, ch. 736, 68A Stat. 259, which related to adjustment for certain re- serves, was omitted from this part by act Mar. 13, 1956, ch. 83, § 2, 70 Stat. 36, which amended this part in its entirety. AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455 struck out "or his delegate" following "Secretary". EFFECTIVE DATE Section applicable only with respect to taxable years beginning after Dec. 31, 1957, see section 4 of Pub. L. 86-69, set out as an Effective Date note under section 801 of this title. SUBPART C-GAIN AND Loss FROM OPERATIONS See. 809, In general. 810. Rules for certain reserves. 811. Dividends to policyholders. 812, Operations loss dcduction. § 809. In general (a) Exclusion of share of investment yield set aside for policyholders (1) Amount The share of each and every item of invest- ment yield (including tax-exempt interest and dividends received) of any life insurance com- pany set aside for policyholders shall not be included in gain or loss from operations. For purposes of the preceding sentence, the share of any item set aside for policyholders shall be that percentage obtained by dividing the required interest by the investment yield; except that if the required interest exceeds the investment yield, then the share of any item set aside for policyholders shall be 100 percent. (2) Required interest For purposes of this part, the required in- terest for any taxable year is the sum of the products obtained by multiplying- (A) each rate of interest required, or as- sumed by the taxpayer, in calculating the reserves described in section 810(c), by (B) the means of the amount of such re- serves computed at that rate at the begin- ning and end of the taxable year. (Wi Gain and loss from operations (1) Gain from operations defined For purposes of this part, the term "gain from operations" means the amount by which the sum of the following exceeds the deduc- tions provided by subsection (d): (A) the life insurance company's share of each and every item of investment yield (in- cluding tax-exempt interest and dividends received); (B) the amount (if any) of the net capital gain; and (C) the sum of the items referred to in subsection (c). (2) Loss from operations defined For purposes of this part, the term "loss from operations" means the amount by which the sum of the deductions provided by subsec- tion (d) exceeds the sum of- (A) the life insurance company's share of each and every item of investment yield (in- cluding tax-exempt interest and dividends received); (B) the amount (if any) of the net capital gain; and (C) the sum of the items referred to in subsection (c). (3) Life insurance company's share For purposes of this subpart, the life insur- ance company's share of any item shall be that percentage which, when added to the percentage obtained under the second sen- tence of subsection (a)(1), equals 100 percent. (c) Gross amount For purposes of subsections (b)(1) and (2), the following items shall be taken into account: (I) Premiums The gross amount of premiums and other consideration (including advance premiums, deposits, fees, assessments, and consideration in respect of assuming liabilities under con- Page 503 § 809
TITLE 26-INTERNAL REVENUE CODE tracts not issued by the taxpayer) on insur- ance and annuity contracts (including con- tracts supplementary thereto); less return premiums, and premiums and other consider- ation arising out of reinsurance ceded. Except in the case of amounts of premiums or other consideration returned to another life insur- ance company in respect of reinsurance ceded, amounts returned where the amount is not fixed in the contract but depends on the experience of the company or the discretion of the management shall not be included in return premiums. (2) Decreases in certain reserves Each net decrease in reserves which is re- quired by section 810 or 811(b)(2) to be taken into account for purposes of this paragraph. (3) Other amounts All amounts, not included in computing in- vestment yield and not includible under para- graph (1) or (2), which under this subtitle are includible in gross income. Except as included in computing investment yield, there shall be excluded any gain from the sale or exchange of a capital asset, and any gain considered as gain from the sale or exchange of a capital asset. (d) Deductions For purposes of subsections (b)(1) and (2), there shall be allowed the following deductions: (1) Death benefits, etc. All claims and benefits accrued, and all losses incurred (whether or not ascertained), during the taxable year on insurance and an- nuity contracts (including contracts supple- mentary thereto). (2) Increases in certain reserves The net increase in reserves which is re- quired by section 810 to be taken into account for purposes of this paragraph. (3) Dividends to policyholders The deduction for dividends to policy- holders (determined under section 811(b)). (4) Operations loss deduction The operations loss deduction (determined under section 812). (5) Certain nonparticipating contracts An amount equal to 10 percent of the in- crease for the taxable year in the reserves for nonparticipating contracts or (if greater) an amount equal to 3 percent of the premiums for the taxable year (excluding that portion of the premiums which is allocable to annuity features) attributable to nonparticipating contracts (other than group contracts) which are issued or renewed for periods of 5 years or more. For purposes of this paragraph, the term "reserves for nonparticipating con- tracts" means such part of the life insurance reserves (excluding that portion of the re- serves which is allocable to annuity features) as relates to nonparticipating contracts (other than group contracts). For purposes of this paragraph and paragraph (6), the term 'pre- miums" means the net amount of the premi- ums and other consideration taken into ac- count under subsection (c)(1). For purposes of this paragraph, the period for which any con- tract is issued or renewed includes the period for which such contract is guaranteed renew- able. (6) Certain accident and health insurance and group life insurance An amount equal to 2 percent of the premi- ums for the taxable year attributable to acci- dent and health insurance contracts (other than those to which paragraph (5) applies) and group life insurance contracts. The de- duction under this paragraph for the taxable year and all preceding taxable years shall not exceed an amount equal to 50 percent of the premiums for the taxable year attributable to such contracts. (7) Assumption by another person of liabilities under insurance, etc., contracts The consideration (other than consider- ation arising out of reinsurance ceded) in re- spect of the assumption by another person of liabilities under insurance and annuity con- tracts (including contracts supplementary thereto). (8) Tax-exempt interest, dividends, etc. (A) Life insurance company's share Each of the following items: (I) the life insurance company's share of interest which under section 103 is ex- cluded from gross income, (i) the deductions for dividends re- ceived provided by sections 243, 244, and 245 (as modified by subparagraph (B)) computed with respect to the life insur- ance company's share of the dividends re- ceived. (B) Application of section 2,16(b) In applying section 246(b) (relating to limitation on aggregate amount of deduc- tions for dividends received) for purposes of subparagraph (A)(iii), the limit on the ag- gregate amount of the deductions allowed by sections 243(a)(1). 244(a), and 245 shall be 85 percent of the gain from operations computed without regard to- (I) the deductions provided by para- graphs (3), (5), and (6) of this subsection, (ii) the operations loss deduction pro- vided by section 812, and (iii) the deductions allowed by sections 243(a)(1), 244(a), and 245, but such limit shall not apply for any tax- able yr ar for which there is a loss from op- erations. (9) Investment expenses, etc. Investment expenses to the extent not al- lowed as a deduction under section 804(c)(1) in computing investment yield, and the amount (if any) by which the sum of the de- ductions allowable under section 804(c) ex- ceeds the gross investment income. (10) Small business deduction A small business deduction in an amount equal to the amount determined under sec- tion 804(a)(3). (11) Other deductions Subject to the modifications provided by subsection (e), all other deductions allowed under this subtitle for purposes of computing § 809 Page 504
TITLE 26-INTERNAL REVENUE CODE taxable income to the extent not allowed as deductions in computing investment yield. Except as provided in paragraph (3), no amount shall be allowed as a deduction under this sub- section in respect of dividends to policyholders. (e Modifications The modifications referred to in subsection (d)(11) are as follows: (1) Interest In applying section 163 (relating to deduc- tion for interest), no deduction shall be al- lowed for interest In respect of Items de- scribed in section 810(c). (2) Bad debts Section 166(c) (relating to reserve for bad debts) shall not apply. (3) Charitable, etc., contributions and gifts In applying section 170- (A) the limit on the total deductions under such section provided by section 170(b)(2) shall be 5 percent of the gain from operations computed without regard to- (I) the deduction provided by section 170, (it) the deductions provided by para- graphs (3), (5), (6), and (8) of subsection (d), and (iti) any operations loss carryback to the taxable year under section 812; and (B) under regulations prescribed by the Secretary a rule similar to the rule con- tained in section 170(d)(2)(B) shall be ap- plied. (4) Amortizable bond premium Section 171 shall not apply. (5) Net operating loss deduction Except as provided by section 844, the de- duction for net operating losses provided in section 172 shall not be allowed. (6) Dividends received The deductions for dividends received pro- vided by sections 243, 244, and 245 shall not be allowed. (fM Limitation on certain deductions (I) In general The amount of the deductions under para- graphs (3), (5), and (6) of subsection (d) shall not exceed $250,000 plus the amount (if any) by which- (A) the gain from operations for the tax- able year, computed without regard to such deductions, exceeds (B) the taxable investment income for the taxable year. (2) Application of limitation The limitation provided by paragraph (1) shall apply first to the amount of the deduc- tion under subsection (d)(3), then to the amount of the deduction under subsection (d)(6), and finally to the amount of the de- duction under subsection (d)(5). (Added Pub. L. 86-69, § 2(a), June 25, 1959, 73 Stat. 121, and amended Pub. L. 87-59, § 2(a), (b), June 27, 1961, 75 Stat. 120; Pub. L. 87-790, § 3(a), Oct. 10, 1962, 76 Stat. 808; Pub. L. 87-858, § 3(b)(3), (c), Oct. 23, 1962, 76 Stat. 1137; Pub. L. 88-272, title II, §§ 214(b)(4), 228(a), Peb. 26, 1964, 78 Stat. 55, 98; Pub. L. 91-172, title II, § 201(a)(2)(C), title IX, § 907(c)(2)(B), Dec. 30, 1969, 83 Stat. 558, 717; Pub. L. 94-455, title XV, § 1508(a), title XIX, §§ 1901(a)(98), (b)(1)(J)(iv), (L)-(N), 33(G), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1741, 1781, 1791, 1801, 1834.) AMENDMENTS 1976-Subsec. (a)(1). Pub. L. 94-455, § 1901(b)(1)(M), struck out ". partially tax-exempt interest," following "(including tax-exempt interest". Subsec. (b)(1)(A). Pub. L. 94-455, § 1901(b)(1)(M), struck out ", partially tax-exempt interest," following "(including tax-exempt interest". Subsec, (b)(1)(B). Pub. L. 94-455. § 1901(b)(33)(G), substituted "of the net capital gain" for "by which the net long-term capital gain exceeds the net short-term capital loss". Subsec. (b)(2)(A). Pub. L. 94-455, § 1901(b)(1)(M), struck out ", partially tax-exempt interest," following "(including tax-exempt interest". Subsec. (b)(2)(B). Pub. L. 94-455, § 1901(b)(33)(G), substituted "of the net capital gain" for "by which the net long-term capital gain exceeds the net short-term capital loss". Subsec. (b)(4). Pub. L. 94-455, § 1901(a)(98)(A), struck out subsec. (b)(4) which related to an exception to the definition of gain from operations. Subsec. (d)(5). Pub. L. 94-455, § 1508(a), added provi- sion that for purposes of this paragraph, the period for which any contract is issued or renewed includes the period for which such contract is guaranteed re- newable. Subsec. (d)(8)tA). Pub. L. 94-455, § 1901(b)(1)(L)(i), redesignated former cl. (iii) as (ii). Former el. (ii), which related to the deduction for partially tax- exempt interest provided by section 242 of this title, was struck out. Subsec. (d)(8)(B). Pub. L. 94-455, § 1901(b)(1)(L)(ii), substituted "subparagraph (A)(ii)" for "subparagraph (A)(iDi)". Subsec. (d)(10). Pub. L. 94-455, § 1901(b)(1)(J)(iv), substituted "section 804(a)(3)" for "section 804(a)(4)". Subsec. (d)(11). Pub. L. 94-455, § 1901(a)(98)(B)(1), redesignated former subsec. (d)(12) as (d)(11). Former subsec. (d)(11), which related to certain mutualization distributions, was struck out. Subsec. (d)(12). Pub. L. 94-455, § 1901(a)(98)(B)(i), redesignated subsec. (d)(12) as (d)(11). Subsec. (e. Pub. L. 94-455, §§ 1901(a)(98)(B)(ii), (b)(1)(M), 1906(b)(13)(A), substituted in provisions preceding par. (1) "subsection (d)(11)" for "subsection (d)(12)", struck out in par. (3)(B) "or his delegate" fol- lowing "Secretary", and redesignated former par. (7) as (6). Former par. (6). which related to partially tax- exempt interest, was struck out. Subsec, (g). Pub. L. 94-455, § 1901(a)(98)(C), struck out subsec. (g) which related to limitations on deduc- tion for certain mutualization distributions. 1969-Subsec. (e)(3). Pub. L. 91-172, § 201(a)(2)(C), struck out "the first sentence of" in subparagraph (A) and, in subparagraph (B), substituted "section 170(d)(2)(B)" for "section 170(b)(3)". Subsec. (e)(5). Pub. L. 91-172, § 907(c)(2)(B), pro- vided that section 844 of this title be excepted from the nondeduction operating loss provisions of section 172 of this title. 1964-Subsec. (d)(8)(B). Pub. L. 88-272, §214(b)(4). substituted "243(a)(1), 244(a)" for "243(a), 244" wher- ever appearing. Subsec. (d)(11). Pub. L. 88-272, § 228(a)(1), included the year 1962. Subsec. (g)(3). Pub. L. 88-272, § 228(a)(2), included the year 1962. 1962-Subsec. (b)(1), (2). Pub. L. 87-858, § 3(b)(3), added subpar. (B) to pars. (1) and (2) and redesignated former subpar. (B) as (C) in such pars. (1) and (2). Subsec. (d)(6). Pub. L. 87-790 substituted "Certain accident and health insurance and group life insur- ance" for "Group life, accident, and health insurance" § 809 Page 505
TITLE 26-INTERNAL REVENUE CODE in the subsection catchline, and "accident and health insurance contracts (other than those to which para- graph (5) applies) and group life insurance contracts" for "group life insurance and group accident and health insurance contracts" in the text. Subsec. (f)(2). Pub. L. 87-858, § 3(c), substituted "(d)(3)", "(d)(6)" and "(d)(5)" for "(d)(6)". "(d)(5)" and "(d)(3)", respectively. 1961-Subsec. (d)(l1). Pub. L. 87-59, §2(a), autho- rized the deduction of certain mutualization distribu- tions made in 1960 and 1961. Subsec. (g)(3). Pub. L. 87-59, § 2(b), included within its provisions certain mutualization distributions made in 1960 and 1961. EFFECTIVE DATE OF 1976 AMENDMENT Section 1508(b) of Pub. L. 94-455 provided that: "The amendments made by subsection (a) [amending subsec. (d)(5) of this section] shall apply to taxable years beginning after December 31, 1957". Amendment of subsecs. (a), (b), (d), (e), (g) by sec- tion 1901 of Pub. L. 94-455 effective for taxable years ending Dec. 31, 1976. see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Amendment of subsec. (e)(3) by section 201(a)(2)(C) of Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1969, see section 201(g) of Pub. L. 91- 172, set out as an Effective Date of 1969 Amendment note under section 170 of this title. Amendment of subsec. (e)(5) by section 907(c)(2)(B) of Pub. L. 91-172 applicable with respect to losses in- curred in taxable year beginning after Dec. 31, 1962, but not affecting any tax liability for any taxable year beginning before Jan. 1, 1967, see section 907(d) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 805 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272 applicable to divi- dends received in taxable years ending after Dec. 31, 1963, see section 214(c) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 243 of this title. Section 228(d) of Pub. L. 88-272 provided that: "The amendment made by subsection (a) [to this section] shall apply to taxable years beginning after December 31, 1961. The amendment made by subsection (c) [to section 832 of this title] shall apply to taxable years beginning after December 31, 1953, and ending after August 16, 1954." EFFECTIVE DATE OF 1962 AMENDMENT Amendment by Pub. L. 87-858 applicable with re- spect to taxable years beginning after Dec. 31, 1961, see section 3Wf) of Pub. L. 87-858, set out as an Effec- tive Date of 1962 Amendment note under section 801 of this title. Section 3(c) of Pub. L. 87-790 provided that: "The amendments made by this section [to subsec. (d)(6) of this section and to section 815(c)(2)(C) of this title] shall apply to taxable years beginning after December 31, 1962." EFFECTIVE DATE OF 1961 AMENDMENT Section 2(c) of Pub. L. 87-59 provided that: "The amendments made by subsections (a) and (b) [to sub- secs. (d)(11) and (g)(3) of this section] shall apply to taxable years beginning after December 31, 1959." EFFECTIVE DATE Section applicable only with respect to taxable years beginning after Dec. 31, 1957, see section 4 of Pub. L. 86-69, set out as an Effective Date note under section 801 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section Is referred to in sections 243, 801, 802, 810, 811, 812, 815, 819, 953, 1561, 1564 of this title. § 810. Rules for certain reserves (a) Adjustment for decrease If the sum of the items described in subsec- tion (c) as of the beginning of the taxable year exceeds the sum of such items as of the close of the taxable year (reduced by the amount of in- vestment yield not included in gain or loss from operations for the taxable year by reason of section 809(a)(1)), the excess shall be taken into account as a net decrease referred to in section 809(c)(2). (b) Adjustment for increase If the sum of the items described in subsec- tion (c) as of the close of the taxable year (re- duced by the amount of investment yield not included in gain or loss from operations for the taxable year by reason of section 809(a)(1)) ex- ceeds the sum of such items as of the beginning of the taxable year, the excess shall be taken into account as a net increase referred to in sec- tion 809(d)(2). (c) Items taken into account The items referred to in subsections (a) and (b) are as follows: (1) The life insurance reserves (as defined in section 801(b)). (2) The unearned premiums and unpaid losses included in total reserves under section 801(c)(2). (3) The amounts (discounted at the rates of interest assumed by the company) necessary to satisfy the obligations under insurance or annuity contracts (including contracts supple- mentary thereto), but only if such obligatins do not involve (at the time with respect to which the computation is made under this paragraph) life, health, or accident contin- gencies. (4) Dividend accumulations, and other amounts, held at interest in connection with insurance or annuity contracts (including contracts supplementary thereto). (5) Premiums received in advance, and li- abilities for premium deposit funds. (6) Special contingency reserves under con- tracts of group term life insurance or group health and accident insurance which are es- tablished and maintained for the provision of insurance on retired lives, for premium stabi- lization, or for a combination thereof. In applying this subsection, the same item shall be counted only once. (d) Adjustment for change in computing reserves (1) In general If the basis for determining any item re- ferred to in subsection (c) as of the close of any taxable year differs from the basis for such determination as of the close of the pre- ceding taxable year, then so much of the dif- ference between- (A) the amount of the item at the close of the taxable year, computed on the new basis, and (B) the amount of the item at the close of the taxable year, computed on the old basis, as is attributable to contracts issued before § 810 Page 506
TITLE 26-INTERNAL REVENUE CODE the taxable year shall be taken into account for purposes of this subpart as follows: (I) if the amount determined under sub- paragraph (A) exceeds the amount deter- mined under subparagraph (B), '/o of such excess shall be taken into account, for each of the succeeding 10 taxable years, as a net increase to which section 809(d)(2) applies; or (ii) if the amount determined under sub- paragraph (B) exceeds the amount deter- mined under subparagraph (A), io of such excess shall be taken into account for each of the 10 succeeding taxable years, as a net decrease to which section 809(c)(2) applies. (2) Termination as life insurance company Except as provided in section 381(c)(22) (re- lating to carryovers in certain corporate read- Justments), if for any taxable year the tax- payer is not a life insurance company, the balance of any adjustments under this para- graph shall be taken into account for the pre- ceding taxable year. (2) Effect of preliminary term election An election under section 818(c) shall not be treated as a change in the basis for deter- mining an item referred to in subsection (c) to which this subsection applies. If an election under section 818(c) applies for the taxable year, the amounts of the items referred to in subparagraphs (A) and (B) of paragraph (1) shall be determined without regard to such election. If such an election would apply in respect of such item for the taxable year but for the new basis, the amount of the item re- ferred to in subparagraph (B) shall be deter- mined on the basis which would have been applicable under section 818(c) if the election applied in respect of the item for the taxable year. (Added Pub. L. 86-69, § 2(a), June 25, 1959, 73 Stat. 125, and amended Pub. L. 91-172, title I, § 121(b)(5)(B), title IX, § 907(a)(2), Dec. 30, 1969, 83 Stat. 541, 715.) AMENDMENTS 1969-Subsec. (c). Pub. L. 91-172, §907(a)(2), added par. (6). Subsec. (e). Pub. L. 91-172, § 121(b)(5)(B), struck out subsec. (c), which dealt with certain decreases in re- serves of voluntary employees' beneficiary associ- ations. EFFECTIVE DATE OF 1969 AMENDMENT Amendment of subsec. (c) by section 907(a)(2) of Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1957, see section 907(d) of Pub. L. 91- 172, set out as an Effective Date of 1969 Amendment note under section 805 of this title. Repeal of subsec. (e) applicable to taxable years be- ginning after Dec, 31, 1969, see section 121(g) of Pub. L. 91-172, set out as an Effective Date of 1969 Amend- ment note under section 511 of this title. EFFECTIVE DATE Section applicable only with respect to taxable years beginning after Dec. 31, 1957, see section 4 of Pub. L. 86-69, set out as an Effective Date note under section 801 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 801, 806, 809, 819, 1351 of this title. § 811. Dividends to policyholders (a) Dividends to policyholders defined For purposes of this part, the term "dividends to policyholders" means dividends and similar distributions to policyholders in thc~r capacity as such. Such term does not include interest paid (as defined in section 805(e)). (b) Amount of deduction (I) In general Except as limited by section 809(f), the de- duction for dividends to policyholders for any taxable year shall be an amount equal to the dividends to policyholders paid during the taxable year- (A) increased by the excess of (I) the amounts held at the end of the taxable year as reserves for dividends to policyholders (as defined in subsection (a)) payable during the year following the taxable year, over (iD such amounts held at the end of the preceding taxable year, or (B) decreased by the excess of (I) such amounts held at the end of the preceding taxable year, over (ii) such amounts held at the end of the taxable year. For purposes of subparagraphs (A) and (B), there shall be included as amounts held at the end of any taxable year amounts set aside, before the 16th day of the third month of the year following such taxable year (or, in the case of a mutual savings bank subject to the tax imposed by section 594, before the 16th day of the fourth month of the year fol- lowing such taxable year), for payment during the year following such taxable year. (2) Certain amounts to be treated as net decreases If the amount determined under paragraph (1)(B) exceeds the dividends to policyholders paid during the taxable year, the amount of such excess shall be a net decrease referred to in section 809(c)(2). (Added Pub. L. 86-69, § 2(a), June 25, 1959, 73 Stat. 126.) PRIOR PROVISIONS A prior section 811, act Aug. 16, 1954, ch. 736, § 811, as added Mar. 13, 1956, ch. 83, § 2, 70 Stat. 44, and amended July 24, 1956, ch. 696, § 2(c), 70 Stat. 633; Mar. 17, 1958, Pub. L. 85-345, § 2(c), 72 Stat. 37, im- posed a tax on the life insurance company taxable income of all life Insurance companies for taxable years beginning after Dec. 31, 1957 prior to the gener- al revision of this part by Pub. L. 86-69, § 2(a). EFFECTIVE DATE Section applicable only with respect to taxable years beginning after Dec. 31, 1957, see section 4 of Pub. L. 86-69, set out as an Effective Date note under section 801 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 809 of this title. Page 507
TITLE 26-INTERNAL REVENUE CODE § 812. Operations loss deduction (a) Deduction allowed There shall be allowed as a deduction for the taxable year an amount equal to the aggregate of- (1) the operations loss carryovers to such year, plus (2) the operations loss carrybacks to such year. For purposes of this part, the term "operations loss deduction" means the deduction allowed by this subsection. (b) Operations loss carrybacks and carryovers (1) Years to which loss may be carried The loss from operations for any taxable year (hereinafter in this section referred to as the "loss year") shall be- (A) an operations loss carryback to each of the 3 taxable years preceding the loss year, (B) an operations loss carryover to each of the 5 taxable years following the loss year, and (C) subject to subsection (e), if the life in- surance company is a new company for the loss year, an operations loss carryover to each of the 3 taxable years following the 5 taxable years described in subparagraph (B). In the case of an operations loss for any tax- able year ending after December 31, 1975, this paragraph shall be applied by substituting "'7 taxable years" for "5 taxable years". (2) Amount of carrybacks and carryovers The entire amount of the loss from oper- ations for any loss year shall be carried to the earliest of the taxable years to which (by reason of paragraph (1)) such loss may be car- ried. The portion of such loss which shall be carried to each of the other taxable years shall be the excess (if any) of the amount of such loss over the sum of the offsets (as de- fined In subsection (d)) for each of the prior taxable years to which such loss may be car- ried. (3) Election for operations loss carrybacks In the case of a loss from operations for any taxable year ending after December 31, 1975, the taxpayer may elect to relinquish the entire carryback period for such loss. Such election shall be made by the due date (in- cluding eitensions of time) for filing the return for the taxable year of the loss from operations for which the election is to be in effect, and once made for any taxable year, such election shall be irrevocable for that tax- able year. (c) Computation of loss from operations In computing the loss from operations for purposes of this section- (1) The operations loss deduction shall not be allowed. (2) The deductions allowed by sections 243 (relating to dividends received by corpora- tions), 244 (relating to dividends received on certain preferred stock of public utilities), and 245 (relating to dividends received from certain foreign corporations) shall be comput- ed without regard to section 246(b) as modi- fied by section 809(d)(8)(B), (d) Offset defined (1) In general For purposes of subsection (b)(2), the term "offset" means, with respect to any taxable year, an amount equal to that increase in the operations loss deduction for the taxable year which reduces the life insurance company taxable income (computed without regard to section 802(b)(3)) for such year to zero. (2) Operations loss deduction For purposes of paragrapl, (1), the oper- ations loss deduction for any taxable year shall be computed without regard to the loss from operations for the loss year or for any taxable year thereafter. (e) New company defined For purposes of this part, a life insurance company Is a new company for any taxable year only if such taxable year begins not more than 5 years after the first day on which it (or any predecessor, if section 381(c)(22) applies or would have applied if in effect) was authorized to do business as an insurance company. (f) Application of subtitle A and subtitle F Except as provided in section 809(e), subtitle A and subtitle F shall apply in respect of oper- ations loss carrybacks, operations loss car- ryovers, and the operations loss deduction under this part in the same manner and to the same extent as such subtitles apply in respect of net operating loss carrybacks, net operating loss carryovers, and the net operating loss de- duction. (Added Pub. L. 86-69, § 2(a), June 25, 1959, 73 Stat. 127, and amended Pub. L. 87-858, § 3(d)(1), Oct. 23, 1962, 76 Stat. 1137; Pub. L. 88-571, § 1(a), Sept. 2, 1964, 78 Stat. 857; Pub. L. 94-455, title VIII, § 806(d)(1), title XIX, § 1901(a)(99), Oct. 4, 1976, 90 Stat. 1598, 1781.) PRIc.t PROVISIONS A prior section 812, act Aug. 16, 1954, ch. 736, § 812, as added Mar. 13, 1956, ch. 83, § 2, 70 Stat. 45, related to reserve and other policy liability deduction, prior to the general revision of this part by Pub. L. 86-69, § 2(a). A prior section 813, act Aug. 16, 1954. ch. 736, § 813, as added Mar. 13, 1956, ch. 83, § 2, 70 Stat. 46, which related to adjustment for certain reserves, was omitted from this part by Pub. L. 86-69, § 2(a), June 25, 1959, 73 Stat. 112, which amended this part in its entirety. . AMENDMENTS 1976-Subsec. (b)(1). Pub. L. 94-455, §§806(d)(1)(A), 1901(a)(99), among other changes, struck out refer- ence to beginning after Dec. 31, 1954, substituted ref- erence to subparagraph (B) for reference to clause (ii), and added provision that in the case of an operations loss for any taxable year ending after Dec. 31, 1975, this paragraph shall be applied by substituting "7 tax- able years" for '5 taxable years". Subsec. (b)(3). Pub, L. 94-455, §806(d)(1)(B), added subsec. (b)(3). 1964-Subsec. (e). Pub. L. 88-571 eliminated provi- sions which imposed limitations on the eight year car- ryover by the exclusion of nonqualifled corporations. 1962-Subsec. (e)(2)(B). Pub. L. 87-858 Inserted In the first sentence "(except a corporation taxable under part II or part III of this subchapter)" following "with any other corporation". Page 508 § 812
TITLE 26-INTERNAL REVENUE CODE EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (b)(1), (3) by section 806(d)(1) (A), (B) of Pub. L. 94-455 applicable to losses incurred in taxable years ending after Dec. 31, 1975, see section 806(g)(1) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 172 of this title. Amendment of subsec. (b)(1) by section 1901(a)(99) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Section l(b) of Pub. L. 88-571 provided that: "The amendment made by subsection (a) [to subsec. (e) of this section] shall apply to a loss frum oper- ations for taxable years beginning after December 31, 1955; except that, in the case of a nonqualified corpo- ration as defined in section 812(e)(2)(B) of the Inter- nal Revenue Code of 1954 (subsec. (e)(2)(B) of this section] as in effect before such amendment- "(1) a loss from operations for a taxable year begin- ning in 1956 shall not be an operating loss carryover to the years 1962 and 1963, and there shall be no reduc- tion in the portion of such loss from operations which may be carried to 1964 by reason of an offset with re- spect to the year 1962 or 1963, and "(2) a loss from operations for a taxable year begin- ning in 1957 shall not be an operating loss carryover to the year 1963, and there shall be no reduction in the portion of such loss from operations which may be carried to 1964 and 1965 by reason of an offset with re- spect to the year 1963." EFFECTIVE DATE OF 1962 AMENDMENT Section 3(d)(2) of Pub. L. 87-858 provided that: "The amendment made by paragraph (1) (to subscc. (c)(2)(B) of this section] shall apply with respect to all taxable years beginning after December 31, 1954, except that in the case of a nonquallfted corporation, as defined in section 812(e)(2)(B) of the Internal Rev- enue Code of 1954 [subsec. (e)(2)(B) of this section] as in effect prior to the amendment made by paragraph (1), a loss from operations for a taxable year beginning in 1955 shall not be an operations loss carryover to the year 1961, and there shall be no reduction In the por- tion of such loss from operations which may be carried to 1962 or 1963 by reason of an offset with respect to the year 1961." EFFECTIVE DATE Section applicable only with respect to taxable years beginning after Dec. 31, 1957, see section 4 of Pub. L. 86-69, set out as an Effective Date note under section 801 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 809, 844. 1351, 6501, 6511. 6601, 6611 of this title. SUBPART D-DIsTRIBUTIONS TO SHAREHOLDERS Sec. 815. Distributions to shareholders § 815. l)istributions to shareholders (a) General rule For purposes of this section and section 802(b)(3), any distribution to shareholders after December 31, 1958, shall be treated as made- (1) first out of the shareholders surplus ac- count, to the extent thereof, (2) then out of the policyholders surplus ac- count, to the extent thereof, and (3) finally out of other accounts. (W) Shareholders surplus account (1) In general Each stock life insurance company shall, for purposes of this part, establish and maintain a shareholders surplus account. The amount in such account on January 1, 1958, shall be zero. (2) Additions to account The amount added to the shareholders sur- plus account for any taxable year beginning after December 31, 1957, shall be the amount by which- (A) the sum of- (I) the life insurance company taxable Income (computed without regard to sec- tion 802(b)(3)), (ii) in the case of a taxable year begin- ning after December 31, 1958, the amount (if any) of the net capital gain, reduced (in the case of a taxable year beginning after December 31, 1961) by the amount referred to in clause (I), (iii) the deductions for dividends re- ceived provided by sections 243, 244, and 245 (as modified by section 809(d)(8)(B)), and the amount of interest excluded from gross income under section 103, and (Iv) the small business deduction pro- vided by section 809(d)(10), exceeds (B) the taxes imposed for the taxable year by section 802(a), determined without regard to section 802(b)(3). (3) Subtractions from account (A) In general There shall be subtracted from the share- holders surplus account for any taxable year the amount which is treated under this section as distributed out of such account. (B) Distributions in 1958 There shall be subtracted from the share- holders surplus account (to the extent thereof) for any taxable year beginning in 1958 the amount of distributions to share- holders made during 1958. (c) Policyholders surplus account (1) In general Each stock life insurance company shall, for purposes of this part, establish and maintain a policyholders surplus account. The amount in such account on January 1, 1959, shall be zero. (2) Additions to account The amount added to the policyholders sur- plus account for any taxable year beginning after December 31, 1958, shall be the sum of- (A) an amount equal to 50 percent of the amount by which the gain from operations exceeds the taxable investment income, (B) the deduction for certain nonpartici- pating contracts provided by section 809(d)(5) (as limited by section 809(f)), and (C) the deduction for accident and health insurance and group life insurance con- tracts provided by section 809(d)(6) (as limited by section 809(f)). Page 509 § 815
TITLE 26-INTERNAL REVENUE CODE (3) Subtractions from account There shall be subtracted from the policy- holders surplus account for any taxable year an amount equal to the sum of- (A) the amount which (without regard to subparagraph (B)) is treated under this sec- tion as distributed out of the policyholders surplus account, and (B) the amount by which the tax imposed for the taxable year by section 802(a) is in- creased by reason of section 802(b)(3). (d) Special rules (1) Election to transfer amounts from policyholders surplus account to shareholders surplus ac- count (A) In general A taxpayer may elect for any taxable year for which it is a life insurance company to subtract from its policyholders surplus ac- count any amount in such account as of the close of such taxable year. The amount so subtracted, less the amount of the tax im- posed with respect to such amount by reason of section 802(b)(3), shall be added to the shareholders surplus account as of the beginning of the succeeding taxable year. (B) Manner and effect of election The election provided by subparagraph (A) shall be made (in such manner and in such form as the Secretary may by regula- tions prescribe) after the close of the tax- able year and not later than the time pre- scribed by law for filing the return (includ- ing extensions thereof) for the taxable year. Such an election, once made, may not be re- voked. (2) Termination as life insurance company (A) Effect of termination Except as provided in section 381(c)(22) (relating to carryovers in certain corporate readjustments), if- (I) for any taxable year the taxpayer is not an insurance company, or (ii) for any two successive taxable years the taxpayer is not a life insurance com- pany, then the amount taken into account under section 802(b)(3) for the last preceding tax- able year for which it was a life insurance company shall be increased (after the appli- cation of subparagraph (B)) by the amount remaining in its policyholders surplus ac- count at the close of such last preceding taxable year. (B) Effect of certain distributions If for any taxable year the taxpayer is an insurance company but not a life insurance company, then any distribution to share- holders during such taxable year shall be treated as made on the last day of the last preceding taxable year for which the tax- payer was a life insurance company. (3) Treatment of certain indebtedness If- (A) the taxpayer makes any payment in discharge of its indebtedness, and (B) such indebtedness is attributable to a distribution by the taxpayer to its share- holders after February 9, 1959, then the amount of such payment shall, for purposes of this section and section 802(b)(3), be treated as a distribution in cash to share- holders, but only to the extent that the distri- bution referred to in subparagraph (B) was treated as made out of accounts other than the shareholders and policyholders surplus accounts. (4) Limitation or amount in policyholders surplus account There shall be treated as a subtraction from the policyholders surplus account for a tax- able year for which the taxpayer is a life in- surance company the amount by which the policyholders surplus account (computed at the end of the taxable year without regard to this paragraph) exceeds whichever of the fol- lowing is the greatest- (A) 15 percent of life insurance reserves at the end of the taxable year, (B) 25 percent of the amount by which the life insurance reserves at the end of the taxable year exceed the life insurance re- serves at the end of 1958, or (C) 50 percent of the net amount of the premiums and other consideration taken into account for the taxable year under sec- tion 809(c)(1). The amount so treated as subtracted, less the amount of the tax imposed with respect to such amount by reason of section 802(b)(3), shall be added to the shareholders surplus ac- count as of the beginning of the succeeding taxable year. (5) Reduction of policyholders surplus account for certain unused deductions If- (A) an amount added to the policyholders surplus account for any taxable year in- creased (or created) a loss from operations for such year, and (B) any portion of the increase (or amount created) in the loss from operations referred to in subparagraph (A) did not reduce the life insurance company taxable income for any taxable year to which such loss was carried, the policyholders surplus account for the tax- able year referred to in subparagraph (A) shall be reduced by the amount described In subparagraph (B). (6) Restoration of amounts distributed out of policy-holders surplus account Notwithstanding any other provision of this subchapter, no amount shall be subtracted from a taxpayer's policyholders surplus ac- count with respect to a distribution made during the last month of the taxable year which, without regard to this paragraph, would be treated in whole or in part as a dis- tribution out of the policyholders surplus ac- count, to the extent that amounts so distrib- uted are returned to the taxpayer no later than the time prescribed by law (including extensions thereof) for filing the taxpayer's return for the taxable year in which the'dis- tribution was made. For purposes of this Page 510 §s815
TITLE 26-INTERNAL REVENUE CODE paragraph, amounts returned to a taxpayer with respect to a distribution shall be first ap- plied to the return of amounts which, withcut regard to this paragraph, would have been treated as distributed out of the policyholders surplus account. This paragraph shall not apply if, at the time such distribution was made, the taxpayer intended to avail itself of the provisions of this paragraph by having its shareholders return all or a part of such dis- tribution. Nothing in this paragraph shall affect the tax treatment of the receipt of the distribution by any shareholder, and the basis to a shareholder of his stock in the taxpayer shall not be Increased by reason of amounts returned under this paragraph to the extent that a dividends received deduction or exclu- sion was allowable in respect of the distribu- tion of such amount under any provision of this title. (e) Special rule for certain mutualizations (i) In general For purposes of this section and section 802(b)(3), any distribution to shareholders after December 31, 1958, in acquisition of stock pursuant to a plan of mutualization shall be treated- (A) first, as made out of paid-in capital and paid-in surplus, to the extent thereof, (B) thereafter, as made in two allocable parts- (I) one part of which is made out of the other accounts referred to in subsection (a)(3), and (ii) the remainder of which is a distribu- tion to which subsection (a) applies. (2) Special rules (A) Allocation ratio The part referred to in paragraph (1)(B)(i) is the amount which bears the same ratio to the amount to which para- graph (1)(B) applies as- (i) the excess (determined as of Decem- ber 31, 1958, and adjusted to the begin- ning of the year of the distribution as pro- vided in subparagraph (B)) of the assets over the total liabilities, bears to (ii) the sum (determined as of the begin- ning of the year of the distribution) of the excess described in clause (I), the amount in the shareholders surplus ac- count, plus the amount in the policy- holders surplus account. (B) Adjustment for certain distributions The excess described in subparagraph (A)(i) shall be reduced by the aggregate of the prior distributions which have been treated under subsection (a)(3) as made out of accounts other than the shareholders surplus account and the policyholders sur- plus account. (f) Distribution defined For purposes of this section, the term "distri- bution" includes any distribution in redemption of stock or in partial or complete liquidation of the corporation, but does not include- (1) any distribution made by the corpora- tion in its stock or in rights to acquire its stock* (2) except for purposes of subsection (a)(3) and subsection (e)(2)(B), any distribution in redemption of stock issued before 1958 which at all times on and after the date of issuance and on and before the date of redemnption is limited as to dividends and is callable, at the option of the issuer, at a price not in excess of 105 percent of the sum of the issue price and the amount of any contribution to surplus made by the original purchaser at the time of his purchase; (3) any distribution after December 31, 1963, of the stock of a controlled corporation to which section 355 applies, if such con- trolled corporation is an insurance company subject to the tax imposed by section 831 and if- (A) control was acquired prior to January 1, 1958, or (B) control has been acquired after De- cember 31, 1957- (i) in a transaction qualifying as a reor- ganization under section 368(a)(1)(B), if the distributing corporation has at all times since December 31, 1957, owned stock representing not less than 50 per- cent of the total combined voting power of all classes of stock entitled to vote, and not less than 50 percent of the value of all classes of stock, of the controlled corpora- tion, or (ii) solely in exchange for stock of the distributing corporation which stock is immediately exchanged by the controlled corporation in a transaction qualifying as a reorganization under section 368(a)(1) (A) or (C), if the controlled corporation has at all times since its organization been wholly owned by the distributing corpora- tion and the distributing corporation has at all times since December 31, 1957, owned stock representing not less than 50 percent of the total combined voting power of all classes of stock entitled to vote, and not less than 50 percent of the value of all classes of stock, of the corpo- ration the assets of which have been transferred to the controlled corporation in the section 368(a)(1)(A) or (C) reorgani- zation; (4) any distribution after December 31, 1966, of the stock of a controlled corporation to which section 355 applies, if such distribu- tion is made to a corporation which immedi- ately after the distribution is in control (within the meaning of section 368(c)) of both the distributing corporation and such con- trolled corporation and if such controlled cor- poration is a life insurance company of which the distributing corporation has been in con- trol at all times since December 31, 1957; or (5) any distribution after December 31, 1968, of the stock of a controlled corporation to which section 355 applies, if such distribu- tion is made to a corporation which immedi- ately after the distribution is the owner of all the stock of all classes of both the distribut- ing corporation and such controlled corpora- tion and if, immediately before the distribu- tion, the distributing corporation had been the owner of all of the stock of all classes of Page 511
TITLE 26-INTERNAL REVENUE CODE such controlled corporation at all times since December 31, 1957. Paragraphs (3), (4), and (5) shall not apply to that portion of the distribution of stock of the controlled corporation equal to the increase in the aggregate adjusted basis of such stock after December 31, 1957, except to the extent such increase results from an acquisition of stock in the controlled corporation in a transaction de- scribed in paragraph (3)(B). If any part of the increase in the aggregate adjusted basis of stock of the controlled corporation after De- cember 31, 1957, results from the transfer (other than as part of a transaction described in paragraph (3)(B)) by the distributing corpo- ration to the controlled corporation of property which has a fair market value in excess of its adjusted basis at the time of the transfer, para- graphs (3), (4), and (5) also shall not apply to that portion of the distribution equal to such excess. (g) Certain distributions related to former subsidlar. les If subsection (f)(5) applied to the distribution by a life insurance company of the stock of a corporation which was a controlled corpora- tion- (1) any distribution by such corporation to its shareholders (after the date of the distri- bution of its stock by the life Insurance com- pany), and (2) any disposition of the stock of such cor- poration by the distributee corporation, shall, for purposes of this section, be treated as a distribution to its shareholders by such life insurance company, until the amounts so treat- ed equal the amount of the distribution of such stock which by reason of subsection (f)(5) was not included as a distribution for purposes of this section. (Added Pub. L. 86-69, § 2(a), June 25, 1959, 73 Stat. 129, and amended Pub. L. 87-790, § 3(b), Oct. 10, 1962, 76 Stat. 808; Pub. L. 87-858, § 3(b)(4), (e), Oct. 23. 1962, 76 Stat. 1137; Pub. L. 88-571, §§ 2, 3(a), 4(a), Sept. 2, 1964, 78 Stat. 857, 859; Pub. L. 90-225, § 4(a), (b), Dec. 27, 1967, 81 Stat. 733, 734; Pub. L. 91-172, title IX, § 907(b), Dec. 30, 1969, 83 Stat. 715; Pub. L. 94- 331, § l(a), June 30, 1976, 90 Stat. 781; Pub. L. 94-455, title XIX, §§ 1901(b)(1)(O), (24), (33)(H), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1791, 1798, 1801, 1834.) PRIOR PROVISIONS A prior section 816, act. Aug. 16, 1954, ch. 736, § 816, as added Mar. 13, 1956, ch. 83, § 2, 70 Stat. 46, which related to taxation of foreign life insurance compa- nies, was omitted from this part by Pub. L. 86-69, § 2(a), June 25, 1959, 73 Stat. 112, which amended this part in its entirety. See section 819(a), (d) of this title. AMENDMENTS 1976-Subsec. (b)(2)(A)(ii). Pub. L. 94-455, § 1901(b)(33)(H), substituted "of the net capital gain" for "by which the net long-term capital gain exceeds the net short-term capital loss". Subsec. (b)(2)(A)(iii). Pub. L. 94-455, § 1901(b)(1)(O), struck out "the deduction for partially tax-exempt in- terest provided by section 242 (as modified by section 804(a)(3))," before "the deductions for dividends". Subsec. (c)(3)(B). Pub. L. 94-455, § 1901(b)(24), struck out "(determined without regard to section 802(a)(3))" following "the amount". Subsec. (d). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" in par. (2). Pub. L. 94-331 added par. (6). 1969-Subsec. (f). Pub. L. 91-172, § 907(b)(1), added par. (5) and inserted references to par. (5) in the mate- rial following par. (5). Subsec. (g). Pub. L. 91-172, § 907(b)(2), added subsec. (g). 1967-Subsec. (f). Pub. L. 90-225 struck-out "or" at the end of par. (2), struck out the period at the end of par. (3)(B)(ii) and inserted in lieu ", or", and added par. (4), and in material following par. (4) added refer- ences to par. (4) wherever appearing, and substituted "paragraph (3)(B)." for "subparagraph (B) of such paragraph". 1964-Subsec. (a). Pub. 88-571, §4(a)(1), eliminated definitions of "distribution." See subsec. (f) of this sec- tion. Subsec. (b)(2)(A)(ii). Pub. L. 88-571, § 2, inserted "re- duced (in the case of a taxable year beginning after December 31, 1961) by the amount referred to in clpuse (i)". Subsec. (d)(5). Pub. L. 88-571, § 3(a), added par. (5). Subsec. (f). Pub. L. 88-571, §4(a)(2), added subsec. (f). 1962-Subsec. (a). Pub. L. 87-858, § 3(e), added provi- sion that "for purposes of this section, the term 'distri- bution' does not include any distribution before Janu- ary 1, 1964, of the stock of a controlled corporation to which section 355 applies, if such controlled corpora. tion is an insurance company subject to the tax im- posed by section 831 and control has been acquired prior to January 1, 1963, in a transaction qualifying as a reorganization under section 368(a)(1)(B)". Subsec. (c)(2). Pub. L. 87-790 substituted "accident and health insurance and group life insurance con. tracts" for "group life and group accident and health insurance contracts" in cl. (C). Subsec. (c)(3)(B). Pub. L. 87-858, § 3(b)(4), substitut. ed "802(a)" for "802(a)(1)". EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (b)(2)(A)(ii), (iii), (c)(3)(B) by section 1901(b)(1)(O), (24), (33)(H) of Pub. L. 94- 455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under sec- tion 2 of this title. Section l(b) of Pub. L. 94-331 provided that: "The amendment made by this section [amending subsec. (d)(6) of this section) shall apply with respect to tax- able years ending after December 31, 1957." EFFECTIVE DATE OF 1969 AMENDMENT Amendment by section 907(b) of Pub. L. 91-172 ap- plicable to taxable years beginning after Dec. 31, 1968, see section 907(d) of Pub. L. 91-172, set out as an Ef- fective Date of 1969 Amendment note under section 805 of this title. EFFECTIVE DATE OF 1967 AMENDMENT Section 4(c) of Pub. L. 90-225 provided that: "The amendments made by this section [amending subsec. (f) of this section] shall apply to taxable years begin- ning after December 31, 1966." EFFECTIVE DATE OF 1964 AMENDMENT Section 3(f) of Pub. L. 88-571 provided that: "The amendments made by this section [to subsec. (d) of this section, and sections 6501, 6511, 6601 and 6611 of this title] shall apply with respect to amounts added to policyholders surplus accounts (within the meaning of section 815(c) of the Internal Revenue Code of 1954) [subsec. (c) of this section] for taxable years be- ginning after December 31, 1958." Section 4(b) of Pub. L. 88-571 provided that: "The amendments made by subsection (a) [adding subsec. § 815 Page 512
TITLE 26-INTERNAL REVENUE CODE (f) and amending subsec. (a) of this section] shall apply to taxable years beginning after December 31, 1963." EFFECTIVE DATE OF 1962 AMENDMENT Amendment by Pub. L. 87-858 applicable with re- spect to taxable years beginning after Dec. 31, 1961, see section 3(f) of Pub. L. 87-858, set out as an Effec- tive Date of 1962 Amendment note under section 801 of this title. Amendment of subsec. (c)(2)(C) by Pub. L. 87-790 applicable to taxable years beginning after Dec. 31, 1962, see section 3(c) of Pub. L. 87-790, set out as an Effective Date of 1962 Amendment note under section 809 of this title. EFFECTIVE DATE Section applicable only with respect to taxable years beginning after December 31, 1957, see section 4 of Pub. L. 86-69, set out as an Effective Date note under section 801 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 802, 819 6501, 6511, 6601, 6611 of this title. SUBPART E-MISCELLANEOUS PROVISIONS Sec. 817. 818. 819. 819A. 820. Rules relating to certain gains and losses. Accounting provisions. Foreign life insurance companies. Contiguous country branches of domestic life insurance companies. Optional treatment of policies reinsured under modified coinsurance contracts. AMENDMENTS 1976-Pub. L. 94-455, title X, § 1043(b), Oct. 4, 1976, 90 Stat. 1642, added item 819A. § 817. Rules relating to certain gains and losses (a) Treatment of capital gains and losses, etc. In the case of a life insurance company- (1) in applying section 1231(a), the term "property used in the trade or business" shall be treated as including only- (A) property used in carrying on an insur- ance business, of a character which is sub- ject to the allowance for depreciation pro- vided in section 167, held for more than 9 months, and real property used in carrying on an insurance business, held for more than 9 months, which is not described in section 1231(b)(1)(A), (B), or (C), and (B) property described in section 1231(b)(2), and (2) in applying section 1221(2), the refer- ence to property used in trade or business shall be treated as including only property used in carrying on an insurance business, (b) Gain on property held on December 31, 1958, and certain substituted property acquired after 1958 (I) Property held on December 31, 1958 In the case of property held by the taxpay- er on December 31, 1958, if- (A) the fair market value of such property on such date exceeds the adjusted basis for determining gain as of such date, and (B) the taxpayer has been a life insurance company at all times on and after Decem- ber 31, 1958, the gain on the sale or other disposition of such property shall be treated as an amount (not less than zero) equal to the amount by which the gain (determined without regard to this subsection) exceeds the difference be. tween the fair market value on December 31, 1958, and the adjusted basis for determining gain as of such date. (2) Certain property acquired after December 31, 1958 In the case of property acquired after De. cember 31, 1958, and having a substituted basis (within the meaning of section 1016(b))- (A) for purposes of paragraph (1), such property shall be deemed held continuously by the taxpayer since the beginning of the holding period thereof, determined with reference to section 1223, (B) the fair market value and adjusted basis referred to in paragraph (1) shall be that of that property for which the holding period taken into account includes Decem- ber 31, 1958, (C) paragraph (1) shall apply only if the property or properties the holding periods of which are taken into account were held only by life insurance companies after De- cember 31, 1958, during the holding periods so taken into account, (D) the difference between the fair market value and adjusted basis referred to in paragraph (1) shall be reduced (not less than zero) by the excess of (I) the gain that would have been recognized but for this subsection on all prior sales or dispositions after December 31, 1958, of properties re- ferred to in subparagraph (C), over (ii) the gain that was recognized on such sales or other dispositions, and (E) the basis of such property shall be de- termined as if the gain which would have been recognized but for this subsection were recognized gain. (3) Property defined For purposes of paragraphs (1) and (2), the term "property" does not include insurance and annuity contracts (and contracts supple- mentary thereto) and property described in paragraph (1) of section 1221. (Added Pub. L. 86-69, § 2(a), June 25, 1959, 73 Stat. 132, and amended Pub. L. 94-455, title XIV, § 1402(b)(1)(M), title XIX, §§ 1901(a)(100), 1951(b)(11)(A), Oct. 4, 1976, 90 Stat. 1732, 1781, 1839.) TAXABLE YEARS AFTER 1977 Subsec. (a)(1)(A) of this section amended by Pub. L. 94-455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, effective for tax- able years beginning after Dee. 31, 1977, by substituting "1 year"for "9 months". PRIOR PROVISIONS A prior section 817, act Aug. 16, 1954, 'ch. 736, § 817, as added Mar. 13, 1956, ch. 83, § 2, 70 Stat. 46, related to denial of double deductions prior to the general re- vision of this part by Pub. L. 86-69, § 2(a). See section 818(f) of this title. AMENDMENTS 1976-Subsec. (a)(1)(A). Pub. L. 94-455, § 1402(b) (1)(M), provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977. Page 513 §9817
TITLE 26-INTERNAL REVENUE CODE Subsec. (c). Pub. L. 94-455, § 1901(a)(100), struck out subsec. (c) which related to limitation on pre-1959 cap- ital losses. Subsec. d). Pub. L. 94-455, § 1951(b)(l1)(A), struck out subsec. (d) which related to gain on transactions occurring prior to Jan. 1, 1959. Subsec. (e). Pub. L. 94-455. § 1901(a)(100), struck out subsec. (e) which related to certain reinsurance trans- actions in 1958. EFFECTIVE DATE OF 1976 AMENDMENT Section 1402(b)(1) of Pub. L. 94-455 provided in part that the substitution of I9 months" for "6 months" in subsec. (a)(1)(A) of this section by section 1402(b)(1)(M) of Pub. L. 94-455 Is effective with re- spect to taxable years beginning in 1977. Amendment of subsecs. (c) and (e) by section 1901(a)(100) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE Section applicable only with respect to taxable years beginning after Dec. 31, 1957, see section 4 of Pub. L. 86-69, set out as an Effective Date note under section 801 of this title. SAVINGS PROVISIONS Section 1951(b)(11)(B) of Pub. L. 94-455 provided that: "Notwithstanding subparagraph (A) [repealing subsec. Cd) of this section], any gain in a taxable year beginning after December 31, 1976, from any sale or other disposition of property prior to January 1, 1959, would be excluded or not taken into account for pur- poses of part 1 of subchapter L of chapter 1 if subsec- tion (d) of section 817 of such Code were still in effect for such taxable year, such gain shall be excluded for purposes of such part." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 953 of this title. § 818. Accounting provisions (a) Method of accounting All computations entering into the determi- nation of the taxes imposed by this part shall be made- (1) under an accrual method of accounting, or (2) to the extent permitted under regula- tions prescribed by the Secretary, under a combination of an accrual method of account- Ing with any other method permitted by this chapter (other than the cash receipts and dis- bursements method). Except as provided in the preceding sentence, all such computations shall be made in a manner consistent with the manner required for purposes of the annual statement approved by the National Association of Insurance Com- missioners. (b) Amortization of premium and accrual of discount (1) In general The appropriate items of income, deduc- tions, and adjustments under this part shall be adjusted to reflect the appropriate amorti- zation of premium and the appropriate accru- al of discount attributable to the taxable year on bonds, notes, debentures, or other evi- dences of indebtedness held by a life insur- ance company. Such amortization and accrual shall be determined- (A) in accordance with the method regu- larly employed by such company, if such method is reasonable, and (B) in all other cases, in accordance with regulations prescribed by the Secretary. (2) Special rules (A) Amortization of bond premium In the case of any bond (as defined in sec- tion 171(d)) acquired after December 31, 1957, the amount of bond premium, and the amortizable bond premium for the taxable year, shall be determined under section 171(b) as if the election set forth in section 171(c) had been made, (B) Convertible evidences of indebtedness In no case shall the amount of premium on a convertible evidence of indebtedness include any amount attributable to the con- version features of the evidence of indebt- edness. (3) Exception For taxable years beginning after December 31, 1962, no accrual of discount shall be re- quired under paragraph (1) on any bond (as defined in section 171(d)), except in the case of discount which is- (A) interest to which section 103 applies, or (B) original issue discount (as defined in section 1232(b)). For purposes of section 805(b)(3)(A), the cur- rent earnings rate for any taxable year begin- ning before January 1, 1963, shall be deter- mined as if the preceding sentence applied to such taxable year. c) Life insurance reserves computed on preliminary term basis For purposes of this part (other than section 801), at the election of the taxpayer the amount taken into account as life insurance re- serves with respect to contracts for which such reserves are computed on a preliminary term basis may be determined on either of the fol- lowing bases: (1) Exact revaluation As if the reserves for all such contracts had been computed on a net level premium basis (using the same mortality assumptions and interest rates for both the preliminary term basis and the net level premium basis). (2) Approximate revaluation The amount computed without regard to this subsection- (A) increased by $21 per $1,000 of insur- ance in force (other than term insurance) under such contracts, less 2.1 percent of re- serves under such contracts, and (B) increased by $5 per $1,000 of term in- surance in force under such contracts which at the time of issuance cover a period of more than 15 years, less 0.5 percent of re- serves under such contracts. If the taxpayer makes an election under either paragraph (1) or (2) for any taxable year, the basis adopted shall be adhered to in making the computations under this part (other than sec- tion 801) for the taxable year and all subse- quent taxable years unless a change in the basis § 818 Page 514
TITLE 26-INTERNAL REVENUE CODE of computing such reserves is approved by the Secretary, except that if, pursuant to an elec- tion made for a taxable year beginning in 1958, the basis adopted is the basis provided in para- graph (2), the taxpayer may adopt the basis provided by paragraph (1) for its first taxable year beginning after 1958. (d Short taxable years If any return of a corporation made under this part is for a period of less than the entire calendar year (referred to in this subsection as "short period"), then section 443 shall not apply in respect of such period, but- (1) the taxable investment income and the gain or loss from operations shall be deter- mined, under regulations prescribed by the Secretary, on an annual basis by a ratable daily projection of the appropriate figures for the short period, (2) that portion of the life insurance compa- ny taxable income described in paragraphs (1) and (2) of section 802(b) shall be determined on an annual basis by treating the amounts ascertained under paragraph (1) as the tax- able investment income and the gain or loss from operations for the taxable year, and (3) that portion of the life insurance compa- ny taxable income described in paragraphs (1) and (2) of section 802(b) for the short period shall be the amount which bears the same ratio to the amount ascertained under para- graph (2) as the number of days in the short period bears to the number of days in the entire calendar year. (e) I)enial of double deductions Nothing in this part shall permit the same item to be deducted more than once under sub- part B and once under subpart C. (f) Computation on consolidated returns of policy- holders' share of investment yield For purposes of this part. in the case of a life insurance company filing or required to file a consolidated return under section 1501 for a taxable year, the computations of the policy- holders' share of investment yield under sub- parts B and C (including all determinations and computations incident thereto) shall be made as if such company were not filing a consolidat- ed return. (Added Pub. L. 86-69, § 2(a), June 25, 1959, 73 Stat. 133, and amended Pub. L. 88-272, title I, § 228(b)(1), Feb. 26, 1964, 78 Stat. 98; Pub. L. 91- 688, § l(a), Jan. 12, 1971, 84 Stat. 2072; Pub. L. 94-455, title XIX, §§ 1901(a)(101), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1781, 1834.) PRIOR Pnov'SIONS A prior section 818, act Aug. 16, 1954, ch. 736, § 818, as added Mar. 13, 1956, ch. 83, § 2, 70 Stat. 46, related to certain new insurance companies prior to the gener- al revision of this part by Pub. L. 86-69, § 2(a). AMENDMENTS 1976-Subsecs. (a)(2), (b)(l)iBI, (d)(1). Pub, L. 94- 455, § 1906(b)(13)(A), struck out "or his delegate" fol- lowing "Secretary". Subsec. (e). Pub. L. 94-455, § 1901(a)(101), redesig- nated former subsec. (f) as (e). Former subsec. (0), which related to a transitional rule for changes in method of accounting, was struck out. Subsec. (f). Pub. L. 94-455, § 1901(a)(101), redesignat- ed former subsec. (g) as (f). Former subsec. (f) redesig. nated (e). Subsec. (g). Pub. L. 94-455, § 1901(a)(101), redesig- nated subsec. (g) as (f). 1971-Subsee. (g). Pub. L. 91-688 added subsec. (g). 1964-Subsec. (b)(3). Pub. L. 88-272 added par. (3). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (e), (f), (g) by section 1901(a)(1l01) effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1971 AMENDMENT Section 1(b) of Pub. L. 91-688 provided that: "The amendment made by subsection (a) [enacting subsec. (g) of this section] shall apply with respect to taxable years beginning after December 31, 1957." EFFECTIVE DATE Section applicable only with respect to taxable years beginning after Dec, 31, 1957, see section 4 of Pub. L. 86-69, set out as an Effective Date note under section 801 of this title. ELECTION TO FILE SEPARATE RETURNS Section 2 of Pub. L. 91-688 provided that: "(a) If- "(1) any insurance company subject to taxation under section 802 of the Internal Revenue Code of 1954 [section 802 of this title] filed a consolidated return under section 1501 of such Code [section 1501 of this title] for any taxable year beginning after December 31, 1957, and ending before March 13, 1969, and "(2) not later than one year after the date of the enactment of this Act [Jan. 12, 1971] "(A) such company elects (in such manner as the Secretary of the Treasury or his delegate may pre- scribe) to have this section apply, "(B) such company files consents to the applica- tion ef this section of all companies which at any time during any taxable year beginning after De- cember 31, 1957, and ending before March 13, 1969, were members of the same affiliated group as such company, and "(C) such company (and each company referred to in subparagraph (1)) files a separate return for the first taxable year beginning after December 31, 1957, for which such company filed a consoli- dated return and for each taxable year thereafter ending before the date of, the enactment of this Act Jan. 12, 19711, then not withstanding any law or rule of law the requirement of filing a consoli- dated return shall be replaced by a requirement of separate returns for each company referred to in paragraph (2)(C) for each taxable year to which paragraph (2)(C) applies with respect to such com- pany. Paragraph (2)(C) shall not apply with re- spect to any company for any taxable year the allowance of a credit for which is barred on the date of the enactment of this Act [Jan. 12, 1971], by res judicata or through the operation of section 7121 or section 7122 of the Internal Revenue Code of 1954 [section 7121 or 7122 of this title]. "(b) If the making or allowance of any refund or credit, or the assessment of any deficiency, of income tax for any taxable year to which subsection (a)(2)(C) applies is prevented before the expiration of 2 years after the date of the enactment of this Act [Jan. 12, 1971] by any law or rule of law (other than sections 7121 and 7122 of such Code and other than res Judi- cata), such refund or credit may nevertheless be made or allowed, and such deficiency may nevertheless be assessed, at any time before the expiration of such 2- year period, but only to the extent that the overpay- ment or deficiency is attributable to an election made under this section. No interest shall be allowed on any Page 515 § 818
TITLE 26-INTERNAL REVENUE CODE credit or refund described in the preceding sentence, and no interest shall be assessed with respect to any deficiency described in the preceding sentence, for any period before the day which is one year after the date of the enactment of this Act [Jan. 12, 1971." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 810, 1016, 1232 of this title. § 819. Foreign life insurance companies (a) Adjustment where surplus held in United States is less than specified minimum (1) In general In the case of any foreign corporation tax- able under this part, if the minimum figure determined under paragraph (2) exceeds the surplus held in the United States, then- (A) the amount of the policy and other contract liability requirements (determined under section 805 without regard to this subsection), and (B) the amount of the required interest (determined under section 809(a)(2) without regard to this subsection), shall each be reduced by an amount deter- mined by multiplying such excess by the cur- rent earnings rate (as defined in section 805(b)(2)). (2) Definitions For purposes of paragraph (1)- (A) The minimum figure is the amount determined by multiplying the taxpayer's total insurance liabilities on United States business by a percentage for the taxable year to be determined and proclaimed by the Secretary. The percentage determined and proclaimed by the Secretary under the preceding sentence shall be based on such data with respect to domestic life insurance companies for the preceding taxable year as the Secretary considers representative. Such percentage shall be computed on the basis of a ratio the numerator of which is the excess of the assets over the total insur- ance liabilities, and the denominator of which is the total insurance liabilities. (B) The surplus held in the United States is the excess of the assets held in the United States over the total insurance li- abilities on United States business. For purposes of this paragraph and subsec- tion (b) the term "total insurance liabilities" means the sum of the total reserves (as de- fined in section 801(c)) plus (to the extent not included in total reserves) the items referred to in paragraphs (3), (4), and (5) of section 810(c). (3) Reduction of section 881 tax In the case of any foreign corporation tax- able under this part, there shall be deter- mined- (A) the amount which would be subject to tax under section 881 if the amount taxable under such section were determined with- out regard to sections 103 and 894, and (B) the amount of the reduction provided by paragraph (1). The tax under section 881 (determined with- out regard to this paragraph) shall be re- duced (but not below zero) by an amount which is the same proportion of such tax as the amount referred to in subparagraph (B) is of the amount referred to in subparagraph (A); but such reduction in tax shall not exceed the increase in tax under this part by reason of the reduction provided by para- graph (1). (b) Distributions to shareholders (I) In general In applying sections 802(b)(3) and 815 with respect to a foreign corporation the amount of the distributions to shareholders shall be determined by multiplying the total amount of the distributions to shareholders (within the meaning of section 815) of the foreign corporation by whichever of the following percentages is selected by the taxpayer for the taxable year: (A) the percentage which the minimum figure for the taxable year (determined under subsection (a)(2)(A)) is of the excess of the assets of the company over the total insurance liabilities; or (B) the percentage which the total insur- ance liabilities on United States business for the taxable year is of the company's total insurance liabilities. (2) Distributions pursuant to certain mutualiza. tions In applying section 815(e) with respect to a foreign corporation- (A) the paid-in capital and paid-in surplus referred to in section 815(e)(1)(A) of a for- eign corporation is the portion of such cap- ital and surplus determined by multiplying such capital and surplus by the percentage selected for the taxable year under pard- graph (1); and (B) the excess referred to in se,.tion 815(e)(2)(A)(i) (without the adjustmert pro- vided by section 815(e)(2)(B)) is whichever of the following is the greater: (i) the minimum figure for 1948 deter- mined under subsection (a)(2)(A) comput- ed by using a percentage of 9 percent in lieu of the percentage deter nined and proclaimed by the Secretary, or (ii) the surplus described in subsection (a)(2)(B) (determined as of December 31, 1958). (c) Cross reference For taxation of foreign corporations carrying on lire insurance business within the United States, see section 842. (Added Pub. L. 86-69, § 2(a), June 25, 1959, 73 Stat. 136, and amended Pub. L. 89-809, title I, § 104(i)(3), Nov. 13, 1966, 80 Stat. 1561; Pub. L. 94-455, title XIX, §§ 1901(a)(102), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1781, 1834.) AMENDMENTS 1976-Subsec. (a)(2)(A). Pub. L. 94-455, §§ 1901(a)(102), 1906(b)(13)(A), among other changes,. struck out reference to in the case of a taxable year beginning before Jan. 1, 1959, 9 percent, reference to in the case of a taxable year beginning after Dec. 31, 1958 and "or his delegate" following "Secretary" and substituted reference to the preceding sentence for reference to clause (if), Subsec. (b)(2)(B)(i). Pub. L. 94-455, § 1901(a)(102)(C), added reference to computed by using a percentage of § 819 Page 516
TITLE 26-INTERNAL REVENUE CODE 9 percent in lieu of the percentage determined and proclaimed by the Secretary. 1966-Subsec. (a). Pub. L. 89-809, § 104()(3)(A) to (D), struck out former subsec. (a), which rendered tax- able the business of a foreign life insurance company carrying on a life insurance business within the United States in the same manner as a domestic life insurance company if, with respect to its United States business, it would qualify as a life insurance company under sec- tion 801, redesignated subsec. (b) as subsec. (a), and, in subsec. (a) as so redesignated, substituted "In the case of any foreign corporation taxable under this part" for "In the case of any company described in subsec- tion (a)," in par. (1), "subsection (b)" for "subsection (c)" in par. (2), and added par. (3). Subsec. (b). Pub. L. 89-809, § 104(i)(3)(A), (E) to (H), redesignated subsec. (c) as subsec. (b), and, in subsec. (b) as so redesignated, substituted "with respect to a foreign corporation" for "for purposes of subsection (a)", "foreign corporation" for "foreign life insurance company", and "subsection (a)C2)(A)" for "subsection (b)(2)(A)" wherever appearing, and, in par. (2)(B)(1i), substituted "subsection (a)(2)(B)" for "subsection (b)(2)(B)". Former subsec. (b) redesignated as subsec. (a). Subsec. (c). Pub, L. 89-809, § 104()(3)(A), (I), added subsec. (c). Former subsec. (c) redesignated as subsec. (b). Subsec. (d). Pub. L. 89-809, § 104(i)(3)(A), struck out subsec. (d) which provided that foreign life insurance companies not carrying on an insurance business within the United States shall not be taxable under this part but shall be taxable as other foreign corpora- tions. EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (a)(2)(A), (b)(2)(B)(1) by sec- tion 1901(a)(102) of Pub. L. 94-455 effective for tax- able years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-809 applicable with re- spect to taxable years beginning after Dec, 31, 1966, see section 104(n) of Pub. L. 89-809, set out as an Ef- fective Date of 1966 Amendment note under section 11 of this title. EFFECTIVE DATE Section applicable only with respect to taxable years beginning after Dec. 31, 1957, see section 4 of Pub. L. 86-69, set out as an Effective Date note under section 801 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 4371 of this title. § 819A. Contiguous country branches of domestic life insurance companies (a) Exclusion of items In the case of a domestic mutual insurance company which- (1) is a life insurance company, (2) has a contiguous country life insurance branch, and (3) makes the election provided by subsec- tion (g) with respect to such branch, there shall be excluded from each and every item involved in the determination of life insur- ance company taxable income the items sepa- rately accounted for in accordance with subsec- tion (c). (b) Contiguous country life insurance branch For purposes of this section, the term "con- tiguous country life insurance branch" means a branch which- (1) issues insurance contracts insuring risks in connection with the lives or health of resi- dents of a country which is contiguous to the United States, (2) has its principal place of business in such contiguous country, and (3) would constitute a mutual life insurance company if such branch were a separate do- mestic insurance company. For purposes of this section, the term "insur- ance contract" means any life, health, accident, or annuity contract or reinsurance contract or any contract relating thereto. (c) Separate accounting required Any taxpayer which makes the election pro- vided by subsection (g) shall establish and maintain a separate account for the various income, exclusion, deduction, asset, reserve, li- ability, and surplus items properly attributable to the contracts described in subsection (b). Such separate accounting shall be made- (1) in accordance with the method regularly employed by such company, if such method clearly reflects income derived from, and the other items attributable to, the contracts de- scribed in subsection (b), and (2) in all other cases, in accordance with regulations prescribed by the Secretary. (d) Recognition of gain on assets in branch account If the aggregate fair market value of all the invested assets and tangible property which are separately accounted for by the domestic life insurance company in the branch account es- tablished pursuant to subsection (c) exceeds the aggregate adjusted basis of such assets for purposes of determining gain, then the domes- tic life insurance company shall be treated as having sold all such assets on the first day of the first taxable year for which the election is in effect at their fair market value on such first day. Notwithstanding any other provision of this chapter, the net gain shall be recognized to the domestic life insurance company on the deemed sale described in the preceding sen- tence. (e) Transaction between contiguous country branch and domestic life insurance company (1) Reimbursement for home office services, etc. Any payment, transfer, reimbursement, credit, or allowance which is made from a sep- arate account established pursuant to subsec- tion (c) to one or more other accounts of a do- mestic life insurance company as reimburse- ment for costs incurred for or with respect to the insurance (or reinsurance) of risks ac- counted for in such separate account shall be taken into account by the domestic life insur- ance company in the same manner as if such payment, transfer, reimbursement, credit, or allowance had been received from a separate person. (2) Repatriation of income (A) In general Except as provided in subparagraph (B), any amount directly or indirectly trans- 71-999 0 - 78 - 35 (Vol. 7) Page 517 § 819A
TITLE 26-INTERNAL REVENUE CODE ferred or credited from a branch account es- tablished pursuant to subsection (c) to one or more other accounts of such company shall, unless such transfer or credit is a re- imbursement to which paragraph (1) ap- plies, be added to the life insurance compa- ny taxable income of the domestic life in- surance company (as computed without regard to this paragraph). (B) Limitation The addition provided by subparagraph (A) for the taxable year with respect to any contiguous country life insurance branch shall not exceed the amount by which- (i) the aggregate decrease in the life in- surance company taxable income of the domestic life insurance company for the taxable year and for all prior taxable years resulting solely from the application of subsection (a) of this section with re- spect to such branch, exceeds (ii) the amount of additions to life in- surance company taxable income pursu- ant to subparagraph (A) with respect to such contiguous country branch for all prior taxable years. (f) Other rules (I) Treatment of foreign taxes (A) In general No income, war profits, or excess profits taxes paid or accrued to any foreign coun- try or possession of the United States which is attributable to income excluded under subsection (a) shall be taken into account for purposes of subpart A of part III of sub- chapter N (relating to foreign tax credit) or allowable as a deduction. (B) Treatment of repatriated amounts For purposes of sections 78 and 902, where any amount is added to the life in- surance company taxable income of the do- mestic life insurance company by reason of subsection (e)(2), the contiguous country life insurance branch shall be treated as a foreign corporation. Any amount so added shall be treated as a dividend paid by a for- eign corporation, and the taxes paid to any foreign country or possession of the United States with respect to such amount shall be deemed to have been paid by such branch. (2) United States source income allocable to contig- uous country branch For purposes of sections 881, 882, and 1442, each contiguous country life insurance branch shall be treated as a foreign corpora- tion. Such sections shall be applied to each such branch in the same manner as If such sections contained the provisions of any treaty to which the United States and the contiguous country are parties, to the same extent such provisions would apply if such branch were incorporated in such contiguous country. (g) Election A taxpayer may make the election provided by this subsection with respect to any contig- uous country for any taxable year beginning after December 31, 1975. An election made under this subsection for any taxable year shall remain in effect for all subsequent taxable years, except that it may be revoked with the consent of the Secretary. The election provided by this subsection shall be made not later than the time prescribed by law for filing the return for the taxable year (including extensions thereof) with respect to which such election is made, and such election and any approved revo- cation thereof shall be made in the manner provided by the Secretary. (h) Special rule for domestic stock life insurance companies At the election of a domest!c stock life insur- ance company which has a contiguous country life insurance branch described in subsection (b) (without regard to the mutual requirement in subsection (b)(3)), the assets of such branch may be transferred to a foreign corporation or- ganized under the laws of the contiguous coun- try without the application of section 367 or 1491. Subsection (a) shall apply to the stock of such foreign corporation as if such domestic company were a mutual company and as if the stock were an item described in subsection (c). Subsection (e)(2) shall apply to amounts trans- ferred o, credited to such domestic company as if such domestic company and such foreign cor- poration constituted one domestic mutual life insurance company. The insurance contracts which may be transferred pursuant to this sub- section shall include only those which are simi- lar to the types of insurance contracts issued by a mutual life insurance company. Notwith- standing the first sentence of this subsection, if the aggregate fair market value of the invested assets and tangible property which are sepa- rately accounted for by the domestic life insur- ance company in the branch account exceeds the aggregate adjusted basis of such assets for purposes of determining gain, the domestic life insurance company shall be deemed to have sold all such assets on the first day of the tax- able year for which the election under this sub- section applies and the net gain shall be recog- nized to the domestic life insurance company on the deemed sale, but not in excess of the proportion of such net gain which equals the proportion which the aggregate fair market value of such assets which are transferred pur- suant to this subsection is of the aggregate fair market value of all such assets. (Added Pub. L. 94-455, title X, § 1043(a), Oct. 4, 1976, 90 Stat. 1639.) EFFECTIVE DATE Section 1043(c) of Pub. L. 94-455 provided that: "The amendment made by this section [enacting this section] shall apply to taxable years beginning after December 31, 1975". § 820. Optional treatment of policies reinsured under modified coinsurance contracts (a) In general (1) Treatment as reinsured under conventional co- insurance contract Under regulations prescribed by the Secre- tary, an insurance or annuity policy reinsured under a modified coinsurance contract (as de- fined in subsection (b)) shall be treated, for purposes of this part (other than for purposes of section 801). as if such policy were rein- Page 518 § 820
'I ITLE 26-INTERNAL REVENUE CODE sured under a conventional coinsurance con- tract. (2) Consent of reinsured and reinsurer Paragraph (1) shall apply to an insurance or annuity policy reinsured under a modified coinsurance contract only if the reinsured and reinsurer consent, in such manner as the Secretary shall prescribe by regulations- (A) to the application of paragraph (1) to all insurance and annuity policies reinsured under such modified coinsurance contract, and (B) to the application of the rules pro- vided by subsection (c) and the rules pre- scribed under such subsection. Such consent, once given, may not be rescind- ed except with the approval of the Secretary. (b) Definition of modified coinsurance contract For purposes of this section, the term "modi- fied coinsurance contract" means an indemnity reinsurance contract under the terms of which- (1) a life insurance company (hereinafter referred to as "the reinsurer") agrees to in- demnify another life insurance company (her- einafter referred to as "the reinsured") against a risk assumed by the reinsured under the Insurance or annuity policy reinsured, (2) the reinsured retains ownership of the assets in relation to the reserve on the policy reinsured, (3) all or part of the gross investment income derived from such assets is paid by the reinsured to the reinsurer as a part of the consideration for the reinsurance of such policy, and (4) the reinsurer is obligated for expenses incurred, and for Federal income taxes im- posed, in respect of such gross investment income. (c) Special rules Under regulations prescribed by the Secre- tary, in applying subsection (a)(1) with respect to any insurance or annuity policy the follow- ing rules shall (to the extent not improper under the terms of the modified coinsurance contract under which such policy is reinsured) be applied in respect of the amount of such policy reinsured: (1) Premiums and gross investment income The premiums (to the extent allocable to the participation of the reinsurer therein) re- ceived for the policy reinsured shall be treat- ed as received by the reinsurer and not by the reinsured. The gross investment income (to the extent allocable to the participation of the reinsurer therein) derived from the assets in relation to the reserve on the policy rein- sured shall be treated as gros3 investment income of the reinsurer and not of the rein- sured. The gross investment income so treat- ed shall be considered as derived proportion- ately from each of the various sources of gross investment income of the reinsured. (2) Capital gains and losses The gains and losses from sales and ex- changes of capital assets, and gains and losses considered as gains and losses from sales and exchanges of capital assets, of the reinsured shall (to the extent of the participation therein by the reinsurer under the terms of the modified coinsurance contract) be treated as gains and losses from sales and exchanges of capital assets of the reinsurer and not of the reinsured. (3) Reserves and assets The reserve on the policy reinsured shall be treated as a part of the reserves of the rein- surer and not of the reinsured, and the assets In relation to such reserve shall be treated as owned by the reinsurer and not by the rein- sured. (4) Expenses The expenses (to the extent jeimbursable by the reinsurer) incurred with respect to the policy reinsured and with respect to the assets referred to in paragraph 1.3) shall be treated as incurred by the reinsurer and not by the reinsured. (5) Dividends to policyholders The dividends to policyholders paid in re- spect of the policy reinsured shall be treated as paid by the reinsurer and not by the rein- sured. For purposes of the preceding sen- tence, the amount of dividends to policy- holders treated as paid by the reinsurer shall be the amount paid, in respect of the policy reinsured, by the reinsurer to the reinsured as reimbursement for dividends to policy- holders paid by the reinsured. This para- graph shall apply also in respect of an insur- ance or annuity policy reinsured under a con- ventional coinsurance contract. (6) Rules prescribed by the Secretary Such other rules as may be prescribed by the Secretary. In applying the rules provided by paragraphs (1), (2), (3), (4), and (5) and the rules prescribed under paragraph (6), an item shall be taken into account as income only once under subpart B and only once under subpart C by both the reinsured and the reinsurer, and an item shall be allowed as a deduction only once under sub- part B and only once under subpart C to both the reinsured and the reinsurer. (Added Pub. L. 86-69, § 2(a), June 25, 1959, 73 Stat. 137, and amended Pub. L. 94-455, title XIX, §§ 1901(a)(103), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1782, 1834.) AMENDMENTS 1976-Subsee. (a). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" wherever appearing. Subsec. (c). Pub. L. 94-455, § 1901(a)(103), struck out "or his delegate" following "Secretary" in two places, redesignated former par. (7) as (6), and substituted in material following par. (6), "and (5) and the rules pre- scribed under paragraph (6)" for "(5), and (6) and the riles prescribed under paragraph (7). Former par. (6), which related to reimbursement for 1957 Federal income tax, was struck out. EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (c) by section 1901(a)(103) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Page 519 § 820
TITLE 26-INTERNAL REVENUE CODE EFFECTIVE DATE Section applicable only with respect to taxable years beginning after Dec. 31, 1957, see section 4 of Pub. L. 86-69, set out as an Effective Date note under section 801 of this title. PART II-MUTUAL INSURANCE COMPA- NIES (OTHER THAN LIFE AND CERTAIN MARINE INSURANCE COMPANIES AND OTHER THAN FIRE OR FLOOD INSUR- ANCE COMPANIES WHICH OPERATE ON BASIS OF PERPETUAL POLICIES OR PREMIUM DEPOSITS) See. 821. Tax on mutual insurance companies to which part II applies. 822. Determination of taxable investment income. 823. Determination of statutory underwriting income or loss. 824. Adjustments to provide protection against losses. 825. Unused loss deduction. 826. Election by reciprocal. AMENDMENTS 1962-Pub. L. 87-834, § 8(a), Oct. 16. 1962, 76 Stat. 989, substituted "other than life and certain marine insurance companies and other than fire or flood in- surance companies which operate on basis of perpet- ual policies or premium deposits" for "other than life or marine or fire insurance companies issuing perpet- ual policies" in the heading of Part II, "companies to which part II applies" for "companies (other than life or marine or fire insurance companies issuing perpet- ual policies)" in item 821, "Determination of taxable investment income" for "Determination of mutual in- surance company taxable income" in item 822, and "Determination of statutory underwriting income of loss" for "Other definitions" in item 823, and added items 824 to 826. PART REFERRED TO IN OTHER SECTIONS This part is referred to in sections 953, 1016 of this title. § 821. Tax on mutual insurance companies to which part II applies (a) Imposition of tax A tax is hereby imposed for each taxable year on the mutual insurance company taxable income of every mutual insurance company (other than a life insurance company and other than a fire, flood, or marine insurance company subject to the tax imposed by section 831). Such tax shall consist of- (1) Normal tax A normal tax equal to- (A) in the case of a taxable year ending after December 31, 1977, 22 percent of the mutual insurance company taxable income, or 44 percent of the amount by which such taxable income exceeds $6,000, whichever is lesser, or (B) in the case of a taxable year ending after December .1, 1974, and before Janu- ary 1, 1978- (1) 20 percent of so much of the mutual insurance company taxable income as does not exceed $25,000, p.us (1i) 22 percent of so much of the mutual insurance company taxable income as ex- ceeds $25,000, or 44 percent of the amount by which such taxable income exceeds $6,000, whichever is lesser; plus (2) Surtax A surtax on the mutual insurance company taxable income computed as provided in sec- tion 11(c) as though the mutual insurance company taxable income were the taxable income referred to in section 11(c). (b) Mutual insurance company taxable income de- fined For purposes of this part, the term "mutual insurance company taxable income" means, with respect to any taxable year, the amount by which- (1) the sum of- (A) the taxable investment income (as de- fined in section 822(a)(1)), (B) the statutory underwriting income (as defined in section 823(a)(1)), and (C) the amounts required by section 824(d) to be subtracted from the protection against loss account, exceeds (2) the sum of- (A) the investment loss (as defined in sec- tion 822(a)(2)), (B) the statutory underwriting loss (as de- fined in section 823(a)(2)), and (C) the unused loss deduction provided by section 825(a). (c) Alternative tax for certain small companies (1) Imposition of tax There is hereby imposed for each taxable year on the income of each mutual insurance company to which this subsection applies a tax (which shall be in lieu of the tax imposed by subsection (a)) computed as follows: (A) Normal tax A normal tax equal to- (1) in the case of a taxable year ending after December 31, 1977, 22 percent of the taxable investment income, or 44 percent of the amount by which such taxable income exceeds $3,000, whichever is lesser, or (ii) in the case of a taxable year ending after December 31, 1974, and before Janu- ary 1, 1978, 20 percent of so much of the taxable investment income as does not exceed $25,000, plus 22 percent of so much of the taxable investment income as exceeds $25,000, or 44 percent of the amount by which such taxable income ex- ceeds $3,000, whichever is lesser; plus (B) Surtax A surtax on the taxable investment income computed as provided in section 11(c) as though the taxable investment income were the taxable income referred to in section 11(c). (2) Gross amount received, over $150,000 but less than $250,000 If the gross amount received during the tax- able year from the items described in section 822(b) (other than paragraph (1)(D) thereof) and premiums (including deposits and assess- ments) is over $150,000 but less than $250,000, the tax imposed by paragraph (1) shall be re- duced to an amount which bears the same proportion to the amount of the tax deter- mined under paragraph (1) as the excess over § 821 Page 520
TITLE 26-INTERNAL REVENUE CODE $150,000 of such gross amount received bears to $100,000. (3) Companies to which subsection applies (A) In general Except as provided in subparagraph (B), this subsection shall apply to every mutual insurance company (other than a life insur- ance company and other than a fire, flood, or marine insurance company subject to the tax imposed by section 831) which received during the taxable year from the items de- scribed in section 822(b) (other than para- graph (1)(D) thereof) and premiums (in- cluding deposits and assessments) a gross amount in excess of $150,000 but not in excess of $500,000. (B) Exceptions This subsection shall not apply to a mutual insurance company for the taxable year if- (I) there is in effect an election by such company made under subsection (d) to be taxable under subsection (a); or (ii) there is any amount in the protec- tion against loss account at the beginning of the taxable year. (d) Election to include statutory underwriting income or loss (I) In general Any mutual insurance company which is subject to the tax imposed by subsection (c) may elect, in such manner and at such time as the Secretary may by regulations pre- scribe, to be subject to the tax imposed by subsection (a). (2) Effect of election If an election is made under paragraph (1), the electing company shall be subject to the tax imposed by subsection (a) (and shall not be subject to the tax imposed by subsection (c)) for the first taxable year for which such election is made and for all taxable years thereafter unless the Secretary consents to a revocation of such election. (e) Tax applicable to member of group filing consoli- dated return Notwithstanding any other provision of this section, if a mutual insurance company to which this section applies joins in the filing of a consolidated return (or is required to so file), the applicable tax shall consist of a normal tax and a surtax computed as provided in section 11 as though the mutual insurance company tax- able income of such company were the taxable income referred to in section 11. (f) Cross references (1) For exemption from tax of certain mutual insur- ance companies, see section 501(c)(15). (2) For alternative tax in case of capital gains, see sec- tion 1201(a). (3) For taxation of foreign corporations carrying on an insurance business within the United States, see section 842. (Aug. 16, 1954, ch. 736, 68A Stat. 260; Mar. 30, 1955, ch. 18, § 2, 69 Stat. 14; Mar. 13, 1956, ch. 83, § 3(a)(1), (2), 70 Stat. 47; Mar. 29, 1956, ch. 115, § 2, 70 Stat. 66; Mar. 29, 1957, Pub. L. 85-12, § 2, 71 Stat. 9; June 30, 1958, Pub. L. 85-475, § 2, 72 Stat. 259; June 30, 1959, Pub. L. 86-75, § 2, 73 Stat. 157; June 30, 1960, Pub. L. 86-564, title II, § 201, 74 Stat. 290; June 30, 1961, Pub. L. 87-72, § 2, 75 Stat. 193; June 28, 1962, Pub. L. 87-508, § 2, 76 Stat. 114; Oct. 16, 1962, Pub. L. 87-834, § 8(a), 76 Stat. 989; June 29, 1963 Pub. L. 88-52, § 2, 77 Stat. 72; Feb. 26, 1964, Pub. L. 88-272, title I, § 123(a), 78 Stat. 29; Nov. 13, 1966, Pub. L. 89-809, title I, § 104(i)(4), 80 Stat. 1562; Oct. 4, 1976, Pub. L. 94-455, title IX, § 901(b), title XV, § 1507(b)(1), title XIX, §§ 1901(a)(104), 1906(b)(13)(A), 90 Stat. 1607, 1739, 1782, 1834.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, § 1901(a)(104)(A), struck out "beginning after December 31, 1963," fol- lowing "imposed for each taxable year". Subsec. (a)(1). Pub. L. 94-455, § 901(b)(1), designated existing provisions as introductory matter and subpar. (A), and in subpar. (A) as so designated, added refer- ence to in the case of taxable year ending after Dec. 31, 1977, and added subpar. (B). Subsec. (c)(1). Pub. L. 94-455, § 1901(a)(104)(B), sub- stituted "There is" for "In the case of taxable years beginning after December 31, 1963, there is". Subsec. (c)(1)(A). Pub. L. 94-455, § 901(b)(2), desig- nated existing provisions as introductory matter and cl. (i), and in cl. (i) as so designated, added reference to in the case of the taxable year ending after Dec. 31, 1977, and added cl. (1i). Subsec. (d). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" wherever appearing. Subsec. (e). Pub. L. 94-455, §§ 1507(b)(1), 1901(a)(104)(C), substituted provisions relating to tax applicable to member of group filing consolidated return for provisions relating to special transitional underwriting loss. Subsec. (f). Pub. L. 94-455, §§ 1507(b)(1), 1901(a)(104)(C), reenacted subsec. (f) without change. 1966-Subsec. (e). Pub. L. 89-809, § 104(i)(4)(A), struck out former subsec. (e) dealing with foreign mutual insurance companies not carrying on an insur- ance business within the United States as redesignated subsec. (f) as subsec. (e). Subsec. f). Pub. L. 89-809, § 104(i)(4)(A), (B), rede- signated subsec. (g) as subsec. f) and, in subsec. (f) as so redesignated, added item (3). Former subsec. (f) re- designated as subsec. (e). Subsec. (g). Pub. L. 89-809, § 104(i)(4)(A), redesignat- ed subsec. (g) as subsec. (f). Former subsec. (f) redesig- nated as subsec. (e). 1964-Subsec. (a). Pub. L. 88-272, § 123(a)(1), substi- tuted "December 31, 1963" for "December 31, 1962", provisions setting a normal tax of 22% of the mutual insurance company taxable income, or 44% of the amount such income exceeds $6,000, whichever is the lesser, for provisions taxing 30% of such income, or 60% of the amount it exceeded $6,000, whichever was the lesser, for taxable years beginning before July 1, 1964, and 25% of such income, or 50% of the amount it exceeded $6,000, whichever was the lesser, for taxable years beginning after June 30, 1964, in par. (1), and in par. (2), "on the mutual insurance company taxable income computed as provided in section 11(c) as though the mutual insurance company taxable income were the taxable income referred to in section 11(c)" for "of 22 percent of the mutual insurance company taxable income (computed without regard to the de- duction provided in section 242 for partially tax exempt interest) in excess of $25,000". Subsec. (c)(1). Pub. L. 88-272, § 123(a)(2), substituted "December 31, 1963" for "December 31, 1962", provi- sions setting a normal tax of 22% of the taxable in- vestment income, or 44% of the amount such income exceeds $3,000, whichever is the lesser, for provisions taxing 30% of such income, or 60% of the amount it exceeded $3,000, whichever was the lesser, for taxable years beginning before July 1, 1964, and 25% of such income, or 50% of the amount it exceeded $3,000, whichever was the lesser, for taxable years beginning Page 521
§ 821 TI'I '&j 2O-Imix , after June 30, 1964, and in par. (B), "on the taxable in- vestment income computed as provided in section 11(c) as though the taxable investment income were the taxable income referred to in section 11(c)" for "of 22 percent of the taxable investment income (computed without regard to the deduction provided in section 242 for partially tax-exempt interest) in excess of $25,000". 1963-Subsec. (a)(1). Pub. L. 88-52 substituted "July 1. 1964" for "July 1, 1963" and "June 30, 1964" for "June 30, 1963", wherever appearing. Subsec. (c)(1)(A). Pub. L. 88-52 substituted "July 1, 1964" for "July 1, 1963" and "June 30, 1964" for June 30, 1963", wherever appearing. 1962-Subsec. (a). Pub. L. 87-834 excluded flood in- surance companies subject to the tax imposed by sec- tion 831 of this title, eliminated provisions which ex- cluded mutual insurance companies which are interin- surers or reciprocal underwriters, and substituted pro- visions authorizing a normal tax, in the case of taxable years beginning before July 1, 1963, of 30 percent of the taxable income, or 60 percent of the amount by which such taxable income exceeds $6,000, whichever is lesser, and in the case of taxable years beginning after June 30, 1963, of 25 percent of the taxable income, or 50 percent of the amount by which such taxable income exceeds $6,000, whichever is less, for provisions which imposed a normal tax, in the case of taxable years beginning before July 1, 1962, of 30 per- cent of the taxable income, or 60 percent of the amount by which such taxable income exceeds $3,000, whichever is the lesser, and in the case of taxable years beginning after June 30, 1962, of 25 percent of the taxable income, or 50 percent of the amount by which such taxable income exceeds $3,000, whichever is the lesser, and if for the taxable year the gross amount of income from the items described in section 822(b) (other than par. (1)(D) thereof) and net premi- ums, minus d11vidends to policyholders, minus the in- terest which under section 103 is excluded from gross income, exceeds $75,000, a tax equal to 1 percent of the amount so computed, or 2 percent of the excess of the amount so computed over $75,000, whichever Is the lesser. Subsec. (a)(1)(A). Pub. L. 87-508 substituted "July 1, 1963" for "July 1, 1962" and "June 30, 1963" for "June 30. 1962", wherever appearing. Subsec. (b). Pub. L. 87-834 substituted provisions de- fining "mutual insurance company taxable income" for provisions which imposed a tax on mutual insur- ance companies which are interinsurers or reciprocal underwriters. Subsec. (b)(1). Pub. L. 87-508 substituted "July 1, 1963" for "July 1, 1962" and "June 30, 1963" for "June 30, 1962", wherever appearing. Subsec. (c). Pub. L. 87-834 amended subsection gen- erally to read as above set forth. Prior to such amend- ment, subsection read as follows: "If the gross amount received during the taxable year from the items de- scribed in section 822(b) (other than paragraph (1)(D) thereof), and premiums (including deposits and assess- ments) is over $75,000 but less than $125,000, the tax imposed by subsection (a) or subsection (b), whichever applies, shall be reduced to an amount which bears the same proportion to the amount of the tax deter- mined under such subsection as the excess over $75,000 of such gross amount received bears to $50,000". Subsec. (d). Pub. L. 87-834 added subsec. (d) and re- designated former subsec. (d) as (e). Subsec. (e). Pub. L. 87-834 redesignated former subsec. (d) as (e) and included flood insurance compa- nies subject to the tax imposed by section 831 within the exception clause. Former subsec. (e) redesignated (g)(2). Subsec. (f). Pub. L. 87-834 added subsec. (f). Subsec. (g). Pub. L. 87-834 added subsec. (g). Provi- sions of subsec. (g)(2) were formerly contained in subsec. (e) of this section. 1961-Subsec. (a)(1)(A). Pub. L. 87-72 substituted "July 1, 1962" for "July 1, 1961" and "June 30, 1962" for "June 30, 1961", wherever appearing. nl, t3XrnT AT 1 (EAflFU PageO52 Subscc. (b)(1). Pub. L. 87-72 substituted "July 1, 1962" for "July 1, 1961" and "June 30, 1962" for "June 30. 1961", wherever appearing. 1960-Subsec. (a)(1)(A). Pub. L. 86-564 substituted 'July 1, lf61" for "July 1. 1960" and "June 30, 1961" for "June 30. 1960" wherever appearing. Subsec. (b)(1). Pub. L. 86-564 substituted "July 1, 1961" for "July 1, 1960" and "June 30, 1961" for "June 30, 1960" wherever appearing. 1959-Subsec. (a)(1)(A). Pub. L. 86-75 substituted "July 1, 1960" for "July 1, 1959" and "June 30, 1960" for "June 30, 1959" wherever appearing. Subsec. (b)(1). Pub. L. 86-75 substituted "July 1, 1960" for "July 1, 1959" wherever appearing. 1958-Subsec. (a)(1)(A). Pub. L. 85-475 substituted "July 1, 1959" for "July 1, 1958" and "June 30, 1959" for "June 30, 1958" wherever appearing. Subsec. (b)(1). Pub. L. 85-475 substituted "July 1, 1959" for "July 1, 1958" and "June 30, 1959" for "June 30, 1958" wherever appearing. 1957-Subsec. (a)(1)(A). Pub. L. 85-12 substituted "July 1, 1958" for "April 1, 1957" and "June 30, 1958" for "March 31, 1957" wherever appearing. Subsec. (b)(1). Pub. L. 85-12 substituted "July 1, 1958" for "April 1, 1957" and "June 30, 1958" for "March 31, 1957" wherever appearing. 1956-Subsec. (a)(1)(A). Act Mar. 29, 1956, substitut- ed "April 1, 1957" for "April 1, 1956" and "March 31, 1957" for "March 31, 1956" wherever appearing. Subsec. (a)(2). Act Mar. 13, 1956, § 3(a)(1), substitut- ed "the items described in section 822(b) (other than paragraph (1)(D) thereof)" for "interest, dividends, rents.". Subsec. (b)(1), Act Mar. 29, 1956, substituted "April 1, 1957" for "April 1, 1956" and "March 31, 1957" for "March 31, 1956" wherever appearing. Subsec. (c). Act Mar. 13, 1956, § 3(a)(2), substituted "the items described in section 822(b) (other than paragraph (1)(D) thereof)" for "interest, dividends, rents,". 1955-Subsec. (a)(1)(A). Act Mar. 30, 1955, substitut- ed "April 1, 1956" for "April 1, 1955" and "March 31, 1956" for "March 31, 1955" wherever appearing. Subsec. (b)(1). Act Mar. 30, 1955, substituted "April 1, 1956" for "April 1, 1955" and "March 31, 1956" for March 31, 1955" wherever appearing. EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (a)(1), (c)(1)(A) by section 901(b)(1), (2) of Pub. L. 94-455 applicable to taxable years ending after Dec. 31, 1974, see section 901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 11 of this title. Amendment of subsecs. (e), (f) by section 1507(b)(1) of Pub. L. 94-455 applicable to taxable years beginning after Dec. 31, 1980, see section 1507(c) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 1504 of this title. Amendment of subsecs. (a), (c)(1), (e), (f) by section 1901(a)(104) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-809 applicable with re- spect to taxable years beginning after Dec. 31, 1966, see section 104(n) of Pub. L. 89-809, set out as an Ef- fective Date of 1966 Amendment note under section 11 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272, except for purposes of section 21 of this title, effective with respect to tax- able years beginning after Dec. 31, 1963, see section 131 of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 1 of this title. EFFECTIVE DATE OF 1962 AMENDMENT * Section 8(h) of Pub. L. 87-834 provided that: "The amendments made by this section [adding sections 823 Page 522
TITLE 26-INTERNAL REVENUE CODE to 826 of this title, amending sections 501, 821, 822, 832, 841, 1016 and 1201 of this title, and redesignating former section 823 of this title as section 822(f) of this title] (other than by subsection (f) [adding subsec. (c) of section 831 of this title]) shall apply with respect to taxable years beginning after December 31, 1962." EFFECTIVE DATE OF 1956 AMENDMENT Section 6 of act Mar. 13, 1956, provided that: "The amendments made by this Act Ito part I, of this sub- chapter as it existed prior to June 25, 1959 and to sec- tions 316(b)(1), 501(c)(15), 594(a)(2), 821, 822(b). (c)(3), (6), (8), (9), (d)(1), (e), 832(b)(4), (c)(5), (8), 841, 842, 843, 891, 1201(a), 1504(b)(2), and 4371(2) of this title] shall apply only to taxable years beginning after De- cember 31, 1954." SHORT TITLE Congress in enacting amendments to part I of this subchapter as it existed prior to June 25, 1959 and to sections 316(b)(1). 501(c)(15), 594(a)(2), 821. 822(b), (c), (3), (6), (8). (9), (d)(1), (e), 832(b)(4), (c)(5), (8), 841, 842, 891, 1201(a), 1504(b)(2), and 4371(2) of this title, and adding section 843 of this title, provided by sec- tion 1 of act Mar. 13, 1956, that they shall be popular- ly known as the "Life Insurance Company Tax Act for 1955". CROSS REFERENCES Alternative tax, see section 1201 of this title. Burial or funeral benefit insurance company as tax. able under this section or section 831, see section 801 of this title. Consolidated returns, includible corporation defined to mean insurance companies taxable under this sec- tion, see section 1504 of this title. Credit for foreign taxes, see section 841 of this title. Dividends defined in distributions by corporations, see section 316 of this title. Doubling tax rates on citizens and corporations of certain foreign countries, see section 891 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 243. 801, 822, 823, 824, 825, 826, 831, 841, 891, 1201, 1504, 1563 of this title. § 822. Determination of taxable investment income (a) Definitions For purposes of this part- (1) The term "taxable investment income" means the gross investment income, minus the deductions provided in subsection (c). (2) The term "investment loss" means the amount by which the deductions provided in subsection (W) exceed the gross investment income. (b) Gross investment income For purposes of subsection (a), the term "gross investment income" means the sum of the following: (1) The gross amount of income during the taxable year from- (A) interest, dividends, rents, and royal- ties, (B) the entering into of any lease, mort- gage, or other instrument or agreement from which the insurance company derives interest, rents, or royalties, (C) the alteration or termination of any instrument or agreement described in sub- paragraph (B), and (D) gains from sales or exchanges of cap- ital assets to the extent provided in sub- chapter P (see. 1201 and following, relating to capital gains and losses). (2) The gross income during the taxable year from any trade or business (other than an insurance business) carried on by the in. surance company, or by a partnership of which the insurance company is a partner. In computing gross income under this para- graph, there shall be excluded any item de- scribed in paragraph (1). (c) Deductions In computing taxable investment income, the following deductions shall be allowed: (1) Tax-free interest The amount of interest which under section 103 is excluded for the taxable year from gross income. (2) Investment expenses Investment expenses paid or accrued during the taxable year. If any general expenses are in part assigned to or included in the invest- ment expenses, the total deduction under this paragraph shall not exceed one-fourth of 1 percent of the mean of the book value of the invested assets held at the beginning and end of the taxable year plus one-fourth of the amount by which taxable investment income (computed without any deduction for invest- ment expenses allowed by this paragraph, for tax-free interest allowed by paragraph (1), or for dividends received allowed by paragraph (7)), exceeds 3% percent of the book value of the mean of the invested assets held at the beginning and end of the taxable year. (3) Real estate expenses Taxes (as provided in section 164), and other expenses, paid or accrued during the taxable year exclusively on or with respect to the real estate owned by the company. No de- duction shall be allowed under this paragraph for any amount paid out for new buildings, or for permanent improvements or betterments made to increase the value of any property. (4) Depreciation The depreciation deduction allowed by sec- tion 167. (5) Interest paid or accrued All interest paid or accrued within the tax- able year on indebtedness, except on indebt- edness incurred or continued to purchase or carry obligations the interest on which is wholly exempt from taxation under this sub- title. (6) Capital losses Capital losses to the extent provided in sub- chapter P (sec. 1201 and following) plus losses from capital assets sold or exchanged in order to obtain funds to meet abnormal insurance losses and to provide for the payment of divi- dends and similar distributions to policy- holders. Capital assets shall be considered as sold or exchanged in order to obtain funds to meet abnormal insurance losses and to pro- vide for the payment of dividends and similar distributions to policyholders to the extent that the gross receipts from their sale or e:*:- change are not greater than the excess, Li any, for the taxable year of the sum of divi- dends and similar distributions paid to policy- holders, losses paid, and expenses paid over the sum of the items described in subsection Page 523 § 822
TITLE 26-INTERNAL REVENUE CODE (b) (other than paragraph (1)(D) thereof) and net premiums received. In the application of section 1212 for purposes of this section, the net capital loss for the taxable year shall be the amount by which losses for such year from sales or exchanges of capital assets ex- ceeds the sum of the gains from such sales or exchanges and whichever of the following amounts is the lesser: (A) the taxable investment income (com- puted without regard to gains or losses from sales or exchanges of capital assets); or (B) losses from the sale or exchange of capital assets sold or exchanged to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders. (7) Special deductions The special deductions allowed by part VIII (except section 248) of subchapter B (sec. 241 and following, relating to dividends received). In applying section 246(b) (relating to limita- tion on aggregate amount of deductions for dividends received) for purposes of this para- graph, the reference in such section to "tax- able income" shall be treated as a reference to "taxable investment income". (8) Trade or business deductions The deductions allowed by this subtitle (without regard to this part) which are attrib- utable to any trade or business (other than an insurance business) carried on by the insur- ance company, or by a partnership of which the insurance company is a partner; except that for purposes of this paragraph- (A) any item, to the extent attributable to the carrying on of the insurance business, shall not be taken into account, and (B) the deduction for net operating losses provided in section 172 shall not be allowed. (9) Depletion The deduction allowed by section 611 (relat- ing to depletion). d) Other applicable rules (1) Rental value of real estate The deduction under subsection (c)(3) or (4) on account of any real estate owned and occu- pied in whole or in part by a mutual insur- ance company subject to the tax imposed by section 821 shall be limited to an amount which bears the same ratio to such deduction (computed without regard to this paragraph) as the rental value of the space not so occu- pied bears to the rental value of the entire property. (2) Amortization of premium and accrual of dis- count The gross amount of income during the tax- able year from interest and the deduction provided in subsection (c)(1) shall each be de- creased to reflect the appropriate amortiza- tion of premium and increased to reflect the appropriate accrual of discount attributable to the taxable year on bonds, notes, deben- tures, or other evidences of Indebtedness held by a mutual insurance company subject to the tax imposed by section 821. Such amorti- zation and accrual shall be determined- (A) in accordance with the method regu. larly employed by such company, if such method is reasonable, and (B) in all other cases, in accordance with regulations prescribed by the Secretary. No accrual of discount shall be required under this paragraph on any bond (as defined in section 171(d). (3) Double deductions Nothing in this part shall permit the same item to be deducted more than once. (e) Definitions For purposes of this part- (1) Net premiums The term "net premiums" means gross pre- miums (including deposits and assessments) written or received on insurance contracts during the taxable year less return premiums and premiums paid or incurred for reinsur- ance. Amounts returned where the amount is not fixed in the insurance contract but de- pends on the experience of the company or the discretion of the management shall not be included in return premiums but shall be treated as dividends to policyholders under paragraph (2). (2) Dividends to policyholders The term "dividends to policyholders" means dividends and similar distributions paid or declared to policyholders. For pur- poses of the preceding sentence, the term "paid or declared" shall be construed accord- ing to the method regularly employed in keeping the books of the insurance company. (Aug. 16, 1954, ch. 736, 68A Stat. 261; Mar. 13, 1956, ch. 83, § 3(a)(3)-(8), 70 Stat. 47, 48; Oct. 16, 1962, Pub. L. 87-834, § 8(b), 76 Stat. 991; reb. 26, 1964, Pub. L. 88-272, title II, § 228(b)(2), 78 Stat. 99; Nov. 13, 1966, Pub. L. 89-809, title I, § 104(i)(5), 80 Stat. 1562; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(a)(105), (b)(1)(P)-(S), 1906(b)(13)(A), 90 Stat. 1782, 1792, 1834.) AMENDMENTS 1976-Subsec. (c)(2). Pub. L. 94-455, § 1901(b)(1)(P), struck out "partially tax-exempt interest and" before "dividends received allowed by". Subsec. (c)(5). Pub. L. 94-455, § 1901(a)(105)(A), struck out "(other than obligations of the United States issued after September 24, 1917, and originally subscribed for by the taxpayer)" following "purchase or carry obligations". Subsec. (c)(6)(A). Pub. L. 94-455, § 1901(b)(1)(Q), struck out "or to the deduction provided in section 242 for partially tax-exempt interest" following "ex- changes of capital assets". Subsec. (c)(7). Pub. L. 94-455, § 1901(b)(1)(R), struck out "partially tax-exempt interest and to" following "and following, relating to". Subsec. (d)(2). Pub. L. 94-455, §§ 1901(a)(105)(B), (b)(1)(S), 1906(b)(13)(A), struck out in subpar. (B) "or his delegate" following "Secretary" and substituted in provisions preceding subpar. (A) "and the deduction provided in subsection (c)(1)" for ", the deduction pro- vided in subsection (c)(1), and the deduction allowed by section 242 (relating to partially tax-exempt inter- est)" and in provisions following subpar. (B) "No ac- crual" for "For taxable years beginning after Decem. ber 31, 1962, no accrual". 1966-Subsec. (e). Pub. L. 89-809 struck out former subsec, (e) dealing with foreign mutual insurance com. § 822 Page 524
TITLE 26-INTERNAL REVENUE CODE panies other than life or marine and redesignated subsec. (if) as subsec. (e). Subsec. i). Pub. L. 89-809 redesignated subsec. (g) as subsec. (f). Former subsec. (if) redesignated as subsec. (e). 1964-Subsec. (d)(2). Pub. L. 88-272 provided that for taxable years beginning after Dec. 31, 1962, no ac- crual of discount shall be required under par. (2) on any bond. 1962-Pub. L. 87-834, § 8(b)(1), substituted "Determi- nation of taxable investment income" for "Determina. tion of mutual insurance company taxable income" in the section catchline, Subsec. (a). Pub. L. 87-834, §8(b)(1), defined "tax- able investment income" and "investment loss" for purposes of this part, and eliminated provisions which defined "mutual insurance company taxable income" for purposes of section 821 of this title, which provi- sions are now contained in section 821(b) of this title. Subsec. (c). Pub. L. 87-834, § 8(b)(2), (3), substituted "taxable investment income" for "mutual insurance company taxable income" in the opening provisions and in pars. (2) and (6)(A), and inserted sentence in par. (7) providing that in applying section 246(b) (re- lating to limitations on aggregate amount of deduc- tions for dividends received) for purposes of par. (7), the reference in such section to "taxable income" shall be treated as a reference to "taxable investment income". Subsec. (e). Pub. L. 87-834, § 8(b)(2), substituted "taxable investment income" for "mutual insurance company taxable income". Subsec. (f). Pub. L. 87-834, § 8(b)(4), added subsec. (f). Provisions of subsec. (f) were formerly contained in section 823 of this title. 1956-Subsec. (b. Act Mar. 13, 1956, § 3(a)(3), princi- pally included royalties, and the income from a trade or business other than the insurance business carried on by the insurance company in "gross investment Income". Subsec. (c). Act Mar. 13, 1956, § 3(a)(4), (5), (6), clari- fied the deduction for real estate expenses in par. (3), substituted in par. (6) "the sum of the items described in subsection (b) (other than paragraph (1)(D) there- of) and net premiums received. In the application of section 1212" for "the sum of interest, dividends, rents, and net premiums received. In the application of section 1211". and inserted pars. (8) and (9). Subsec. (d)(1). Act Mar. 13, 1956, § 3(a)(7), substitut- ed "subsection (c)(3) or (4)" for "subsection (e)(3) or (4)". Subsee. (e). Act Mar. 13, 1956, § 3(a)(8), substituted "items described in subsection (b) (other than para- graph (1)(D) thereof" for "interest, dividends, rents,". EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (c)(2), (5). (6)(A), (7). (d)(2), by section 1901(a)(105), (b)(1)(P) to (S) of Pub. L. 94- 455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under sec- tion 2 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-809 applicable with re- spect to taxable years beginning after Dec. 31, 1966, see section 104(n) of Pub. L. 89-809, set out as an Ef- fective Date of 1966 Amendment note under section 11 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Amendment of subsecs, (a), (c) and (e) and addition of subsec. (f) by Pub. L, 87-834 applicable with respect to taxable years beginning after Dec. 31, 1962, see sec- tion 8(h) of Pub. L, 87-834, set out as an Effective Date of 1962 Amendment note under section 821 of this title. EFFECTIVE DATE OF 1956 AMENDMENT Amendment to subsecs. (b), (c), (d)(1), and (e), by act Mar. 13, 1956 applicable only to taxable years begin- ning after Dec. 31, 1954, see section 6 of act Mar. 13, 1956, set out as an Effective Date of 1956 Amendment note set out under section 821 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 501, 821. 832, 841 of this title. § 823. Determination of statutory underwriting income or loss (a) In general For purposes of this part- (1) The term "statutory underwriting income" means the amount by which- (A) the gross income which would be taken into account in computing taxable income under section 832 if the taxpayer were subject to the tax imposed by section 831, reduced by the gross investment income, exceeds (B) the sum of (I) the deductions which would be taken into account in computing taxable income if the taxpayer were subject to the tax imposed by section 831, reduced by the deductions provided in section 822(c), plus (it) the deductions provided in subsection (c) and section 824(a). (2) The term "statutory underwriting loss" means the excess of the amount referred to in paragraph (1)(B) over the amount referred to in paragraph (1)(A). (M) Modifications In applying subsection (a)- (1) Net operating loss deduction Except as provided by section 844, the de- duction for net operating losses provided in section 172 shall not be allowed. (2) Interinsurers In the case of a mutual insurance company which is an interinsurer or reciprocal under- writer- (A) there shall be allowed as a deduction the increase for the taxable year in savings credited to subscriber accounts, or (B) there shall be included as an item of gross income the decrease for the taxable year in savings credited to subscriber ac- counts. For purposes of the preceding sentence, the term "savings credited to subscriber ac- counts" means such portion of the surplus as is credited to the Individual accounts of sub- scribers before the 16th day of the third month following the close of the taxable year, but only if the company would be obli- gated to pay such amount promptly to such subscriber if he terminated his contract at the close of the company's taxable year. For purposes of determining his taxable income, the subscriber shall treat any such savings credited to his account as a dividend paid or declared. (c) Special deduction for small company having gross amount of less than $1,100,000 (1) In general If the gross amount received during the tax- able year by a taxpayer subject to the tax im- posed by section 821(a) from the items de- scribed in section 822(b) (other than para- graph (1)(D) thereof) and premiums (includ- Page 525 § 823
TITLE 26-INTERNAL REVENUE CODE ing deposits and assessments) does not equal or exceed $1,100,000, then in determining the statutory underwriting income or loss for the taxable year there shall be allowed an addi- tional deduction of $6,000; except that if such gross amount exceeds $500,000, such addition- al deduction shall be equal to 1 percent of the amount by which $1,100,000 exceeds such gross amount. (2) Limitation The amount of the deduction allowed under paragraph (1) shall not exceed the statutory underwriting income for the taxable year, computed without regard to any deduction under this subsection or section 824(a). (Added Pub. L. 87-834, § 8(c), Oct. 16, 1962, 76 Stat. 992, and amended Pub. L. 91-172, title IX, § 907(c)(2)(B), Dec. 30, 1969, 83 Stat. 717.) PRIOR PROVISIONS A prior section 623, act Aug. 16, 1954, ch. 736, 68A Stat. 263, which defined "net premiums" and "divi- dends to policyholders", was redesignated section 822(f) of this title by section 8(b)(4) of Pub. L. 87-834. AMENDMENTS 1969-Subsec. (b)(1). Pub. L. 91-172 provided that section 844 of this title be excepted from the nonde- duction operating loss provision of section 172 of this title. ErcTIvE DATE oF 1969 AMENDMEN'r Amendment to subsec. (b)(1) by Pub. L. 91-172 appli- cable with respect to losses incurred in taxable year beginning after Dec. 31, 1962, but not affecting any tax liability for any taxable year beginning before Jan. 1. 1967, see section 907(d) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under sec- tion 805 of this title. EFFECTIVE DATE Section applicable with respect to taxable years be- ginning after Dec. 31, 1962, see section 8(h) of Pub. L. 87-834, set out as an Effective Date of 1962 Amend- ment note under section 821 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 821 of this title. § 824. Adjustments to provide protection against losses (a) Allowance of deduction (1) In general In determining the statutory underwriting income or loss for any taxable year there shall be allowed as a deduction the sum of- (A) an amount equal to 1 percent of the losses Incurred during the taxable year (as determined under section 832(b)(5)), plus (B) an amount equal to 25 percent of the underwriting gain for the taxable year, plus (C) if the concentrated windstorm, etc., premium percentage for the taxable year exceeds 40 percent, an amount determined by applying so much of such percentage as exceeds 40 percent to the underwriting gain for the taxable year. For purposes of this paragraph, the term "un- derwriting gain" means statutory underwrit- ing income, computed without any deduction under this subsection. (2) Special rule for companies having concentrated windstorm, etc., risks For purposes of paragraph (1)(C), the term "concentrated windstorth, etc., premium per- centage" means, with respect to any taxable year, the percentage obtained by dividing- (A) the amount of the premiums earned on insurance contracts during the taxable year (as defined in section 832(b)(4)), to the extent attributable to insuring against losses arising, either in any one State or within 200 miles of any fixed point selected by the taxpayer, from windstorm, hall, flood, earthquake, or similar hazards, by (B) the amount of the premiums earned on insurance contracts during the taxable year (as so defined). (b) Protection against loss account Each insurance company subject to the tax imposed by section 821(a) for any taxable year shall, for purposes of this part, establish and maintain a protection against loss account. (c) Additions to account There shall be added to the protection against loss account for each taxable year an amount equal to the amount allowable as a de- duction for the taxable year under subsection (a)(1). (d) Subtractions (1) Annual substractions After applying subscction (c), there shall be subtracted for the taxable year from the pro- tection against loss account- (A) first, an amount equal to the excess (if any) of the deduction allowed under sub- section (a) for the taxable year over the un- derwriting gain (within the meaning of sub- section (a)(1)) for the taxable year, (B) then, the amount (if any) by which- (i) the sum of the investment loss for such year and the statutory underwriting loss (reduced by the amount referred to in subparagraph (A)) for such year, exceeds (ii) the sum of the statutory underwrit- ing income for such taxable year and the taxable investment income for such tax- able year, (C) next (in the order in which the losses occurred), amounts equal to the unused loss carryovers to such year, (D) next, any amount remaining which was added to the account for the fifth pre- ceding taxable year, minus one-half of the amount remaining in the account for such taxable year which was added by reason of subsection (a)(1)(B), and (E) finally, the amount by which the total amount in the account exceeds which ever of the following Is the greater: (1) 10 percent of premiums earned on in- surance contracts during the taxable year (as defined in section 832(b)(4)) less divi- dends to policyholders (as defined in sec- tion 832(c)(11)), or (ii) the total amount in the account at the close of the preceding taxable year. (2) Rules for ceiling on protection against loss ac- count For purposes of paragraph (1)(E), the total amount in the account shall be determined- § 824 Page 526
TITLE 26-INTERNAL REVENUE CODE (A) after the application of this section without regard to paragraph (1)(E), and (B) without taking into consideration amounts remaining in the account which were added, with respect to all taxable years, by reason of subsection (a)(1)(C). (3) Priorities The amounts required to be subtracted from the protection against loss account- (A) under subparagraphs (A), (B), and (C) of paragraph (1) shall be subtracted- (I) first (on a first-in, first-out, basis) from amounts in the account with respect to the five preceding taxable years and the taxable year, and (ii) then from- amounts in the account with respect to earlier years, (B) under subparagraph (E) of paragraph (1) shall be subtracted only from amounts in the account with respect to the taxable year, and (C) under paragraphs (A), (B), (C), and (E), of paragraph (1) shall, if the amount to be subtracted from the total amounts in the account with respect to any taxable year is less than such total, be subtracted from each of the amounts (referred to in subsec- tion (a)(1)) in the account with respect to such year in the proportion which each bears to such total. (4) Termination of taxability under section 821 If the taxpayer is not subject to tax under section 821 for any taxable year, the entire amount in the account at the close of the pre- ceding taxable year shall be subtracted from the account in such preceding taxable year. (5) Election to subtract amount from account (A) A taxpayer may elect from any tax- able year for which it is subject to tax under section 821(a) to subtract from its protection against loss account any amount which, but for the application of this sub- paragraph, would be in such account as of the close of such taxable year. (B) The election provided by subpara- graph (A) for any taxable year shall be made (in such manner and in such form as the Secretary may by regulations prescribe) after the close of such taxable year and not later than the time prescribed by law for filing the return (including extensions thereof) for the taxable year following such taxable year. Such an election, once made, may not be revoked. (Added Pub. L. 87-834, § 8(c), Oct. 16, 1962, 76 Stat. 993, and amended Pub. L. 94-455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834. AMENDMENTS 1976-Subsec. (d)(5)(B). Pub. L. 94-455 struck out "or his delegate" following "Secretary". EFFECTIVE DATE Section applicable with respect to taxable years be- ginning after Dec. 31, 1962, see section 8(h) of Pub. L. 87-834, set out as an Effective Date of 1962 Amend- ment note under section 821 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 821, 823, 825, 826 of this title. § 825. Unused loss deduction (a) Amount of deduction For purposes of this part, the unused loss de- duction for the taxable year shall be an amount equal to the unused loss carryovers or carry- backs to the taxable year. (b) Unused loss defined For purposes of this part, the term "unused loss" means, with respect to any taxable year, the amount (if any) by which- (1) the sum of the statutory underwriting loss and the investment loss, exceeds (2) the sum of- (A) the taxable investment income, (B) the statutory underwriting income, and (C) the amounts required by section 824(d) to be subtracted from the protection against loss account. (c) Loss year defined For purposes of this part, the term "loss year" means, with respect to any company sub- ject to the tax imposed by section 821(a), any taxable year in which the unused loss (as de- fined in subsection (b)) of such taxpayer is more than zero. (d) Years to which carried (1) In general The unused loss for any taxable year shall be- (A) an unused loss carryback to each of the 3 taxable years preceding the loss year, and (B) an unused loss carryover to each of the 5 taxable years following the loss year. In the case of an unused loss for a taxable year ending after December 31, 1975, such unused loss shall be an unused loss carryover to each of the 7 taxable years following the loss year. (2) Election for unused loss carrybacks In the case of an unused loss for any tax- able year ending after December 31, 1975, the taxpayer may elect to relinquish the entire carryback period for such loss. Such election shall be made by the due date (including ex- tensions of time) for filing the return for the taxable year of the unused loss for which the election is to be in effect, and once made for any taxable year, such election shall be irrev- ocable for that taxable year. (e) Amount of carrybacks and'carryovers The entire amount of the unused loss for any loss year shall be carried to the earliest of the taxable years to which such loss may be car- ried. The portion of such loss which shall be carried to each of the other taxable years shall be the excess (if any) of the amount of such loss over the sum of the offsets (as defined in subsection f)) for each of the prior taxable years to which such loss may be carried, Page 527 § 825
TITLE 26-INTERNAL REVENUE CODE () Offset defined For purposes of subsection (e), the term "offset" means with respect to any taxable year (hereinafter referred to as the "offset year")- (1) in the case of an unused loss carryback from the loss year to the offset year, the mutual insurance company taxable income for the offset year; or (2) in the case of an unused loss carryover from the loss year to the offset year, an amount equal to the sum of- (A) the amount required to be subtracted from the protection against loss account under section 824(d)(1)(C) for the offset year, plus (B) the mutual insurance company tax- able income for the offset year. For purposes of paragraphs (1) and (2)(B), the mutual insurance company taxable income for the offset year shall be determined without regard to any unused loss carryback or car- ryover from the loss year or any taxable year thereafter. (g) Limitations For purposes of this part, an unused loss shall not be carried- (1) except as provided by section 844, to or from any taxable year for which the insur- ance company is not subject to the tax im- posed by section 821(a), nor (2) except as provided by section 844, to any taxable year if, between the loss year and such taxable year, there is an intervening tax- able year for which the insurance company was not subject to the tax imposed by section 821(a). (Added Pub. L. 87-834, § 98(c), Oct. 16, 1962, 76 Stat. 995, and amended Pub. L. 91-172 title IX, §907(c)(2)(C), (D), Dec. 30, 1969, 83 Stat. 717; Pub. L. 94-455, title VIII, § 806(d)(2), title XIX, § 1901(a)(106), Oct. 4, 1976, 90 Stat. 1599, 1782.) AMEND MENTS 1976-Subsec. (d). Pub. L. 94-455, § 806(d)(2), among other changes, added requirement that unused loss carryovers for a taxable year ending after Dec. 31, 1975 shall be an unused loss carryover for each of the 7 taxable years following the loss year and provision relating to election of unused loss carrybacks. Subsec. (g). Pub. L. 94-455, § 1901(a)(106), redesig- nated former pars. (2) and (3) as (1) and (2). Former par. (1), which related to the prohibition of an unused loss carried to or from any taxable year beginning before Jan. 1, 1963, was struck out. 1969-Subsec. (g)(2), (3). Pub. L. 91-172 provided that section 844 of this title be excepted from the non- allowable carryover provisions of this section. EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (d) by section 806(d)(2) of Pub. L. 94-455 applicable to losses incurred in taxable years ending after Dec. 31, 1975, see section 806(g)(1) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 172 of this title. Amendment of subsec. (g) by section 1901(a)(106) of Pub. L. 94-455 effective for taxable years ending after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Amendment by section 907(c)(2)(C), (D) of Pub. L. 91-172 applicable with respect to losses incurred in taxable year beginning after Dec. 31, 1962, but not af- fecting any tax liability for any taxable year begin- ning before Jan. 1, 1967, see section 907(d) of Pub. L. 91-172, set out as an Effective Date of 1969 Amend- ment note under section 805 of this title. EFFECTIVE DATE Section applicable with respect to taxable years be- ginning after Dec. 31, 1962, see section 8(h) of Pub. L. 87-834, set out as an Effective Date of 1962 Amend- ment note under section 821 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section Is referred to in sections 821, 844 of this title. § 826. Election by reciprocal (a) In general Except as otherwise provided in this section. any mutual insurance company which is an in- terinsurer or reciprocal underwriter (herein- after in this section referred to as a "recipro- cal") subject to the taxes imposed by section 821(a) may, under regulations prescribed by the Secretary, elect to be subject to the limitation provided in subsection (b). Such election shall be effective for the taxable year for which made and for all succeeding taxable years, and shall not be revoked except with the consent of the Secretary. (b) Limitation The deduction for amounts paid or incurred in the taxable year to the attorney-in-fact by a reciprocal making the election provided in sub- section (a) shall be limited to, but in no case in- creased by, the deductions of the attorney-in- fact allocable, in accordance with regulations prescribed by the Secretary, to the income re- ceived by the attorney-in-fact from the recipro- cal. (c) Exception An election may not be made by a reciprocal under subsection (a) unless the attorney-in-fact of such reciprocal- (1) is subject to the taxes imposed by sec- tion 11(b) and (c); (2) consents in such manner as the Secre- tary shall prescribe by regulations to make available such information as may be re- quired during the period in which the elec- tion provided in subsection (a) is in effect, under regulations prescribed by the Secre- tary; (3) reports the income received from the re- ciprocal and the deductions allocable thereto under the same method of accounting under which the reciprocal reports deductions for amounts paid to the attorney-in-fact; and (4) files its return on the calendar year basis. (d) Special rule In applying section 824(d)(1)(D), any amount which was added to the protection against loss account by reason of an election under this sec- tion shall be treated as having been added by reason of section 824(a)(1)(A). (e) Credit Any reciprocal electing to be subject to the limitation provided in subsection (b) shall be credited with so much of the tax paid by the at- torney-in-fact as is attributable, under regula- tions prescribed by the Secretary, to the Page 528 § 826
TITLE 26-INTERNAL REVENUE CODE income received by the attorney-in-fact from the reciprocal in such taxable year. (f) Surtax exemption denied Any increase in taxable income of a reciprocal attributable to the limitation provided in sub- section (b) shall be taxed without regard to the surtax exemption provided in section 821(a)(2). (g) Adjustment for refund If for any taxable year an attorney-in-fact is allowed a credit or refund for taxes paid with respect to which credit or refund to the recipro- cal resulted under subsection (e), the taxes of such reciprocal for such taxable year shall be properly adjusted under regulations prescribed by the Secretary. (h) Taxes of attorney.in-fact unaffected Nothing in this section shall increase or de- crease the taxes imposed by this chapter on the income of the attorney-in-fact. (Added Pub. L. 87-834, § 8(c), Oct. 16, 1962, 76 Stat. 996, and amended Pub. L. 94-455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) AMENMENTS 1976-Subsecs. (a), (b), (c)(2), (e), (g). Pub. L. 94-455 struck out "or his delegate" following "Secretary". EFFECTIVE DATE Section applicable with respect to taxable years be- ginning after Dec. 31, 1962, see section 8(h) of Pub. L. 87-834, set out as an Effective Date of 1962 Amend- ment note under section 821 of this title. PART III-OTHER INSURANCE COMPANIES Sec. 831. Tax on insurance companies (other than life or mutual), mutual marine insurance companies, and certain mutual fire or flood insurance com- panies. 832. Insurance company taxable income. AMENDMENTS 1962-Pub. L. 87-834, § 8(g)(4)(C), Oct. 16, 1962. 76 Stat. 999, substituted "and certain mutual fire or flood insurance companies" for "and mutual fire insurance companies issuing perpetual policies" in item 831. PART REFERRED TO IN OTHER SECTIONS This part is referred to in section 953 of this title. § 831. Tax on insurance companies (other than life or mutual), mutual marine insurance companies, and certain mutual fire or flood insurance com- panies (a) Imposition of tax Taxes computed as provided in section 11 shall be imposed for each taxable year on the taxable income of- (1) every insurance company (other than a life or mutual insurance company), (2) every mutual marine insurance compa- ny, and (3) every mutual fire or flood insurance company- (A) exclusively issuing perpetual policies, or (B) whose principal business is the issu- ance of policies for which the premium de- posits are the same, regardless of the length of the term for which the policies are writ- ten, if the unabsorbed portion of such pre- mium deposits not required for losses, ex- penses, or establishment of reserves is re- turned or credited to the policyholder on cancellation or expiration of the policy. (b) Election for multiple line company to be taxed on total income (1) In general Any mutual insurance company engaged in writing marine, fire, and casualty insurance which for any 5-year period beginning after December 31, 1941, and ending before Janu- ary 1, 1962, was subject to the tax imposed by section 831 (or the tax imposed by corre- sponding provisions of prior law) may elect, in such manner and at such time as the Secre- tary may by regulations prescribe, to be sub- ject to the tax imposed by section 831, wheth- er or not marine insurance is its predominant source of premium income. (2) Effect of election If an election is made under paragraph (1), the electing company shall (in lieu of being subject to the tax imposed by section 821) be subject to the tax imposed by this section for taxable years beginning after December 31, 1961, Such election shall not be revoked except with the consent of the Secretary. (c) Cross references (1) For alternative tax in case of capital gains, see sec. tion 1201(a). (2) For taxation of foreign corporations carrying on an insurance business within the United States, see section 842. (Aug. 16, 1954, ch. 736, 68A Stat. 264; Oct. 16, 1962, Pub. L. 87-834, § 8(e)(1), (f), (g)(4)(B), 76 Stat. 997-999; Nov. 13, 1966, Pub. L. 89-809, title I, § 104(i)(6), 80 Stat. 1562; Oct. 4, 1976, Pub. L. 94-455, title XIX. §§ 1901(a)(107), 1906(b)(13)(A), 90 Stat. 1782, 1834.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, § 1901(a)(107), sub- stituted "on the taxable income" for "or the taxable income '. Subsec. Cb). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" wherever appearing. 1966-Subsec. (b). Pub. L. 89-809, § 104i)(6)(A), struck out subsec. (b) which excepted foreign insur- ance companies other than life or mutual insurance companies, foreign mutual marine insurance compa- nies, and foreign mutual fire insurance companies not carrying on an insurance business within the United States and provided that they would be taxable as other foreign corporations and redesignated subsec. (c) as subsec. (b). Subsec. (c). Pub. L. 89-809, § 104(I)(6)(B), redesignat- ed subsec. (d) as subsec. (c) and, in subsec. (c) as ro re- designated, added item (2). Former subsec. (c) redesig- nated as subsec. (b). Subsec. Cd). Pub. L, 89-809, § 1040i)(6)(B), redesignat- ed subsec. (d) as subsec. (c). 1962-Pub. L. 87-834, § 8(g)(4)(B), substituted "and certain mutual fire or flood insurance companies" for "and mutual fire insurance companies issuing perpet- ual policies" in the section catchllne. Subsec. (a). Pub. L. 87-834, §8(e)(1), included flood insurance companies, and substituted provisions au- thorizing imposition of the tax on those companies whose principal business is the issuance of policies for which the premium deposits are the same, regardless of the length of the term for which the policies are written, if the unabsorbed portion of such premium Page 529
TITLE 26-INTERNAL REVENUE CODE deposits not required for losses, expenses, (or establish- ment of reserves is returned or credited to the policy- holder on cancellation or expiration of the policy for provisions which authorized imposition of tax on those companies which issued policies for which the sole premium charged is a single deposit which (except for such deduction of underwriting costs as may be provided) is refundable on cancellation or expiration of the policy. Subsec. (c). Pub. L. 87-834, § 8(f), added subsec. (c) and redesignated former subsec. (c) as (d). Subsec. d). Pub. L. 87-834, § 8(f), redesignated former subsec. (c) as (d). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (a) by section 1901(a)(107) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-809 applicable with re- spect to taxable years beginning after Dec. 31, 1966, see section 104(n) of Pub. L. 89-809, set out as an Ef- fective Date of 1966 Amendment note under section 11 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Amendment of subsec. (a) by Pub. L. 87-834 applica- ble with respect to taxable years beginning after Dec. 31, 1962, see section 8(h) of Pub. L. 87-834, set out as an Effective Date of 1962 Amendment note under sec- tion 821 of this title. CROSS REFERENCES Alternative tax, see section 1201 of this title. Burial or funeral benefit insurance company as tax- able under this section or section 821, see section 801 of this title. Consolidated returns, see section 1503 of this title. Doubling of tax rates on citizens and corporations of certain foreign countries, see section 891 of this title. Tax on mutual insurarce companies to which part II applies, see section 821 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 801, 815, 821, 823, 832, 841, 891, 1201 of this title. § 832. Insurance company taxable income (a) Definition of taxable income In the case of an insurance company subject to the tax imposed by section 831, the term "taxable income" means the gross income as de- fined in subsection (b)(1) less the deductions al- lowed by subsection (c). (b) Definitions In the case of an insurance company subject to the tax imposed by section 831- (1) Gross income The term "gross income" means the sum of- (A) the combined gross amount earned during the taxable year, from investment income and from underwriting income as provided in this subsection, computed on the basis of the underwriting and Invest- ment exhibit of the annual statement ap- proved by the National Association of In- surance Commissioners, (B) gain during the taxable year from the sale or other disposition of property, and (C) all other items constituting gross income under subchapter B, except that, in the case of a mutual fire insurance compa- ny described in section 831(a)(3)(A), the amount of single deposit premiums paid to such company shall not be included in gross income, (D) in the case of a mutual fire or flood insurance company described in section 831(a)(3)(B), an amount equal to 2 percent of the premiums earned on insurance con- tracts during the taxable year with respect to policies described in section 831(a)(3)(B) after deduction of premium deposits re- turned or credited during the same taxable year; and CE) in the case of a company which writes mortgage guaranty insurance, the amount required by subsection (e)(5) to be subtract- ed from the mortgage guaranty account. (2) Investment income The term "investment income" means the .gross amount of income earned during the taxable year from interest, dividends, and rents, computed as follows: To all interest, dividends, and rents received during the tax- able year, add interest, dividends, and rents due and accrued at the end of the taxable year, and deduct all interest, dividends, and rents due and accrued at the end of the pre- ceding taxable year. (3) Underwriting income The term "underwriting income" means the premiums earned on insurance contracts during the taxable year less losses incurred and expenses incurred. (4) Premiums earned The term "premiums earned on insurance contracts during the taxable year" means an amount computed as follows: (A) From the amount of gross premiums written on insurance contracts during the taxable year, deduct return premiums and premiums paid for reinsurance. (B) To the result so obtained, add un- earned premiums on outstanding business at the end of the preceding taxable year and deduct unearned premiums on out- standing business at the end of the taxable year. For purposes of this subsection, unearned premiums shall include life insurance re- serves, as defined in section 801(b), pertaining to the life, burial, or funeral insurance, or an- nuity business of an insurance company sub- ject to the tax imposed by section 831 and not qualifying as a life insurance company under section 801. For purposes of this subsection, unearned premiums of mutual fire or flood insurance companies described in section 831(a)(3)(B) means (with respect to the poli- cies described in section 831(a)(3)(B)) the amount of unabsorbed premium deposits which the company would be obligated to return to its policyholders at the close of the taxable year if all of its policies were termi- nated at such time; and the determination of such amount shall be based on the schedule of unabsorbed premium deposit returns for each such company then in effect. Premiums paid by the subscriber of a mutual flood in- surance company referred to in paragraph (3) of section 831(a) shall be treated, for pur- § 832 Page 530
TITLE 26-INTERNAL REVENUE CODE poses of computing the taxable income of such subscriber, in the same manner as pre- miums paid by a policyholder to a mutual fire insurance company referred to in such para- graph (3). (5) Losses incurred The term "losses incurred" means losses in- curred during the taxable year on insurance contracts, computed as follows: (A) To losses paid during the taxable year, add salvage and reinsurance recover- able outstanding at the end of the preced- ing taxable year and deduct salvage and re- insurance recoverable outstanding at the end of the taxable year. (B) To the result so obtained, add all unpaid losses outstanding at the end of the taxable year and deduct unpaid losses out- standing at the end of the preceding tax- able year. (6) Expenses incurred The term "expenses incurred" means all ex- penses shown on the annual statement ap- proved by the National Association of Insur- ance Commissioners, and shall be computed as follows: To all expenses paid during the taxable year, add expenses unpaid at the end of the taxable year and deduct expenses unpaid at the end of the preceding taxable year. For the purpose of computing the tax- able income subject to the tax Imposed by section 831, there shall be deducted from ex- penses incurred (as defined in this paragraph) all expenses incurred which are not allowed as deductions by subsection (c). (e) Deductions allowed In computing the taxable income of an insur- ance company subject to the tax imposed by section 831, there shall be allowed as deduc- tions: (1) all ordinary and necessary expenses in- curred, as provided in section 162 (relating to trade or business expenses); (2) all interest, as provided in section 163; (3) taxes, as provided in section 164; (4) losses incurred, as defined in subsection (b)(5) of this section; (5) capital losses to the extent provided in subchapter P (sec. 1201 and following, relat- ing to capital gains and losses) plus losses from capital assets sold or exchanged in order to obtain funds to meet abnormal insurance losses and to provide for the payment of divi- dends and similar distributions to policy- holders. Capital assets shall be considered as sold or exchanged in order to obtain funds to meet abnormal insurance losses and to pro- vide for the payment of dividends and similar distributions to policyholders to the extent that the gross receipts from their sale or ex- change are not greater than the excess, if any, for the taxable year of the sum of divi- dends and similar distributions paid to policy- holders in their capacity as such, losses paid, and expenses paid over the sum of the items described in section 822(b) (other than para- graph (1)(D) thereof) and net premiums re- ceived. In the application of section 1212 for purposes of this section, the net capital loss for the taxable year shall be the amount by which losses for such year from sales or ex- changes of capital assets exceeds the sum of the gains from such sales or exchanges and whichever of the following amounts is the lesser: (A) the taxable income (computed with- out regard to gains or losses from sales or exchanges of capital assets; or (B) losses from the sale or exchange of capital assets sold or exchanged to obtain funds to meet abnormal insurance losses and to provide for the payment of dividends and similar distributions to policyholders; (6) debts in the nature of agency balances and bills receivable which beconme worthless within the taxable year; (7) the amount of interest earned during the taxable year which under section 103 is excluded from gross income; (8) the depreciation deduction allowed by section 167 and the deduction allowed by sec- tion 611 (relating to depletion); (9) charitable, etc., contributions, as pro- vided in section 170; (10) deductions (other thqn those specified in this subsection) as pro,,.ed in part VI of subchapter B (sec. 161 and following, relating to itemized deductions for individuals and corporations) and in part I of subchapter D (see. 401 and following, relating to pension, profit-sharing, stock bonus plans, etc.); (11) dividends and similar distributions paid or declared to policyholders in their capacity as such, except in the case of a mutual fire in- surance company described in section 831(a)(3)(A). For purposes of the preceding sentence, the term "dividends and similar dis- tributions". includes amounts returned or credited to policyholders on cancellation or expiration of policies described in section 831(a)(3)(B). For purposes of this paragraph, the term "paid or declared" shall be con- strued according to the method of accounting regularly employed in keeping the books of the insurance company; (12) the special deductions allowed by part VIII of subchapter B (see. 241 and following, relating to dividends received); and (13) in the case of a company which writes mortgage guaranty insurance, the deduction allowed by subsection (e). (d) Double deductions Nothing in this section shall permit the same item to be deducted more than once. (e) Special deduction and income account In the case of taxable years beginning after December 31, 1966, of a company which writes mortgage guaranty insurance- (1) Additional deduction There shall be allowed as a deduction for the taxable year, if bonds are purchased as required by paragraph (2), the sum of- (A) an amount representing the amount required by State law or regulation to be set aside in a reserve for mortgage guaranty in- surance losses resulting from adverse eco- nomic cycles; and (B) an amount representing the aggregate of amounts so set aside in such reserve for the 8 preceding taxable years to the extent such amounts were not deducted under this paragraph in such preceding taxable years, Page 531 § 832
TITLE 26-INTERNAL REVENUE CODE except that the deduction allowable for the taxable year under this paragraph shall not exceed the taxable income for the taxable year computed without regard to this para- graph or to any carry-back of a net operating loss. For purposes of this paragraph, the amount required by State law or regulation to be so set aside in any taxable year shall not exceed bO percent of premiums earned on in- surance contracts (as defined in subsection (b)(4)) with respect to mortgage guaranty in- surance for such year. For purposes of this subsection, all amounts shall be taken into ac- count on a first-in-time basis. The computa- tion and deduction under this section of losses incurred (including losses resulting from adverse economic cycles) shall not be af- fected by the provisions of this subsection. For purposes of this subsection, the terms "preceding taxable years" and "preceding taxable year" shall not include taxable years which began before January 1, 1967. (2) Purchase of bonds The deduction under paragraph (1) shall be allowed only to the extent that tax and loss bonds are purchased in an amount equal to the tax benefit attributable to such deduc- tion, as determined under regulations pre- scribed by the Secretary, on or before the date that any taxes (determined without regard to this subsection) due for the taxable year for which the deduction is allowed are due to be paid, as if no election to make in- stallment payments under section 6152 is made. If a deduction would be allowed but for the fact that tax and loss bonds were not timely purchased, such deduction shall be al- lowed to the extent such purchases are made within a reasonable time, as determined by the Secretary, if all interest and penalties, computed as if this sentence did not apply, are paid. (3) Mortgage guaranty account Each company which writes mortgage guar- anty insurance shall, for purposes of this part, establish and maintain a mortgage guar- anty account. (4) Additions to account There shall be added to the mortgage guar- anty account for each taxable year an amount equal to the amount allowed as a de- duction for the taxable year under paragraph (1). (5) Subtractions from account and Inclusion in gross income After applying paragraph (4), there shall be subtracted for the taxable year from the mortgage guaranty account and included in gross income- (A) the amount (if any) remaining which was added to the account for the tenth pre- ceding taxable year, and (B) the excess (if any) of the aggregate amount in the mortgage guaranty account over the aggregate amount in the reserve referred to in paragraph (1)(A). For pur- poses of determining such excess, the aggre- gate amount in the mortgage guaranty ac- count shall be determined after applying subparagraph (A), and the aggregate amount in the reserve referred to in para- graph (1)(A) shall be determined by disre- garding any amounts remaining in such re- serve added for taxable years beginning before January 1, 1967, (C) an amount (if any) equal to the net operating loss for the taxable year comput- ed without regard to this subparagraph, and (D) any amount improperly subtracted from the account under subparagraph (A), (B), or (C) to the extent that tax and loss bonds were redeemed with respect to such amount. If a company liquidates or otherwise termi- nates its mortgage guaranty insurance busi- ness and does not transfer or distribut., such business in an acquisition of assets referred to in section 381(a), the entire amount remain- ing in such account shall be subtracted. Except in the case where a company transfers or distributes its mortgage guaranty insur- ance in an acquisition of assets referred to in section 381(a), if the company is not subject to the tax tmposed by section 831 for any tax- able year, the entire amount in the account at the close of the preceding taxable year shall be subtracted from the account in such pre- ceding taxable year. (6) Lease guaranty insurance; insurance of state and local obligations In the case of any taxable year beginning after December 31, 1970, the provisions of this subsection shall also apply in all respects to a company which writes lease guaranty in- surance or insurance on obligations the inter- est on which is excludable from gross income under section 103. In applying this subsection to such a company, any reference to mort- gage guaranty insurance contained in this section shall be deemed to be a reference also to lease guaranty insurance and to insurance on obligations the interest on which is exclud- able from gross income under section 103; and in the case of insurance on obligations the in- terest on which is excludable from gross income under section 103, the references in paragraph (1) to "losses resulting from ad- verse economic cycles" include losses from de- clining revenues related to such obligations (as well as losses resulting from adverse eco- nomic cycles), and the time specified in sub- paragraph (A) of paragraph (5) shall be the twentieth preceding taxable year. (Aug. 16, 1954, ch. 736, 68A Stat. 264; Mar. 13, 1956, ch. 83, § 3(b), 70 Stat. 48; Oct. 16, 1962, Pub. L. 87-834, §8(e)(2)-(5), 76 Stat. 997, 998; Feb. 26, 1964, Pub. L. 88-272, title II, § 228(c), 78 Stat. 99; Nov. 13, 1966, Pub. L. 89-809, title I, § 104(i)(7), 80 Stat. 1562; Jan. 2, 1968, Pub. L. 90-240, § 5(a)-(c), 81 Stat. 776, 777; Oct. 26, 1974, Pub. L. 93-483, § 5, 88 Stat. 1458; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(a)(108), (b)(1)(T), (U), 1906(b)(13)(A), 90 Stat. 1782, 1792, 1834.) AMENDMENTS 1976-Subsec. (b)(1), (6). Pub. L. 94-455, § 1901(a)(108), substituted "Association" for "Conven- tion", Subsec. (c)(5)(A). Pub. L. 94-455, § 1901(b)(1)(T), struck out "or to the deductions provided in section Page 532 9832
TITLE 26-INTERNAL REVENUE CODE 242 for partially tax-exempt interest" following "ex- changes of capital assets". Subsec. (c)(12). Pub. L. 94-455, § 1901(b)(1)(U), struck out "partially tax-exempt interest and to" fol- lowing "and following, relating to". Subsec. (e)(2). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". 1974-Subsec. (e)(6). Pub. L. 93-483 added subsec. (e)(6). 1968-Subsec. (b)(1). Pub. L. 90-240. § 5(a), added subpar. (E). Subsec. c) Pub. L. 90-240, § 5(b), aided par. (13). Subsec. (e). Pub. L. 90-240, § 5(c), added subsec. (e). 1966-Subsec. (d). Pub. L. 89-809 struck out subsec. (d) having reference to the taxable income of foreign Insurance companies other than life or mutual and foreign mutual marine and redesignated subsec. (e) a. subsec. (o,. Subsec. (e). Pub. L. 89-809 redesignated subsec. (e) as subsec. d). 1964-Subset. (c)(10). Pub. L. 88-272 inserted the ref- erence to part I of subchapter D. 1962-Subsec. (b)(1)(C). Pub. L. 87-834. § 8(e)(3), (5), substituted "section 831(a)(3)(A)" for "section 831(a)". Subsec. (b)(1)(D). Pub. L. 87-834, §8(e)(5), added subsec. (b)(1)CD). Subsec. (b)(4). Pub. L. 87-834, § 8(e)(2), inserted pro- visions defining unearned premiums of mutual fire or flood Insurance companies, and which require premi- ums paid by the subscriber of a mutual flood insur. ance company to be treated, for purposes of comput- ing the taxable income of such subscriber, in the same manner as premiums paid by a policyholder to a mutual fire insurance company referred to in par. (3) of section 831(a) of this title. Subsec. (c)( 11). Pub. L. 87-834, § 8(e)(4), substituted "section 831(a)(3)(A)" for "section 831(a)", and insert- ed the definition of "dividends and similar distribu- tions". 1956-Subsec. (b)(4). Act Mar. 13, 1956. § 3(b)(1), sub- stituted "section 801(b)" for "section 806". Subsec, (c). Act Mar. 13, 1956, § 3(b)(2), (3), substitut- ed "the items described In section 822(b) (other than paragraph (1)(D) thereof) and net premiums received. In the application of section 1212" for "interest, divi- dends, rents, and net premiums received. In the appli- cation of section 1211" in par. (5), and authorized the deduction for depletion in par. (8). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (b)(1), (6), (c)(5)(A), (12) by section 1901(a)(108), (b)(1)(T), (U) of Pub. L. 94-455 effective for taxable years beginning after Dec. 3), 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under sec- tion 2 of this title. EFFECTIVE DATE OF 1968 AMENDMENT Section 5(e) of Pub. L. 90-240 provided that: "The amendments made by subsections Ca), (b), (c), and (d) [amending sections 381(c)(22), 832 of this title] shall apply to taxable years beginning after December 31, 1966, except that so much of section 832(e)(2) of the Internal Revenue Code of 1954 (subsee. (e)(2) of this section] (as added by the amendment made by subsec- tion (c)) as provides for payment of interest and penal- ties for failure to make a timely purchase of tax and loss bonds shall not apply with respect to any period during which such bonds are not available for pur- chase." EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-809 applicable with re- spect to taxable years beginning after Dec. 31, 1966, see section 104(n) of Pub. L. 89-809, set out as an Ef- fective Date of 1966 Amendment note under section 11 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272 applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 228(d) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 809 of this title, EFFECTIVE DATE OF 1962 AMENDMENT Amendment of subsecs. (b)(1), (4) and (c)(11) by Pub. L. 87-834 applicable with respect to taxable years beginning after Dec. 31, 1962, see section 8(h) of Pub. L. 87-834, set out as an Effective Date of 1962 Amend- ment note under section 821 of this title. EFFECTIVE DATE OF 1956 AMENDMENT Amendment of subsecs. (b)(4), (c) by act Mar. 13, 1956, applicable only to taxable years beginning after Dec. 31, 1954, see section 6 of act Mar. 13, 1956, set out as an Effective Date of 1956 Amendment note under section 821 of this title. TREATMENT AS UNEARNED PREMIUMS OF ADDITIONS TO RESERVES REQUIRED BY STATE LAW OR REGULATIONS FOR MORTGAGE GUARANTY INSURANCE LOSSES Section 5(g) of Pub. L. 90-240 provided that: "(1) In the case of taxable years beginning before 1967, a company shall treat additions to a reserve, re- quired by State law or regulations for mortgage guar- anty insurance losses resulting from adverse economic cycles, as unearned premiums for purposes of section 832(b)(4) of the Internal Revenue Code of 1954 (subsec. (b)(4) of this section], but the amount so treated as unearned premiums In a taxable year shall not exceed 50 percent of premiums earned nn Insur- ance contracts (as defined in section 832(b)(4) of such Code (subsec. (b)(4) of this section]), determined with- out regard to amounts added to the reserve, with re- spect to mortgage guaranty insurance for such year. The amount of unearned premiums at the close of 1966 shall be determined without regard to the preced- ing sentence for the purpose of applying section 832(b)(4) of such Code [subsec. (b)(4) of this section] to 1967. Additions to such a reserve shall not be treat- ed as unearned premiums for any taxable year begin- ning after 1966. "(2) If a mortgage guaranty insurance company made additions to a reserve which were so treated as unearned premiums described in paragraph (1), such company, in taxable years beginning after 1966, shall include in gross income (in addition to the items speci- fied in section 832(b)(1) of such Code subsec. (b)(1) of this section]) the sum of the following amounts until there is included in gross income an amount equal to the aggregate additions to the reserve described in paragraph (1) for taxable years beginning before 1967: "CA) an amount (if any) equal to the excess of losses incurred (as defined in sectian 832(b)(5) of such Code [subsec. (b)(5) of this section]) for the taxable year over 35 percent of premiums earned on insurance contracts during the taxable year (as de- fined in section 832(b)(4) of such Code [subsec. (b)(4) of this section)), determined without regard to amounts added to the reserve referred to in para- graph (1), with respect to mortgage guaranty insur- ance, '(B) the amount (if any) remaining which was added to the reserve for the tenth preceding taxable year, and "(C) the excess (if any) of- "Ci) the aggregate of amounts so treated as un- earned premiums for all taxable years beginning before 1967 less the total of the amounts included in gross income under this paragraph for prior tax- able years and the amounts included in gross income under subparagraphs (A) and (B) for the taxable year, over "(ii) the aggregate of the additions made for tax- able years beginning before 1967 which remain in the reserve at the close of the taxable year. 71-999 0 - 78 - 36 (Vol, 7) Page 533 § 832
TITLE 26-INTERNAL REVENUE CODE Amounts shall be taken into account on a first-in-time basis. For purposes of section 832(e) of such Code [subsec. (e) of this section] and this paragraph, if part of the reserve is reduced under State law or regula- tion, such reduction shall first apply to the extent of amounts added to the reserve for taxable years begin- ning before 1967, and only then to amounts added thereafter. "(3) The provisions of this subsection shall apply to taxable years beginning after December 31, 1956." CROSS REFERENCES Consolidated returns, see section 1504 of this title. Credit on foreign taxes, see section 841 of this title. Dividends defined in distributions by corporations, see section 316 of this title. Personal holding company income, see section 543 of this title. Tax imposed on corporations, see section 11 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 543, 823, 824, 841, 844, 953, 6511 of this title; title 31 section 757c-3. PART IV-PROVISIONS OF GENERAL APPLICATION Sec. 841. Credit for foreign taxes. 842. Foreign corporations carrying on insurance busi- ness. 843. Annual accounting period. 844. Special loss carryover rules. AMENDMENTS 1969-Pub. L. 91-172, title IX, § 907(c)(2)(A), Dec. 30, 1969, 83 Stat. 717, added item 844. 1966-Pub. L. 89-809, title I, § 104(i)(2), Nov. 13, 1966, 80 Stat. 1561, substituted "Foreign corporations carry- ing on insurance business" for "Computation of gross income" in item 842. 1956-Act Mar. 13, 1956, ch. 83, § 4(b). 70 Stat. 49, added item 843. § 841. Credit for foreign taxes The taxes imposed by foreign countries or possessions of the United States shall be al- lowed as a credit against the tax of a domestic insurance company subject to the tax imposed by section 802, 821, or 831, to the extent pro- vided in the case of a domestic corporation in section 901 (relating to foreign tax credit). For purposes of the preceding sentence (and for purposes of applying section 906 with respect to a foreign corporation subject to tax under this subchapter), the term "taxable income" as used in section 904 means- (1) in the case of the tax imposed by section 802, the life insurance company taxable income (as defined in section 802(b)), (2) in the case of the tax imposed by section 821(a), the mutual insurance company tax- able income (as defined in section 821(b)); and in the case of the tax imposed by section 821(c), the taxable investment income (as de- fined in section 822(a)), and (3) in the case of the tax imposed by section 831, the taxable income (as defined in section 832(a)). (Aug. 16, 1954, ch. 736, 68A Stat. 267: Mar. 13, 1956, ch. 83, § 5(4), 70 Stat. 49; June 25, 1959, Pub. L. 86-69, § 3(b), 73 Stat. 139; Oct. 16, 1962, Pub. L. 87-834, § 8(g)(1), 76 Stat. 998; Nov. 13, 1966, Pub. L. 89-809, title I, § 104()(8), 80 Stat. 1562.) AMENDMENTS 1966-Pub. L. 89-809 substituted "For purposes of the preceding sentence (and for purposes of applying section 906 with respect to a foreign corporation sub- Ject to tax under this subchapter), the term "taxable income" as used in section 904" for "For purposes of the preceding sentence, the term 'taxable income' as used in section 904". 1962-Pub. L. 87-834 added par. (2) and redesignated former par. (2) as (3). 1959-Pub. L. 86-69 eliminated a reference to seccion 811 of this title in the first sentence, and substituted "section 802, the life insurance company taxable income (as defined in section 802(b)), and" for "section 802 or 811, the net investment income (as defined in section 803(c))" in par. (1). 1956-Act Mar. 13, 1956, inserted references to sec- tion 811. EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-809 with respect to tax- able years beginning after Dec. 31, 1966, see section 104(n) of Pub. L. 89-809, set out as an Effective Date of 1966 Amendment note under section 11 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Amendmcnt by Pub, L. 87-834 applicable with re- spect to taxable years beginning after Dec. 31, 1962, see section 8(h) of Pub. L. 87-834, set out as an Effec- tive Date of 1962 Amendment note under section 821 of this title. EFFECTIVE DATE OF 1959 AMENDMENT Amendment by Pub. L. 86-69 applicable only with respect to taxable years beginning after Dec. 31, 1957, see section 4 of Pub. L. 86-69, set out as an Effective Date note under section 801 of this title. EFFECTIVE DATE OF 1956 AMENDMENT Amendment by act Mar. 13, 1956 applicable only to taxable years beginning after Dec. 31, 1954, see section 6 of act Mar. 13, 1956, set out as an Effective Date of 1956 Amendment note under section 821 of this title. § 842. Foreign corporations carrying on Insurance business If a foreign corporation carrying on an insur- ance business within the United States would qualify under part I, II, or III of this sub- chapter for the taxable year if (without regard to income not effectively connected with the conduct of any trade or business within the United States) it were a domestic corporation, such corporation shall be taxable under such part on its income effectively connected with its conduct of any trade or business within the United States. With respect to the remainder of its income, which is from sources within the United States, such a foreign corporation shall be taxable as provided in section 881. (Aug. 16, 1954, ch. 736, 68A Stat. 267; Mar. 13, 1956, ch. 83, § 5(5), 70 Stat. 49; June 25, 1959, Pub. L. 86-69, § 3(f)(1), 73 Stat. 140; Nov. 13, 1966, Pub. L. 89-809, title I, § 104(i)(1), 80 Stat. 1561.) AMENDMENTS 1966-Pub. L. 89-809 substituted provisions covering the taxability of foreign corporations that are carry- ing on an insurance business within the United States which would qualify under part I, II, or III of this sub- chapter for the taxable year if (without regard to income not effectively connected with the conduct of any trade or business within the United States) it were a domestic corporation for provisions that the gross income of insurance companies subject to the tax im- § 841 Page 534
TITLE 26-INTERNAL REVENUE CODE posed by section 802 or 831 shall not be determined in the manner provided in part I of subchapter N (relat- ing to determination of sources of income). 1959-Pub. L. 86-69 eliminated reference to section 811. 1956-Act Mar. 13, 1956, inserted reference to sec- tion 811. EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-809 with respect to tax- able years beginning after Dec. 31, 1966, see section 104(n) of Pub. L. 89-809, set out as an Effective Date of 1966 Amendment note under section 11 of this title. EFFEcTIvE DATE OF 1959 AmENDMENT Amendment by Pub. L. 86-69 applicable only with respect to taxable years beginning after Dec. 31, 1957, Eee section 4 of Pub. L. 86-69, set out as an Effective Date note under section 801 of this title. EFFECTIVE DATE OF 1956 AMENDMENT Amendment by act Mar. 13, 1956 applicable only to taxable years beginning after Dec. 31, 1954, see section 6 of act Mar. 13, 1956, set out as an Effective Date of 1956 Amendment note under section 821 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 819, 821, 1442 of this title. § 843. Annual accounting period For purposes of this subtitle, the annual ac- counting period for each insurance company subject to a tax imposed by this subchapter shall be the calendar year. Under regulations prescribed by the Secretary, an insurance com- pany which Joins in the filing of a consolidated return (or is required to so file) may adopt the taxable year of the common parent corporation even though such year is not a calendar year. (Added Mar. 13, 1956, ch. 83, § 4(a), 70 Stat. 48, and amended Oct. 4, 1976, Pub. L. 94-455, title XV, § 1507(b)(2), 90 Stat. 1740.) AMENDMENTS 1976-Pub. L. 94-455 added provision permitting an insurance company which Joins in the filing of a con- solidated return to adopt the taxable year of the common parent corporation even though such year is not a calendar year. EFFECTIVE DATE OF 1976 AMENDMENT Amendment of section by section 1507(b)(2) of Pub. L. 94-455 applicable to taxable years beginning after Dec. 31, 1980, see section 1507(c)(1) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 1504 of this title. EFFECTIVE DATE Section as applicablE only to taxable years beginning after Dec. 31, 1954, see Effective Date of 1956 Amend- ment note set out under section 821 of this title. § 844. Special loss carryover rules (a) General rule If an insurance company- (1) is subject to the tax imposed by part I, II, or III of this subchapter for the taxable year, and (2) was subject to the tax imposed by a dif- ferent part of this subchapter for a prior tax- able year beginning after December 31, 1962, then any operations loss carryover under sec- tion 812, unused loss carryover under section 825, or net operating loss carryover under sec- tion 172, as the case may be, arising in such prior taxable year shall be included in its oper- ations loss deduction under section 812(a), unused loss deduction under section 825(a), or net operating loss deduction under section 832(c)(10), as the case may be. (b) Limitation The amount included under section 812(a), 825(a), or 832(c)(10), as the case may be, by reason of the application of subsection (a) shall not exceed the amount that would have consti- tuted the loss carryover under such section if for all relevant taxable years such company had been subject to the tax imposed by the part referred to in subsection (a)(1) rather than the part referred to in subsection (a)(2). For purposes of applying the preceding sentence- (1) In the case of a mutual insurance compa- ny which becomes a stock insurance compa- ny, an amount equal to 25 percent of the de- duction under section 832(c)(11) (relating to dividends to policyholders) shall not be al- lowed, and (2) section 812(b)(1)(C) (relating to addi- tional years to which losses may be carried by new life insurance companies) shall not apply. (c) Regulations The Secretary shall prescribe such regula- tions as may be necessary to carry out the pur- poses of this section. (Added Pub. L. 91-172, title IX, § 907(c)(1), Dec. 30, 1969, 83 Stat. 716, and amended Pub. L. 94- 455, title XIX, §§ 1901(b)(25), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1798, 1834.) AMENDMENTS 1976-Subsee. (b)(2). Pub. L. 94-455, § 1901(b)(25), substituted "section 812(b)(1)(C)" for "section 812(b)(1)(AMMii". Subsec. (c). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (b)(2) by section 1901(b)(25) of Pub. L. 94-455, effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE Section applicable with respect to losses incurred In taxable years beginning after Dec. 31, 1962, but not af- fecting any tax liability for any taxable year begin- ning before Jan. 1, 1967, see section 907(d) of Pub. L. 91-172, set out as an Effective Date of 1969 Amend- ment note under section 805 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 809, 823, 825 of this title. Subchapter M-Regulated Investment Companies and Real Estate Investment Trusts Part I. Regulated investment companies. II. Real estate investment trusts. SUBCHAPTER REFERRED TO IN OTHER SECTIONS This subchapter is referred to in sections 11, 46, 50B, 1504 of this title. Page 535
TITLE 26-INTERNAL REVENUE CODE PART I-REGULATED INVESTMENT COMPANIES Sec. 851. Definition of regulated investment company. 852. Taxation of regulated investment companies and their shareholders. 853. Foreign tax credit allowed to shareholders. 854. Limitations applicable to dividends received from regulated investment company. 855. Dividends paiz by regulated investment company after close of taxable year. AMENDMENTS 1960-Pub. L. 86-779, § 10(b)(1), Sept. 14, 1960, 74 Stat. 1008, added "and Real Estate Investment Trusts" to the Subchapter M heading, Part I and Part II desig- nations thereunder and Part I designation preceding table of sections numbered 851 to 855. PAnT REFERRED TO IN OTHER SECTIONS This part is referred to in section 58 of this title. § 851. Definition of regulated investment company (a) General rule For purposes of this subtitle, the term "regu- lated investment company" means any domes- tic corporation (other than a personal holding company as defined in section 542)- (1) whlch, at all times during the taxable year, is registered under the Investment Com- pany Act of 1940, as amended (15 U.S.C. 80a-1 to 80b-2) either as a management company or as a unit investment trust, or (2) which is a common trust fund or similar fund excluded by section 3(c)(3) of such Act (15 U.S.C. 80a-3(c)) from the definition of "investment company" and is not included in the definition of "common trust fund" by sec- tion 584(a). (b) Limitations A corporation shall not be considered a regu- lated investment company for any taxable year unless- (1) it files with its return for the taxable year an election to be a regulated investment company or has made such election for a pre- vious taxable year; (2) at least 90 percent of its gross income is derived from dividends, interests, and gains from the sale or other disposition of stock or securities; (3) less than 30 percent of its gross income is derived from the sale or other disposition of stock or securities held for less than 3 months; and (4) at the close of each quarter of the tax- able year- (A) at least 50 percent of the value of its total assets is represented by- (I) cash and cash items (including re- ceivables), Government securities and se- curities of other regulated investment companies, and (ii) other securities for purposes of this calculation limited, except and to the extent provided in subsection (e), in re- spect of any one issuer to an amount not greater in value than 5 percent of the value of the total assets of the taxpayer and to not more than 10 percent of the outstanding voting securities of such issuer, and (B) not more than 25 percent of the value of its total assets is invested in the securi- ties (other than Government securities or the securities of other regulated investment companies) of any one issuer, or of two or more issuers which the taxpayer controls and which are determined, under regula- tions prescribed by the Secretary; to be en- gaged in the same or similar trades or busi- nesses or related trades or businesses. For purposes of paragraph (2), there shall be treated as dividends amounts included in gross income under section 951(a)(1)(A)(i) for the taxable year to the extent that, under section 959(a)(1), there is a distribution out of the earnings and profits of the taxable year which are attributable to the amounts so included. (c) 'ules applicable to subsection (b)(4) For purposes of subsection (b)(4) and this subsection- (1) In ascertaining the value of the taxpay- er's investment in the securities of an issuer, for the purposes of subparagraph (B), there shall be included its proper proportion of the investment of any other corporation, a member of a controlled group, in the securi- ties of such issuer, as determined under regu- lations prescribed by the Secretary. (2) The term "controls" means the owner- ship in a corporation of 20 percent or more of the total combined voting power of all classes of stock entitled to vote. (3) The term "controlled group" means one or more chains of corporations connected through stock ownership with the taxpayer if- (A) 20 percent or more of the total com- bined voting power of all classes of stock en- titled to vote of each of the corporations (except the taxpayer) is owned directly by one or more of the other corporations, and (B) the taxpayer owns directly 20 percent or more of the total combined voting power of all classes of stock entitled to vote, of at least one of the other corporations. (4) The term "value" means, with respect to securities (other than those of majority- owned subsidiaries) for which market quota- tions are readily available, the market value of such securities; and with respect to other securities and assets, fair value as determined in good faith by the board of directors, except that in the case of securities of majority- owned subsidiaries which are investment com- panies such fair value shall riot exceed market value or asset value, whichever is higher. (5) All other terms shall have the same meaning as when used in the Investment Company Act of 1940, as amendd. (d) Determination of status A corporation which meets the requirements of subsections (b)(4) and (c) at the close of any quarter shall not lose its status as a regulated investment company because of a discrepancy during a subsequent quarter between the value of its various investments and such require- ments unless such discrepancy exists immedi- ately after the acquisition of any security or other property and is wholly or partly the result of such acquisition. A corporation which Page 536
TITLE 26-INTERNAL REVENUE CODE does not meet such requirements at the close of any quarter by reason of a discrepancy existing immediately after the acquisition of any securi- ty or other property which is wholly or partly the result of such acquisition during such quar- ter shall not lose its status for such quarter as a regulated investment company if such discrep- ancy is eliminated within 30 days after the close of such quarter and in such cases it shall be considered to have met such requirements at the close of such quarter for purposes of apply- ing the preceding sentence. (e) Investment companies furnishing capital to devel- opment corporations. (1) General rule If the Securities and Exchange Commission determines, in accordance with regulations issued by it, and certifies to the Secretary not earlier than 60 days prior to the close of the taxable year of a registered management company, that such investment company is principally engaged in the furnishing of cap- ital to other corporations which are principal- ly engaged in the development or exploitation of inventions, technological improvements, new processes, or products not previously gen- erally available, such investment company may, in the computation of 50 percent of the value of its assets under subparagraph (A) of subsection (b)(4) for any quarter of such tax- able year, include the value of any securities of an issuer, whether or not the investment company owns more than 10 percent of the outstanding voting securities of such issuer, the basis of which, when added to the basis of the investment company for securities of such issuer previously acquired, did not exceed 5 percent of the value of the total assets of the investment company at the time of the subse- quent acquisition of securities. The preceding sentence shall not apply to the securities of an issuer if the investment company has con- tinuously held any security of such issuer (or of any predecessor company of such issuer as determined under regulations prescribed by the Secretary) for 10 or more years preceding such quarter of such taxable year. (2) Limitation The provisions of this subsection shall not apply at the close of any quarter of a taxable year to an investment company if at the close of such quarter more than 25 percent of the value of its total assets is represented by secu- rities of issuers with respect to each of which the investment company holds more than 10 percent of the outstanding voting securities of such issuer and in respect of each of which or any predecessor thereof the investment company has continuously held any security for 10 or more years preceding such quarter unless the value of its total assets so repre- sented is reduced to 25 percent or less within 30 days after the close of such quarter. (3) Determination of status For purposes of this subsection, unless the Securities and Exchange Commission deter- mines otherwise, a corporation shall be con- sidered to be principally engaged in the devel- opment or exploitation of inventions, techno- logicai improvements, new processes, or prod- ucts not previously generally available, for at least 10 years after the date of the first acqui- sition of any security in such corporation or any predecessor thereof by such investment company if at the date of such acquisition the corporation or its predecessor was principally so engaged, and an investment company shall be considered at any date to be furnishing capital to any company whose securities it holds if within 10 years prior to such date it has acquired any of such securities, or any se. curities surrendered in exchange therefor, from such other company or predecessor thereof. For purposes of the certification under this subsection, the Securities and Ex- change Commissioa hall have authority to issue such rules, regulations and orders, and to conduct such investigations and hearings, either public or private, as it may deem ap- propriate. (4) Definitions The terms used in this subsection shall have the same meaning as in subsections (b)(4) and (c) of this section. (f) Certain unit investment trusts For purposes of this title- (1) A unit investment trust (as defined in the Investment Company Act of 1940)- (A) which is registered under such Act and issues periodic payment plan certifi- cates (as defined in such Act) in one or more series, (B) substantially all of the assets of which, as to all such series, consist of (i) se- curities issued by a single management com- pany (as defined in such Act) and securities acquired pursuant to subparagraph (C), or (ii) securities issued by a single other corpo- ration, and (C) which has no power to invest in any other securities except securities issued by a single other management company, when permitted by such Act or the rules and reg- ulations of the Securities and Exchange Commission, shall not be treated as a person. (2) In the case of a unit investment trust de- scribed in paragraph (1)- (A) each holder of an interest in such trust shall, to the extent of such interest, be treated as owning a proportionate share of the assets of such trust; (B) the basis of the assets of such trust which are treated under subparagraph (A) as being owned by a holder of an interest in such trust shall be the same as the basis of his interest in such trust; and (C) in determining the period for which the holder of an interest in such trust has held the assets of the trust which are treat- ed under subparagraph (A) as being owned by him, there shall be included the period for which such holder has held his interest in such trust. This subsection shall not apply in the case of a unit investment trust which is a segregated asset account under the insurance laws or regu- lations of a State. (Aug. 16, 1954, ch. 736, 68A Stat. 268; Sept. 3, 1958, Pub. L. 85-886, title I, § 38, 72 Stat. 1638; Dec. 30, 1969, Pub. L. 91-172, title IX, § 908(a), Page 537 § 851
TITLE 26-INTERNAL REVENUE CODE 83 Stat. 717; Mar. 29, 1975, Pub. L. 94-12, title VI, § 602(a)(2), 89 Stat. 58; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(a)(109), 1906(b)(13)(A), 90 Stat. 1783, 1834.) REFERENCES IN TEXT The Investment Company Act of 1940, as amended, referred to in subsecs. (a)(1), (c)(5). (f), is act Aug. 22, 1940, ch. 686, title I, 54 Stat. 789, as amended, which is classified generally to subchapter I (§ 80a-1 et seq.) of chapter 2D of Title 15, Commerce and Trade. For com- plete classification of this Act to the Code, see section 80a-51 of Title 15 and Tables volume. AMENDMENTS 1976-Subsec. (a)(1). Pub. L. 94-455, § 1901(a)(109)(A), struck out "54 Stat. 789;" before "15 U.S.C. 80a-1 to 80b-2)". Subsec. (b). Pub. L. 94-455, § 1901(a)(109)(B), struck out "which began after December 31, 1941" following "previous taxable year" in par. (1), and "or his dele- gate" following "Secretary" in par. (4)(B). Subsecs. (c), d). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" wherever appearing. 1975-Subsec. (b). Pub. L. 94-12 added provisions di- recting that, for purposes of par. (2), there shall be treated as dividends amounts included in gross income under section 951(a)(1)(A)(i) for the taxable year to the extent that, under section 959(a)(1), there is a dis- tribution out of earnings and profits of the taxable year which are attributable to the amounts so includ- ed. 1969-Subsec. (f). Pub. L. 91-172 added sub-c. (f). 1958-Subsec. (e)(1). Pub. L. 85-866, § 33' a), substi- tuted in the first sentence "not earlier than 60 days" for "not less than 60 days". Subsec. (e)(2). Pub. L. 85-866, § 38(b), substituted "issuer" for "issues". EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (a)(1) and (b)(1) by section 1901(a)(109) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTxVE DATE OF 1975 AMENDMENT Amendment by Pub. L. 94-12 applicable to taxable years of foreign corporations beginning after Dec. 31, 1975, and to taxable years of United States sharehold- ers (within the meaning of section 951(b) of this title) within which or with which such taxable years of such foreign corporations end, see section 602(f) of Pub. L. 94-12, set out as an Effective Date of 1975 Amendment note under section 955 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Section 908(b) of Pub. L. 91-172 provided that: "The amendment made by subsection (a) [adding subsec. (f) of this section] shall apply to taxable years of unit in- vestment trusts ending after December 31, 1968, and to taxable years of holders of interests in such trusts ending with or within such taxable years of such trusts. The enactment of this section shall not be con- strued to result in the realization of gain or loss by any unit investment trust or by any holder of an inter- est in a unit investment trust." EFFECTIVE DATE OF 1958 AMENDMENT Amendment of subsecs. (e)(1) and (e)(2) by Pub. L. 85-866 applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section l(c) of Pub. L. 85-866, set out as an Effective Date of 1958 Amendment note under section 165 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 11, 50B, 403, 853, 992, 1212, 1247 of this title. SECTION REFEIRED TO IN D.C. CODE This section is referred to in section 47-1557b of the District of Columbia Code. § 852. Taxation of regulated Investment companies and their shareholders (a) Requirements applicable to regulated investment companies The provisions of this part (other than sub- section (c) of this section) shall not be applica- ble to a regulated investment company for a taxable year unless- (1) the deduction for dividends paid during the taxable year (as defined in section 561, but without regard to capital gain dividends) equals or exceeds the sum of- (A) 90 percent of its investment'company taxable income for the taxable year deter- mined without regard to subsection (b)(2)(D); and (B) 90 percent of the excess of (i) its inter- est income excludable from gross income under section 103(a) over (if) its deductions disallowed under sections 265, 171(a)(2), and (2) the investment company complies for such year with regulations prescribed by the Secretary for the purpose of ascertaining the actual ownership of its outstanding stock. (b) Method of taxation of companies and sharehold. ers (1) Imposition of normal tax and surtax on regulat- ed investment companies There is hereby imposed for each taxable year upon the investment company taxable income of every regulated investment compa- ny a normal tax and surtax computed as pro- vided in section 11, as though the investment company taxable income were the taxable income referred to in section 11. (2) Investment company taxable income The investment company taxable income shall be the taxable income of the regulated investment company adjusted as follows: (A) There shall be excluded the amount of the net capital gain, if any. (B) The net operating loss deduction pro- vided in section 172 shall not be allowed. (C) The deductions for corporations pro- vided in part VIII (except section 248) in subchapter B (section 241 and following, re- lating to the deduction for dividends re- ceived, etc.) shall not be allowed. (D) The deduction for dividends paid (as defined in section 561) shall be allowed, but shall be computed without regard to capital gains dividends and exempt-interest divi- dends. (E) The taxable income shall be computed without regard to section 443(b) (relating to computation of tax on change of annual ac- counting period). (3) Capital gains (A) Imposition of tax There is hereby imposed for each taxable year in the case of every regulated invest- ment company a tax, determined as pro- vided in section 1201(a), on the excess, if any, of the net capital gain over the deduc- tion for dividends paid (as defined in section § 852 Page 538
TITLE 26-INTERNAL REVENUE CODE 561) determined with reference to capital gain dividends only. (B) Treatment of capital gain dividends by share- holders A capital gain dividend shall be treated by the shareholders as a gain from the sale or exchange of a capital asset held for more than 9 months. (C) Definition of capital gain dividend For purposes of this part, a capital gain dividend is any dividend, or part thereof, which is designated by the company as a capital gain dividend in a written notice mailed to its shareholders not later than 45 days after the close of its taxable year. If the aggregate amount so designated with respect to a taxable year of the company (including capital gains dividends paid after the close of the taxable year described in section 855) is greater than the net capital gain of the taxable year, the portion of each distribution which shall be a capital gain dividend shall be only that proportion of the amount so designated which such net capital gain bears to the aggregate amount so designated. (D) Treatment by shareholders of undistributed capital gains (i) Every shareholder of a regulated in- vestment company at the close of the co- mapny's taxable year shall include, in computing his long-term capital gains in his return for his taxable year in which the last day of the company's taxable year falls, such amount as the company shall designate in respect of such shares in a written notice mailed to its share- holders at any time prior to the expira- tion of 45 days after close of its taxable year, but the amount so includible by any shareholder shall not exceed that part of the amount subjected to tax in subpara- graph (A) which he would have received it all of such amount had been distributed as capital gain dividends by the company to the holders of such shares at the close of its taxable year. (ii) For purposes of this title, every such shareholder shall be deemed to have paid, for his taxable year under clause (I), the tax imposed by subparagraph (A) on the amounts required by this subparagraph to be included in respect of such shares in computing his long-term capital gains for that year; and such shareholder shall be allowed credit or refund, as the case may be, for the tax so deemed to have been paid by him. (iii) The adjusted basis of such shares in the hands of the shareholder shall be in- creased, with respect to the amounts re- quired by this subparagraph to be includ- ed in computing his long-term capital gains, by 70 percent of so much of such amounts as equals the amount subject to tax in accordance with section 1201(a). (iv) In the event of such designation the tax imposed by subparagraph (A) shall be paid by the regulated investment compa- ny within 30 days after close of its taxable year. v) The earnings and profits of such reg- ulated investment company, and the earn- ings and profits of any such shareholder which is a corporation, shall be appropri- ately adjusted in accordance with regula- tions prescribed by the Secretary. (4) Loss on sale or exchange of stock held less than 31 days If- (A) under subparagraph (B) or (D) of paragraph (3) a shareholder of a regulated investment company is required, with re- spect to any share, to treat any amount as a long-term capital gain, and (B) such share is held by the taxpayer for less than 31 days, then any loss on the sale or exchange of such share shall, to the extent of the amount de- scribed in subparagraph (A) of this para- graph, be treated as loss from the sale or ex- change of a capital asset held for more than 9 months. For purposes of this paragraph, the rules of section 246(c)(3) shall apply in deter- mining whether any share of stock has been held for less than 31 days; except that "30 days" shall be substituted for the number of days specified in subparagraph (B) of section 246(c)(3). (5) Exempt-interest dividends If, at the close of each quarter of its taxable year, at least 50 percent of the value (as de- fined in section 851(c)(4)) of the total assets of the regulated investment company consists of obligations described in section 103(a)(1), such company shall be qualified to pay exempt-interest dividends, as defined herein, to its shareholders. (A) Definition An exempt-interest dividend means any dividend or part thereof (other than a cap- ital gain dividend) paid by a regulated in- vestment company and designated by it as an exempt-interest dividend in a written notice mailed to its shareholders not later than 45 days after the close of its taxable year. If the aggregate amount so designated with respect to a taxable year of the compa- ny (including exempt-interest dividends paid after the close of the taxable year as described in section 855) is greater than the excess of- (I) the amount of interest excludable from gross income under section 103(a)(1), over (ii) the amounts disallowed as deduc- tions under sections 265 and 171(a)(2), the portion of such distribution which shall constitute an exempt-interest dividend shall be only that proportion of the amount so designated as the amount of such excess for such taxable year bears to the amount so designated. (B) Treatment of exempt-interest dividends by shareholders An exempt-interest dividend shall be treated by the shareholders for all purposes of this subtitle as an item of interest ex- cludable from gross income under section 103(a)(1). Such purposes include but are not limited to- Page 539 § 852
TITLE 26-INTERNAL REVENUE CODE (i) the determination of gross income and taxable income, (it) the determination of distributable net income under subchapter J, (iii) the allowance of, or calculation of the amount of, any credit or deduction, and (iv) the determination of the basis in the hands of any shareholder of any share of stock of the company. (c) Earnings and profits The earnings and profits of a regulated in- vestment company for any taxable year (but not its accumulated earnings and profits) shall not be reduced by any amount which is not al- lowable as a deduction in computing its taxable income for such taxable year. For purposes of this subsection, the term "regulated investment company" includes a domestic corporation which is a regulated investment company deter- mined without regard to the requirements of subsection (a). (d) Distributions in redemption of Interests in unit investment trusts In the case of a unit investment trust- (1) which is registered under the Invest- ment Company Act of 1940 (15 U.S.C. 80a-1 and following) and issues periodic payment plan certificates (as defined in such Act), and (2) substantially all of the assets of which consist of securities issued by a management company (as defined in such Act), section 562(c) (relating to preferential divi- dends) shall not apply to a distribution by such trust to a holder of an interest in such trust in redemption of part of all of such interest, with respect to the capital gain net income of such trust attributable to such redemption. (Aug. 16, 1954, ch. 736, 68A Stat. 271; July 11, 1956, ch. 573, § 2(a), 70 Stat. 530; Sept. 2, 1958, Pub. L. 85-866, title I, §§ 39(a), 101(a), (b), 72 Stat. 1638, 1674; Sept. 14, 1960, Pub. L. 86-779, § 10(b)(2), (3), 74 Stat. 1009; Feb. 26, 1964, Pub. L. 88-272, title II, § 229(a)(1), (2), (b), 78 Stat. 99; Dec. 30, 1969, Pub. L. 91-172, title V, § 511(c)(2), 83 Stat. 637; Oct. 4, 1976, Pub. L. 94- 455, title XIV, § 1402(b)(1)(N), title XIX, § 1901(a)(110)(A), (B)(i), (C), (b)(1)(V), (6)(B), (33)(I), (J), (N), 1906(b)(13)(A), title XXI, § 2137, 90 Stat. 1732, 1783, 1792, 1794, 1801, 1802, 1834, 1930, 1931.) TAXABLE YEARS AFTER 1977 Subsecs. (b)(3)(B), (4) of this section amended by Pub. L. 94-455, title XIV, § 1402(b)(2), Oct 4, 1976, 90 Stat. 1732, effec- tive for taxable years beginning after Dec. 31, 1977, by substituting "1 year" for "9 months". REFERENCES IN TEXT The Investment Company Act of 1940, referred to in subsec. (d), is act Aug. 22, 1940, ch. 686, title I, 54 Stat. 789, as amended, which is classified generally to sub- chapter I (Q 80a-1 et seq.) of chapter 2D of Title 15, Commerce and Trade. For complete classification of this Act to the Code, see section 80a-51 of Title 15 and Tables volume. AMENDMENTS 1976-Subsec. (a)(1). Pub. L. 94-455, §§ 1901(b)(6)(B), 2137(a), designated existing provisions as introductory material and subpar. (A) and added subpar. (B). Subsec. (a)(2). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (b)(1). Pub. L. 94-455, § 1901(b)(1)(V), struck out provision relating to the computation of the normal tax under section 11 of this title. Subsec. (b)(2)(A). Pub. L. 94-455, § 1901(b)(33)(I), substituted "the amount of the net capital gain, if any" for "the excess, if any, of the net long-term cap- ital gain over the short-term capital loss". Subsec. (b)(2)(D). Pub. L. 94-455, § 2137(b), added reference to exempt-interest dividends, Subsec. (b)(3)(A). Pub. L. 94-455, § 1901(b)(33)(J)(i), among other changes, struck out reference to the sum of the net short-term capital loss. Subsec. (b)(3)(B). Pub. L. 94-455, § 1402(b)(1)(N), provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977. Subsec. (b)(3)(C). Pub. L. 94-455, § 1901(a)(110)(A), (b)(33)(J)(ii), substituted "net capital gain" for "excess of the net long-term capital gain over the net short- term capital loss" in two places and struck out provi- sion requiring for purpose of the deduction for capital gains dividends paid, the deductions shall in the case of a taxable year beginning before Jan. 1, 1975, first be made from the amount subject to tax In accordance with section 1201(a)(1)(B), to the extent thereof, and then from the amount subject to tax in accordance with section 1201(a)(1)(A). Subsec. (b)(3)(D)(iii). Pub. L. 94-455, § 1901(a)(110)(B)(i), struck out "by 75 percent of so much of such amounts as equals the amount subject to tax in accordance with section 1201(a)(1)(A) and" following "his long term capital gains," and "(72 per- cent in the case of a taxable year beginning after De- cember 31, 1969, and before January 1, 1971)" follow- ing "by 70 percent" and substituted "section 1201(a)" for "section 1201(a)(1)(B) or (2)". Subsec. (b)(3)(D)(v). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (b)(4). Pub. L. 94-455, § 1402(b)(1)(N), pro- vided that "6 months" would be changed to "9 months" for taxable years beginning in 1977. Subsec. (b)(5). Pub. L. 94-455, § 2137(c), added subsec. (b)(5). Subsec. (d). Pub. L. 94-455, § 1901(a)(110)(C), (b)(33)(N), inserted in par. (1) "(15 U.S.C. 80a-1 and following)" following "Investment company Act of 1940" and substituted in provision following par. (2) "capital gain net income" for "net capital gain". 1969-Subsec. (b)(3)(A). Pub. L. 91-172, § 511(c)(2)(A), substituted "determined as provided in section 1201(a), on" for "of 25 percent of". Subsec. (b)(3)(C). Pub. L. 91-172, §511(c)(2)(B), added provision requiring for the purposes of the de- duction for capital gains dividends paid the deduction shall, in the case of a taxable year beginning before Jan. 1, 1975, first be made from the amount subject to tax in accordance with section 1201(a)(1)(B), to the extent thereof, and then from the amount subject to tax in accordance with section 1201(a)(1)(A). Subsec. (b)(3)(D). Pub. L. 91-172, § 511(c)(2)(C), (D), struck out "of 25 percent" in cl. (it), substituted refer- ence in cl. (i1) to the increase of the adjusted basis of shares in the hands of the shareholder, with respect to the amounts required by this subpar., by 75 percent of so much of such amounts as equals the amount sub- ject to tax in accordance with section 1201(a)(1)(A) and by 70 percent (72 percent in the case of a taxable year beginning after Dec. 31, 1969, and before Jan. 1, 1971) of so much of such amounts as equals the amount subject to tax in accordance with section 1201(a)(1)(B) or (2), for reference to the increase of the adjusted basis of shares in the hand of the share. holder by 75 percent of the amounts required by this subpar. to be included in computing his long-term cap- ital gains. Page 540 § 852
TITLE 26-INTERNAL REVENUE CODE 1964-Subsec. (b)(3)(C), (D)(i). Pub. L. 88-272, § 229(a)(1), (2), substituted "45 days" for "30 days" in pars, (C) and (D)(i). Subsec. (d). Pub. L. 88-272, § 229(b), added subsec. (d). 1960-Subsec. (a). Pub. L. 86-779. § 10(b)(2), substi- tuted "this part" for "this subchapter". Subsec. (b)(3)(C). Pub. L. 86-779, § 10(b)(3), substi- tuted "For purposes of this part, a capital gain divi- dend is" for "A capital gain dividend means". 1958-Subsec. (a). Pub. L. 85-868, § 101(a), inserted "(other than subsection (c) of this section)". Subsec. (b)(4). Pub. L. 85-866, § 39(a), added subsec. (b)(4). Subsec. (c). Pub. L. 85-866, § 101(b), added sentence defining regulated investment company. 1956-Subsec. (b)(3)(D). Act July 11, 1956, added subsec. (b)(3)(D). EFFECTIVE DATE OF 1976 AMENDMENT Section 1402(b)(1) of Pub. 1.. 94-455 provided in part that the substitution of "9 months" for "6 months" in subsec. (b)(3)(B), (4) of this section by section 1402(b)(1)(N) of Pub. L. 94-455 is effective with re- spect to taxable years beginning in 1977. Amendment of subsecs. (a)(1), (b)(1), (2)(A), (3)(A). (C). (d) by section 1901(a)(110)(A), (C), (b)(1)(V), (6)(H), (33)(I). (J)(i), (ii), (N), respectively, of Pub. L. 94-455 effective for taxable years beginning after Dec. 31. 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Section 1901(a)(110)(B)(i) of Pub. L. 94-455 pro- vided that: "The amendment made by clause (i) [amending subsec. (b)(3)(D)(iii) of this section] shall not be considered to affect the amount of any increase in the basis of stock under the provisions of section 852(b)(3)(D)(iii) of the Internal Revenue Code of 1954 [subsec. (b)(3)(D)tdli) of this section] which is based upon amounts subject to tax under section 1201 of such Code [section 1201 of this title] in taxable years beginning before January 1, 1975." Section 2137(e) of Pub. L. 94-455 provided that: "The amendments made by this section [amending subsecs. (a)(1), (b)(2)(D), (5) of this section and enact- ing sections 103(g)(24) and 265(3), (4) of this title] shall apply to taxable years beginning after December 31, 1975." EFFECTIVE DATE OF 1969 AMENDMENT Amendment by Pub. L. 91-172 applicable with re- spect to taxable years beginning after Dec. 31, 1969, see section 511(d) of Pub. L. 91-172, set out as an Ef- fective Date note under section 1201 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Section 229(c) of Pub. L. 88-272 provided that: "The amendments made by subsection (a) [amending sec- tions 852(b), 853, 854(b)(2), and 855 of this title] shall apply to taxable years of regulated investment compa- nies ending on or after the date of the enactment of this Act (Feb. 26, 1964]. The amendment made by sub- section (b) [adding subsec. (d) of this section] shall apply to taxable years of regulated investment compa- nies ending after December 31, 1963." EFFECTIVE DATE OF 1960 AMENDmENr Amendment of section by Pub. L. 86-779 applicable with respect to taxable years of real estate investment trusts beginning after Dec. 31, 1960, see section 10(k) of Pub. L. 86-779, set out as an Effective Date note under section 856 of this title. EFFECTIVE DATE OF 1958 AMENDMENT Section 39(b) of Pub. L. 85-866 provided that: "The amendment made by subsection (a) [adding subsec. (b)(4) of this section] shall apply with respect to tax- able years ending after December 31, 1957, but only with respect to shares of stock acquired after Decem- ber 31. 1957." Section 101(c) of Pub. L. 85-866 provided that: "The amendments made by this section [to subsecs. (a) and (c) of this section] shall apply with respect to taxable years of regulated investment companies beginning on or after March 1, 1958." EFFECTIVE DATE OF 1956 AMENDMENT Section 2(b) of act July 11, 1956, provided that: "The amendment made by this section (adding subpar. (D) to subsec. (b)(3) of this section] shall apply only with respect to taxable years of regulated investment com- panies beginning after December 31, 1956'." CROss RmIR'ENCES Doubling of tax rate on citizens and corporations of certain foreign countries, see section 891 of this title. SECTION RERRED TO IN OTHER SECTIONS This section is referred to in sections 48, 58, 103, 443, 853. 854, 891. 1201 of this title. SECTION REFERRED TO IN D.C. CODE This section is referred to in section 47-1557b of the District of Columbia Code. § 853. Foreign tax credit allowed to shareholders (a) General rule A regulated investment company- (1) more than 50 percent of the value (as defined in section 851(c)(4)) of whose total assets at the close of the taxable year consists of stock or securities in foreign corporations, and (2) which meets the requirements of section 852(a) for the taxable year, may, for such taxable year, elect the applica- tion of this section with respect to income, war profits, and excess profits taxes described in section 901(b)(1), which are paid by the invest- ment company during such taxable year to for- eign countries and possessions of the United States. (b) Effect of election If the election provided in subsection (a) is ef- fective for a taxable year- (1) the regulated investment company- (A) shall not, with respect to such taxable year, be allowed a deduction under section 164(a) or a credit under section 901 for taxes to which subsection (a) is applicable, and (B) shall be allowed as an addition to the dividends paid deduction for such taxable year the amount of such taxes; (2) each shareholder of such Investment company shall- (A) include in gross income and treat as paid by him his proportionate share of such taxes, and (B) treat as gross income from sources within the respective foreign countries and possessions of the United States, for pur- poses of applying subpart A of part III of subchapter N, the sum of his proportionate share of such taxes and the portion of any dividend paid by such investment company which represents income derived from sources within foreign countries or posses- sions of the United States. § 853 Page 541
TITLE 26-INTERNAL REVENUE CODE (c) Notice to shareholders The amounts to be treated by the share- holder, for purposes of subsection (b)(2), as his proportionate share of- (1) taxes paid to any foreign country or pos- session of the United States, and (2) gross income derived from sources within any foreign country or possession of the United States, shall not exceed the amounts so designated by the company in a written notice mailed to its shareholders not later than 45 days after the close of its taxable year. (d) Manner of making election and notifying share- holders The election provided in subsection (a) and the notice to shareholders required by subsec- tion (c) shall be made in such manner as the Secretary may prescribe by regulations. (e) Cross references (1) For treatment by shareholders of taxes paid to for- eign countries and possessions of the United States, see section 164(a) and section 901. (2) For definition of foreign corporation, see section 7701(a)(5). (Aug. 16, 1954, ch. 736, 68A Stat. 272; Feb. 26, 1964, Pub. L. 88-272, title II, § 229(a)(3), 78 Stat. 99; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (d). Pub. L. 94-455 struck out "or his delegate" following "Secretary". 1964-Subsec. (c). Pub. L. 88-272 substituted "45 days" for "30 days". EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272 applicable to taxable years of regulated investment companies ending on or after Feb. 26, 1964, see section 229(c) of Pub. L. 88-272, set out as an Effective Date of 1969 Amendment note under section 852 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 855 of this title. § 854. Limitations applicable to dividends received from regulated investment company (a) Capital gain dividend For purposes of section 116 (relating to an ex- clusion for dividends received by individuals) and section 243 (relating to deductions for divi- dends received by corporations), a capital gain dividend (as defined in section 852(b)(3)) re- ceived from a regulated investment company shall not be considered as a dividend. (b) Other dividends (1) General rule In the case of a dividend received from a regulated investment company (other than a dividend to which subsection (a) applies)- (A) if such investment company meets the requirements ot section 852(a) for the tax- able year during which it paid such divi- dend; and (B) the aggregate dividends received by such company during such taxable year are less than 75 percent of its gross income, then, in computing the exclusion under sec- tion 116 and the deduction under section 243, there shall be taken into account only that portion of the dividend which bears the same ratio to the amount of such dividend as the aggregate dividends received by such compa- ny during such taxable year bear to its gross income for such taxable year. (2) Notice to shareholders The amount of any distribution by a regu- lated investment company which may be taken into account as a dividend for purposes of the exclusion under section 116 and the de- duction under section 243 shall not exceed the amount so designated by the company in a written notice to its shareholders mailed not later than 45 days after the close of its taxable year. (3) Definitions For purposes of this subsection- (A) The term "gross income" does not in- clude gain from the sale or other disposition of stock or securities. (B) The term "aggregate dividends re- ceived" includes only dividends received from domestic corporations other than divi- dends described in section 116(b) (relating to dividends excluded from gross income). In determining the amount of any dividend for purposes of this subparagraph, the rules provided in section 116(c) (relating to cer- tain distributions) shall apply. (Aug. 16, 1954, ch. 736, 68A Stat. 273; Feb. 26, 1964, Pub. L. 88-272, title II, H4 201(d)(8)-(10), 229(a)(4), 78 Stat. 32, 99.) AMENDMENTS 1964-Subsec. (a). Pub. L. 88-272, § 201(d)(8), deleted "section 34(a) (relating to credit for dividends received by individuals)," preceding "section 116". Subsec. (b). Pub. L. 88-272, §§201(d)(9), (10), 229(a)(4), substituted "45 days" for "30 days" in par. (2), and deleted "the credit under section 34(a)," pre- ceding "the exclusion" in par. (1), and "the credit under section 34," preceding "the exclusion" in pnr. (2). EFFECTIVE DATE OF 1964 AMENDMENT Amendment of subsecs. (a), (b)(1), (2) by Pub. L. 88- 272, applicable to dividends received after Dec. 31, 1964, in taxable years ending after such date, see sec- tion 201(e) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 37 of this title. Amendment of subsec. (b)(2) by Pub. L. 88-272 appli. cable to taxable years of regulated investment compa- nies ending on or after Feb. 26, 1964, see section 229(c) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 852 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 116, 243 of this title. § 855. Dividends paid by regulated investment compa- ny after close of taxable year (a) General rule For purposes of this chapter, if a regulated investment company- (1) declares a dividend prior to the time pre- scribed by law for the filing of its return for a taxable year (including the period of any ex- tension of time granted for filing such return), and § 854 Page 542
TITLE 26-INTERNAL REVENUE CODE (2) distributes the amount of such dividend to shareholders in the 12-month period fol- lowing the close of such taxable year and not later than the date of the first regular divi- dend payment made after such declaration, the amount so declared and distributed shall, to the extent the company elects in such return in accordance with regulations prescribed by the Secretary, be considered as having been paid during such taxable year, except as provided in subsections (b), (c) and (d). (b) Receipt by shareholder Amounts to which subsection (a) is applicable shall be treated as received by the shareholder in the taxable year in which the distribution is made. (c) Notice to shareholders In the case of amounts to which subsection (a) is applicable, any notice to shareholders re- quired under this part with respect to such amounts shall be made not later than 45 days after the close of the taxable year in which the distribution is made. (d) Foreign tax election If an investment company to which section 853 is applicable for the taxable year makes a distribution as provided in subsection (a) of this section, the shareholders shall consider the amounts described in section 853(b)(2) allocable to such distribution as paid or received, as the case may be, in the taxable year in which the distribution is made. (Aug. 16, 1954, ch. 736, 68A Stat. 274; Sept. 14, 1960, Pub. L. 86-779, § 10(b)(2), 74 Stat. 1009; Feb. 26, 1964, Pub. L. 88-272, title II, § 229(a)(5), 78 Stat. 99; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455 struck out "or his delegate" following "Secretary". 1964-Subsec. (c). Pub. L. 88-272 substituted "45 days" for "30 days". 1960-Subsec. (c). Pub. L. 86-779 substituted "this part" for "this subchapter". EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272 applicable to taxable years of regulated investment companies ending on or after Feb. 26, 1964, see section 229(c) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 852 of this title. EFFECTIVE DATE OF 1960 AMENDMENT Amendment by Pub. L. 86-779 applicable with re- spect to taxable years of real estate investment trusts beginning after Dec. 31, 1960, see section 10(k) of Pub. L. 86-779, set out as an Effective Date note under sec- tion 856 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sectionE 265, 852 of this title. SECTION REFERRED TO IN D.C. CODE This section is referred to In section 47-1557b of the District of Columbia Code. PART I1-REAL ESTATE INVESTMENT TRUSTS Sec. 856. Definition of real estate investment trust. 857. Taxation of real estate investment trusts and their beneficiaries. 858. Dividends paid by real estate investment trust after close of taxable year. 859. Deduction for deficiency dividends. 860. Adoption of annual accounting period. AMENDMENTS 1976-Pub. L. 94-455, title XVI, §§ 1601(a)(2), 1604()(2), Oct. 4, 1976, 90 Stat. 1745, 1752, added items 859 and 860. 1960-Pub. L. 86-779, § 10(a), Sept. 14, 1960, 74 Stat. 1003, added Part 11 analysis. PART REFERRED TO IN OTHER SECTIONS This part Is referred to in sections 58, 116, 172, 243 of this title. § 856. Definition of real estate investment trust (a) In general For purposes of this title, the term "real estate investment trust" means a corporation, trust, or association- (1) which is managed by one or more trust- ees or directors; (2) the beneficial ownership of which is evi- denced by transferable shares, or by transfer- able certificates of beneficial interest; (3) which (but for the provisions of this part) would be taxable as a domestic corpora- tion; (4) which is neither (A) a financial institu- tion to which section 585, 586, or 593 applies, nor (B) an insurance company to which sub- chapter L applies; (5) the beneficial ownership of which is held by 100 or more persons; (6) which would not be a personal holding company (as defined in section 542) if all of its adjusted ordinary gross income (as defined in section 543(b)(2)) constituted personal holding company income (as defined in sec- tion 543); and (7) which meets the requirements of subsec- tion (c). (b) Determination of status The conditions described in paragraphs (1) to (4), inclusive, of subsection (a) must be met during the entire taxable year, and the condi- tion described in paragraph (5) must exist during at least 335 days of a taxable year of 12 months, or during a proportionate part of a taxable year of less than 12 months. (c) Limitations A corporation, trust, or association shall not be considered a real estate investment trust for any taxable year unless- (1) it files with its return for the taxable year an election to be a real estate investment trust or has made such election for a previous taxable year, and such election has not been terminated or revoked under subsection (g); (2) at least 95 percent (90 percent for tax- able years beginning before January 1, 1980) of its gross income (excluding gross income from prohibited transactions) is derived from- (A) dividends; Page 543 § 856
TITLE 26-INTERNAL REVENUE CODE (B) interest; (C) rents from real property; (D) gain from the sale or other disposition of stock, securities, and real property (in- cluding interests in real property and inter- ests in mortgages on real property) which is not property described in section 1221(1); (E) abatements and refunds of taxes on real property; (F) income and gain derived from foreclo- sure property (as defined in subsection (e)); and (G) amounts (other than amounts the de- termination of which depends in whole or in part on the income or profits of any person) received or accrued as consideration for entering into agreements (I) to make loans secured by mortgages on real property or on interests in real property or (i) to purchase or lease real property (including interests in real property and interests in mortgages on real property); (3) at least 75 percent of its gross income (excluding gross income from prohibited transactions) is derived from- (A) rents from real property; (B) interest on obligations secured by mortgages on real property or on Interests in real property; (C) gain from the sale or other disposition of real property (including interests in real property and interests in mortgages on real property) which is not property described in section 1221(1); (D) dividends or other distributions on, and gain from the sale or other disposition of, transferable shares (or transferable cer- tificates of beneficial interest) in other real estate investment trusts which meet the re- quirements of this part; (E) abatements and refunds of taxes on real property; (F) income and gain derived from foreclo- sure property (as defined in subsection (e)); and (G) amounts (other than amounts the de- termination of which depends in whole or in part on the income or profits of any person) received or accrued as consideration for entering into agreements (i) to make loans secured by mortgages on real property or on interests in real property or (ii) to purchase or lease real property (including interests in real property and interests in mortgages on real property); (4) less than 30 percent of its gross income is derived from the sale or other disposition of- (A) stock or securities held for less than 9 months; (B) section 1221(1) property (other than foreclosure property); and (C) real property (including interests in real property and interests in mortgages on real property) held for less than 4 years other than- (I) property compulsorily or involuntar- ily converted within the meaning of sec- tion 1033, and (ii) property which is foreclosure prop- erty within the definition of section 856(e); and (5) at the close of each quarter of the tax- able year- (A) at least 75 percent of the value of its total assets is represented by real estate assets, cash and cash items (including re- ceivables), and Government securities; tnd (B) not more than 25 percent of the value of its total assets is represented by securi- ties (other than those includible under sub- paragraph (A)) for purposes of this calcula- tion limited in respect of any one issuer to an amount not greater in value than 5 per- cent of the value of the total assets of the trust and to not more than 10 percent of the outstanding voting securities of such issuer. A real estate investment trust which meets the requirements of this paragraph at the close of any quarter shall not lose its status as a real estate investment trust because of a discrepancy during a subsequent quarter be- tween the value of its various investments and such requirements unless such discrepan- cy exists immediately after the acquisition of any security or other property and is wholly or partly the result of such acquisition. A real estate investment trust which does not meet such requirements at the close of any quarter by reason of a discrepancy existing immedi- ately after the acquisition of any security or other property which is wholly or partly the result of such acquisition during such quarter shall not lose its status for such quarter as a real estate investment trust if such discrepan- cy is eliminated within 30 days after the close of such quarter and in such cases it shall be considered to have met such requirements at the close of such quarter for purposes of ap- plying the preceding sentence. (6) For purposes of this part- (A) The term "value" means, with respect to securities for which market quotations are readily available, the market value of such securities; and with respect to other securities and assets, fair value as deter- mined in good faith by the trustees, except that in the case of securities of real estate investment trusts such fair value shall not exceed market value or asset value, which- ever is higher. (B) The term "real estate assets" means real property (including interests in real property and interests In mortgages on real property) and shares (or transferable certi- ficates of beneficial interest) in other real estate investment trusts which meet the re- quirements of this part. (C) The term "interests in real property" includes fee ownership and co-ownership of land or improvements thereon, leaseholds of land or improvements thereon, options to acquire land or improvements thereon, and options to acquire leaseholds of land or im- provements thereon, but does not include mineral, oil, or gas royalty interests. (D) All other terms shall have the same meaning as when used in the Investment Company Act of 1940, as amended (15 U.S.C. 80a-1 and following). (7) A corporation, trust, or association which fails to meet the requirements of para- 856 Page 544
TITLE 26-INTERNAL REVENUE CODE graph (2) or (3), or of both such paragraphs, for any taxable year shall nevertheless be considered to have satisfied the requirements of such paragraphs for such taxable year if- (A) the nature and amount of each item of its gross income described in such para- graphs is set forth in a schedule attached to its income tax return for such taxable year; (B) the inclusion of any incorrect infor- mation in the schedule referred to in sub- paragraph (A) is not due to fraud with intent to evade tax; and (C) the failure to meet the requirements of paragraph (2) or (3), or of both such paragraphs, is due to reasonable cause and not due to willful neglect. (d) Rents from real property defined (1) Amounts Included For purposes of paragraphs (2) and (3) of subsection (c), the term "rents from real property" includes (subject to paragraph (2))- (A) rents from interests in real property, (B) charges for services customarily fur- nished or rendered in connection with the rental of real property, whether or not such charges are separately stated, and (C) rent attributable to personal property which is leased under, or in connection with, a lease of real property, but only if the rent attributable to such personal prop- erty for the taxable year does not exceed 15 percent of the total rent for the taxable year attributable to both the real and per- sonal property leased under, or in connec- tion with, such lease. For purposes of subparagraph (C), with re- spect to each lease of real property, rent at- tributable to personal property for the tax- able year is that amount which bears the same ratio to total rent for the taxable year as the average of the adjusted bases of the personal property at the beginning and at the end of the taxable year bears to the average of the aggregate adjusted bases of both the real property and the personal property at the beginning and at the end of such taxable year. (2) Amounts excluded For purposes of paragraphs (2) and (3) of subsection (c), the term "rents from real property" does not include- (A) except as provided in paragraph (4), any amount received or accrued, directly or indirectly, with respect to any real or per- sonal property, if the determination of such amount depends in whole or in part on the income or profits derived by any person from such property (except that any amount so received or accrued shall not be excluded from the term "rents from real property" solely by reason of being based on a fixed percentage or percentages of re- ceipts or sales); (B) any amount received or accrued di- rectly or indirectly from any person if the real estate investment trust owns, directly or indirectly- (i) in the case of any person which is a corporation, stock of such person possess- ing 10 percent or more of the total corn- bined voting power of all classes of stock entitled to vote, or 10 percent or more of the total number of shares of all classes of stock of such person; or (ii) in the case of any person which is not a corporation, an interest of 10 per- cent or more in the assets or net profits of such person; and (C) any amount received or accrued, di- rectly or indirectly, with respect to any real or personal property if the real estate in- vestment trust furnishes or renders services to the tenants of such property, or manages or operates such property, other than through an independent contractor from whom the trust itself does not derive or re- ceive any income. (3) Independent contractor defined For purposes of this subsection and subsec- tion (e), the term "independent contractor" means any person- (A) who does not own, directly or indirect- ly, more than 35 percent of the shares, or certificates of beneficial interest, in the real estate investment trust; and (B) if such person is a corporation, not more than 35 percent of the total combined voting power of whose stock (or 35 percent of the total shares of all classes of whose stock), or, if such person is not a corpora- tion, not more than 35 percent of the inter- est in whose assets or net profits is owned, directly or indirectly, by one or more per- sons owning 35 percent or more of the shares or certificates of beneficial interest in the trust. (4) Special rule for certain contingent rents Where a real estate investment trust re- ceives or accrues, with respect to real or per- sonal property, any amount which would be excluded from the term "rents from real property" solely because the tenant of the real estate investment trust receives or ac- crues, directly or indirectly, from subtenants any amount the determination of which de- pends in whole or in part on the income or profits derived by any person from such prop- erty, only a proportionate part (determined pursuant to regulations prescribed by the Secretary) of the amount received or accrued by the real estate investment trust from that tenant will be excluded from the term "rents from real property". (5) Constructive ownership of stock For purposes of this subsection, the rules prescribed by section 318(a) for determining the ownership of stock shall apply in deter- mining the ownership of stock, assets, or net profits of any person; except that "10 per- cent" shall be substituted for "50 percent" in subparagraph (C) of section 318(a)(2) and 318(a)(3). (e) Special rules for foreclosure property (1) Foreclosure property defined For purposes of this part, the term "foreclo- sure property" means any real property (in- cluding interests in real property), and any personal property incident to such real prop- erty, acquired by the real estate investment trust as the result of such trust having bid in Page 545 § 856
TITLE 26-INTERNAL REVENUE CODE such property at foreclosure, or having other- wise reduced such property to ownership or possession by agreement or process of law, after there was default (or default was immi- nent) on a lease of such property or on an in- debtedness which such property secured. Such term does not include property acquired by the real estate investment trust as a result of indebtedness arising from the sale or uther disposition of property of the trust described in section 1221(1) which was not originally ac- quired as foreclosure property. (2) Grace period Except as provided in paragraph (3), prop- erty shall cease to be foreclosure property with respect to the real estate investment trust on the date which is 2 years after the date such trust acquired such property. (3) Extensions If the real estate investment trust estab- lishes to the satisfaction of the Secretary that an extension of the grace period is neces- sary for the orderly liq'idation of the trust's interest in such property, the Secretary may extend the grace period for such property. Any such extension shall be for a period of not more than 1 year, and not more than 2 extensions shall be granted with respect to any property. (4) Termination of grace period in certain cases Any foreclosure property shall cease to be such on the first day (occurring on or after the day on which the real estate investment trust acquired the property) on which- (A) a lease is entered into with respect to such property which, by its terms, will give rise to income which is not described in sub- section (c)(3) (other than subparagraph (F) of such subsection), or any amount is re- ceived or accrued, directly or indirectly, pursuant to a lease entered into on or after such day which is not described in such sub- section, (B) any construction takes place on such property (other than completion of a build- ing, or completion of any other improve- ment, where more than 10 percent of the construction of such building or other im- provement was completed before default became imminent), or (C) if such day is more than 90 days after the day on which such property was ac- quired by the real estate investment trust and the property is used in a trade or busi- ness which is conducted by the trust (other than through an independent contractor (within the meaning of section (d)(3)) from whom the trust itself does not derive or re- ceive any income). (5) Taxpayer must make election Property shall be treated as foreclosure property for purposes of this part only if the real estate investment trust so elects (in the manner provided in regulations prescribed by the Secretary on or before the due date (in- cluding any extensions of time) for filing its return of tax under this chapter for the tax- able year in which such trust acquires such property. Any such election shall be irrevoca- ble. (f) Interest For purposes of paragraphs (2)(B) and (3)(B) of subsection (c), the term "interest" does not include any amount received or accrued, direct- ly or indirectly, if the determination of such amount depends in whole or in part on the income or profits of any person except that: (1) any amount so received or accrued shall not be excluded from the term "interest" solely by reason of being based on a fixed per- centage or percentages of receipts or sales, and (2) where a real estate investment trust re- ceives or accrues any amount which would be excluded from the term "interest" solely be- cause the debtor of the real estate investment trust receives or accrues any amount the de- termination of which depends in whole or in part on the income or profits of any person, only a proportionate part (determined pursu- ant to regulations prescribed by the Secre- tary) of the amount received or accrued by the real estate investment trust from such debtor will be excluded from the term "inter- est". The provisions of this subsection shall apply only with respect to amounts received or ac- crued pursuant to loans made after May 27, 1976. For purposes of the preceding sentence, a loan is considered to be made before May 28, 1976, if such loan is made pursuant to a binding commitment entered into before May 28, 1976. (g) Termination of election (1) Failure to qualify An election under subsection (c)(1) made by a corporation, trust, or association shall ter- miante if the corporation, trust, or associ- ation is not a real estate investment trust to which the provisions of this part apply for the taxable year with respect to which the election is made, or for any succeeding tax- able year. Such termination shall be effective for the taxable year for which the corpora- tion, trust, or association is not a real estate investment trust to which the provisions of this part apply, and for all succeeding taxable years. (2) Revocation An election under subsection (c)(1) made by a corporation, trust, or association may be re- voked by it for any taxable year after the first taxable year for which the election is ef- fective. A revocation under this paragraph shall be effective for the taxable year in which made and for all succeeding taxable years. Such revocation must be made on or before the 90th day after the first day of the first taxable year for which the revocation is to be effective. Such revocation shall be made in such manner as the Secretary shall pre- scribe by regulations. (3) Election after termination or revocation Except as provided in paragraph (4), if a corporation, trust, or association has made an election under subsection (c)(1) and such elec- tion has been terminated or revoked under paragraph (1) or paragraph (2), such corpora- tion, trust, or association (and any successor corporation, trust, or association) shall not be eligible to make an election under subsection § 856 Page 546
TITLE 26-INTERNAL REVENUE CODE (c)(1) for any taxable year prior to the fifth taxable year which begins after the first tax- able year for which such termination or revo- cation is effective. (4) Exception If the election of a corporation, trust, or as- sociation has been terminated under para- graph (1), paragraph (3) shall not apply if- (A) the corporation, trust, or association does not willfully fall to file within the time prescribed by law an income tax return for the taxable year with respect to which the termination of the election under subsec- tion (c)(1) occurs; (B) the inclusion of any incorrect infor- mation in the return referred to in subpara- graph (A) is not due to fraud with intent to evade tax; and (C) the corporation, trust, or association establishes to the satisfaction of the Secre- tary that Its failure to qualify as a real estate investment trust to which the provi- sions of this part apply is due to reasonable cause and not due to willful neglect. (Added Pub. L. 86-779, § 10(a), Sept. 14, 1960, 74 Stat. 1004, and amended Pub. L. 88-272, title II, § 225(k)(4), Feb. 26, 1964, 78 Stat. 94; Pub. L. 88- 554, § 4(b)(4), Aug. 31, 1964, 78 Stat. 763; Pub. L. 93-625, § 6(a), (b), (d)(1), Jan. 3, 1975, 88 Stat. 2112 to 2114; Pub. L. 94-455, title XIV' § 1402(b)(1)(O), title XVI, §§ 1602(a), 1603(a), (c)(1)-(4), 1604(a)-(c)(1), (d)-(f)(3)(A), (g), (k)(1), (2)(A), title XIX, §§1901(a)(111), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1732, 1746, 1748-1753, 1783, 1834.) TAXABLE YEARS ArTLR 1977 Subsec. (c)(4)(A) of this section amended by Pub. L. 94-455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, effective for tax- able years beginning after Dec. 31, 1977, by substituting "1 year"for "9 months" REFERENCES IN TEXT The Investment Company Act of 1940, referred to in subsec. (c)(6)(D), is act Aug. 22, 1940, ch. 686, title I, 54 Stat. 789, as amended, which is classified generally to subchapter I (§ 80a-1 et seq.) of chapter 2D of Title 15, Commerce and Trade. For complete classification of this Act to the Code, see section 80a-51 of Title 15, and Tables volume. AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, §§ 1603(a), 1604(f)(1), (2), in introductory provisions substituted "this title" for "this subtitle" and "a corporation, trust, or association" fur "an unincorporated trust or an unicorporated association", in par. (1) added "or di- rectors" following "trustees", and in par. (4) substitut- ed reference to which is neither (A) a financial institu- tion to which section 585, 586, or 593 applies, nor (B) an insurance company to which subchapter L applies for reference to which does not hold any property pri- marily for sale to customers in the ordinary course of its trade or business. Subsec. (c). Pub. L. 94-455, § 1604(f)(3)(A), in intro- ductory material substituted "A corporation, trust, or association" for "A trust or association". Subsec. (c)(1). Pub, L. 94-455, §§ 1604(k)(2)(A), 1901(a)(111)(A), struck out reference to which began after Dec. 31, 1960 and added reference to such elec- tion has not been terminated or revoked under subsec- tion (g). Subsec. (c)(2). Pub. L. 94-455, §§ 1603(c)(2), 1604(a), (c)(1), in introductory provision substituted "95 per- cent (90 percent for taxable years beginning before January 1, 1980) of its gross income (excluding gross Income from prohibited transactions)" for "90 percent of its gross income", in subpar. (D) added reference to which is not property not described in section 1221(1), and added subpar. (G). Subsec. (c)(3). Pub. L. 94-455, §§ 1603(c)(1), (3). 1604(c)(1), in introductory provision inserted "(exclud. ing gross income from prohibited transactions) 75 per- cent of its gross income", in subpar. (C) added refer- ence to which is not property described in section 1221(1), and added subpar. (G). Subsec. (c)(4). Pub. L. 94-455, §§ 1402(b)(1)(O), 1604(d), in subpar. (A) provided that "6 months" would be changed to "9 months" for taxable years be- ginning in 1977, added subpar. (B), and redesignated former subpar. (B) as (C), and in subpar. (C) as so re- designated, substituted "(including interest in real property and interest in mortgages on real property" for "(including interest in real property)" and added reference to property which is foreclosure property within the definition of section 856(e). Subsec. (c)(6)(C). Pub. L. 94-455, § 1604(e), added ref- erence to options to acquire land or improvements thereon, and options to acquire leaseholds of land or improvements thereon. Subset. (c)(6)(D). Pub. L. 94-455, § 1901(a)(111)(B), inserted "(15 U.S.C. 80a-1 and following)" following as amended". Subsec. (c)(7'. Pub. L. 94-455, § 1602(a), added subsec. (c)(7). Subsec. (d). Pub. L. 94-455, § 1604(b), among other changes, added provisions including in definition of rents from real property charges for services custom- arily furnished or rendered in connection with rental of real property and rent attributable to personal property which is leased under, or in connection with, a lease of real property, provisions relating to the com- putation of the amount of rent attributable to person- al property, and provisions relating to the special rule for certain contingent rents. Subsec. (e)(1). Pub. L. 94-455, § 1603(c)(4), added pro- vision relating to the exclusion, from the definition of foreclosure property, of property acquired by the real estate investment trust or other disposition of proper- ty of the trust described in section 1221(1) of this title. Subsec. (e)(3), (5). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" each time appearing. Subsec. (f). Pub. L. 94-455, § 1604(g), added subsec. (f). Subsec. (g). Pub. L. 94-455, § 1604(k)(1), added subscc. (g). 1975-Subsec. (a)(4). Pub. L. 93-625, § 6(b), inserted "(other than foreclosure prope,-rty, as defined in sub- section (e))" following "property". Subsec. (c)(2), (3). Pub. L. 93-625, §6(d)(1), added subpar. (F) to pars. (2) and (3). Subsec. (e). Pub. L. 93-625, § 6(a), added subsec. (e). 1964-Subsec. (a)(6). Pub L. 88-272 substituted "ad- justed ordinary gross income (as defined in section 543(b)(2))" for "gross income". Subsec. (d). Pub. L. 88-5544 inserted the reference to subparagraph (C) of section 318(a)(3) of this title. EFFECTIVE DATE OF 1976 AMENDMENT Section 1402(b)(1) of Pub. L. 94-455 provided in part that the substitution of "9 months" for "6 months" in sub~ec. (c)(4)(A) of this section by section 1402(b)(1)(O) of Pub. L. 94-455 is effective with re- spect to taxable years beginning in 1977. Section 1608(d) of Pub. L. 94-455 provided that: "(1) Except as provided in paragraphs (2) and (3), the amendments made by sections 1603, 1604, and 1605 shall apply to taxable years of real estate investment trusts beginning after the date of the enactment of this Act [Oct. 4, 1976]. "(2) If, as a result of a determination (as d-.fined in section 859(c) of the Internal Revenue Code of 1954 [section 859(c) of this title]), occurring after the date of enactment of this Act [Oct. 4, 1976], with respect to Page 547 § 856
TITLE 26--INTERNAL REVENUE CODE the real estate investment trust, such trust does not meet the requirement of section 856(a)(4) of the Inter- nal Revenue Code of 1954 (as in effect before the amendment of such section by this Act) (section 856(a)(4) of this title] for any taxable year beginning on or before the date of the enactment of this Act (Oct. 4, 1976], such trust may elect, within 60 days after such determination in the manner provided in regulations prescribed by the Secretary of the Trea- sury or his delegate, to have the provisions of section 1603 (other than paragraphs (1), (2), (3), and (4) of section 1603(c)) apply with respect to such taxable year. Where the provisions of section 1603 apply to a real estate investment trust with respect to any tax- able year beginning on or before the date of the enact- ment of this Act [Oct. 4, 1976]- "(A) credit or refund of any overpayment of tax which results from the application of section 1603 to such taxable year shall be made as if on the date of the determination (as defined in section 859(c) of the Internal Revenue Code of 1954) 2 years re- mained before the expiration of the period of limita- tion prescribed by section 6511 of such Code (section 6511 of this title] on the filing of claim for refund for the taxable year to which the overpayment re- lates, "(B) the running of the statute of limitations pro- vided in section 6501 of such Code [section 6501 of this title] on the making of assessments, and the bringing of distraint or a proceeding in court for col- lection, in respect of any deficiency (as defined in section 6211 of such Code [section 6211 of this title]) established by such a determination, and all interest, additions to tax, additional amounts, or assessable penalties in respect thereof, shall be suspended for a period of 2 years after the date of such determina- tion, and "(C) the collection of any deficiency (as defined in section 6211 of such Code) established by such deter- mination and all interest, additions to tax, additional amounts, and assessable penalties in respect thereof shall, except in cases of jeopardy, be stayed until the expiration of 60 days after the date of such determi- nation. No distraint or proceeding in court shall be begun for the collection of an amount the collection of which is stayed under subparagraph (C) during the period for which the collection of such amount is stayed. "(3) Section 856(g)(3) of the Internal Revenue Code of 1954 [subsec. (g)(3) of this section], as added by sec- tion 1604 of this Act, shall not apply with respect to a termination of an election, filed by a taxpayer under section 856(c)(1) of such Code [subsec. (c)(1) of this section] on or before the date of the enactment of this Act [Oct. 4, 1976], unless the provisions of part II of subchapter M of chapter 1 of subtitle A of such Code [this title] apply to such taxpayer for a taxable year ending after the date of the enactment of this Act [Oct. 4, 1976] for which such election is in effect." EFFECTIVE DATr OF 1975 AMENDMENT Section 6(e) of Pub. L. 93-625 provided that: "The amendments made by this section [to this section and section 857 of this title] apply to foreclosure property acquired after December 31, 1973. Notwithstanding the provisions of section 856(e)(5) of the Internal Rev- enue Code of 1954 [subsec. (e)(5) of this section] (as added by subsection (a) of this section) any taxpayer required to make an election with respect to foreclo- sure property sooner than 90 days after the date of en- actment of this Act [Jan. 3, 1975], may make that elec- tion at any time before the 91st day after the date of enactment of this Act [Jan. 3, 1975)." EFFECTIVE DATE OF 1964 AMENDMENT Amendment by section 4 of Pub. L. 88-554 effective Aug. 31, 1964, except that for purposes of sections 302 and 304 of this title, such amendments shall not apply to distributions in payment for stock acquisitions or redemptions, if such acquisitions or redemptions oc- curred before Aug. 31, 1964, see section 4(c) of Pub. L. 88-554 set out as an Effective Date of 1964 Amend. ment note under section 318 of this title. Amendment by Pub. L. 88-272 applicable to taxable years beginning after Dec. 31, 1963, see section 225(l) of Pub. L. 88-272 set out as an Effective Date of 1964 Amendment note under section 316 of this title. EFFECTIVE DATE Section 10(k) of Pub, L. 86-779 provided that: "The amendments made by this section [adding sections 856 to 858 and amending sections 11(d)(3), 34(c), 116(b), 243(c), 318(b), 443(d), 852(a), (b)(3)(), 855(c) and 1504(b)(6) of this title] shall apply with respect to tax- able years of real estate investment trusts beginning after December 31, 1960." TRUST NOT DISQUALIFIEiD IN CERTAIN CASES WHERE INCOME TESTS NOT MET Section 1608(b) of Pub. L. 94-455 provided that: "The amendment made by section 1602 [enacting subsec. (c)(7) of this section and section 857(b)(2)(E), (5) of this title] sha! apply to taxable years of real estate investment trusts beginning after the date of the enactment of this Act [Oct. 4, 1976]. In addition, the amendments made by section 1602 shall apply to a taxable year of a real estate investment trust begin- ning before the date of the enactment of this Act [Oct. 4, 1976] if, as the result of a determination (as defined in section 859(c) of the Internal Revenue Code of 1954) [section 859(c) of this title] with respect to such trust occurring after the date of the enactment of this Act [Oct. 4, 19701, such trust for such taxable years does not meet the requirements of section 856(c)(2) or section 856(c)(3), or of both such sections, of such Code [subsecs. (c)(2) or (c)(3) of this section] as in effect for such taxable year. In any case, the amendment made by section 1602(a) requiring a sched- ule to be attached to the income tax return of certain real estate investment trusts shall apply only to tax- able years of such trusts beginning after the date of the enactment of this Act [Oct. 4, 1976]. If the amend- ments made by section 1602 apply to a taxable year ending on or before the date of enactment of this Act [Oct. 4, 1976], the reference to paragraph (2)(B) in section 857(b)(5) of such Code, as amended (section 857(b)(5) of this title], shall be considered to be a ref- erence to paragraph (2)(C) of section 857(b) of such Code, as in effect immediately before the enactment of this Act [Oct. 4, 1976]." CROSS REFERENCES Liquidations before Jan. 1, 1966, see section 225(h) of Pub. L. 88-272, set out as a Liquidations Before Jan- uary 1, 1966 note under section 333 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 318, 857, 1212 of this title. SECTION REFERRED TO IN D.C. CODE This section is referred to in section 47-1557b of the District of Columbia Code. § 857. Taxation of real estate investment trusts and their beneficiaries (a) Requirements applicable to real estate investment trusts The provisions of this part (other than sub- section (d) of this section and subsection (g) of section 856) shall not apply to a real estate in- vestment trust for a taxable year unless- (1) the deduction for dividends paid during the taxable year (as defined in section 561, but determined without regard to capital gains dividends equals or exceeds- (A) the sum of- (i) 95 percent (90 percent for taxable years beginning before January 1, 1980) of Page 548 § 857
TITLE 26-INTERNAL REVENUE CODE the real estate investment trust taxable income for the taxable year (determined without regard to the deduction for divi- dends paid (as defined in section 561) and by excluding any net capital gain); and (it) 95 percent (90 percent for taxable years beginning before January 1, 1980) of the excess of the net income from foreclo- sure property over the tax imposed on such income by subsection (b)(4)(A); minus (B) the sum of- (I) the amount of any penalty imposed on the real estate investment trust by sec- tion 6697 which is paid by such trust during the taxable year; and (ii) the net loss derived from prohibited transactions, and (2). the real estate investment trust complies for such year with regulations prescribed by the Secretary for the purpose of ascertaining the actual ownership of the outstanding shares, or certificates of beneficial interest, of such trust. (b) Method of taxation of real estate investment trusts and holders of shares or certificates of beneficial interest (1) Imposition of normal tax and surtax on real estate investment trusts There is hereby imposed for each taxable year on the real estate investment trust tax- able income of every real estate investment trust a normal tax and surtax computed as provided in section 11, as though the real estate investment trust taxable income were the taxable income referred to in section 11. (2) Real estate investment trust taxable income For purposes of this part, the term "real estate investment trust taxable income" means the taxable income of the real estate investment trust, adjusted as follows: (A) The deductions for corporations pro- vided in part VIII (except section 248) of subchapter B (section 241 and following, re- lating to the deduction for dividends re- ceived, etc.) shall not be allowed. (B) The deduction for dividends paid (as defined in section 561) shall be allowed, but shall be computed without regard to that portion of such deduction which is attribut- able to the amount excluded under subpara- graph (D). (C) The taxable income shall be computed without regard to section 443(b) (relating to computation of tax on change of annual ac- counting period). (D) There shall be excluded an amount equal to the net income from foreclosure property. (E) There shall be deducted an amount equal to the tax imposed by paragraph (5) for the taxable year. (F) There shall be excluded an amount equal to any net income derived from pro- hibited transactions and there shall be in- cluded an amount equal to any net loss de- rived from prohibited transactions. (3) Capital gains (A) Alternative tax in case of capital gains If for any taxable year a real estate in- vestment trust has a net capital gain, then, in lieu of the tax imposed by subsection (b)(1), there is hereby imposed a tax (if such tax is less than the tax imposed by such subsection) which shall consist of the sum of- (I) a tax, computed as provided in sub- section (b)(1), on the real estate invest- ment trust taxable income (determined by excluding such net capital gain and by computing the deduction for dividends paid without regard to capital gain divi- dends), and (ii) a tax of 30 percent of the excess of the net capital gain over the deduction for dividends paid (as defined in section 561) determined with reference to capital gains dividends only. (B) Treatment of capital gain dividends by share. holders A capital gain dividend shall be treated by the shareholders or holders of beneficial in- terests as a gain from the sale or exchange of a capital asset held for more than 9 months. (C) Definition of capital gain dividend For purposes of this part, a capital gain dividend is any dividend, or part thereof, which is designated by the real estate in- vestment trust as a capital gain dividend in a written notice mailed to its shareholders or holders of beneficial interests at any time before the expiration of 30 days after the close of its taxable year; except that, if there is an increase in the excess described in subparagraph (A)(i) of this paragraph for such year which results from a determi- nation (as defined in section 859(c)), such designation may be made with respect to such increase at any time before the expira- tion of 120 days after the date of such de- termination. If the aggregate amount so designated with respect to a taxable year of the trust (including capital gain dividends paid after the close of the taxable year de- scribed in section 858) is greater than the net capital gain of the taxable year, the portion of each distribution which shall be a capital gain dividend shall be only that proportion of the amount so designated which such net capital gain bears to the ag- gregate amount so designated. For purposes of this subparagraph, the net capital gain shall be deemed not to exceed the real estate investment trust taxable income (de- termined without regard to the deduction for dividends paid (as defined in section 561) for the taxable year). (4) Income from foreclosure property (A) Imposition of tax There is hereby imposed for each taxable year on the net income from foreclosure property of every real estate investment trust a tax determined by applying section 11 to such income as if such income consti- tuted the taxable income of a corporation taxable under section 11. For purposes of the preceding sentence, the surtax exemp- tion shall be zero. 71-999 0 - 78 -37 (Vol. 7) § 857 Page 549
TITLE 26-INTERNAL REVENUE CODE (B) Net income from foreclosure property For purposes of this part, the term "net income from foreclosure property" means the excess of- (i) gain from the sale or other disposi- tion of foreclosure property described in section 1221(1) and the gross income for the taxable year derived from foreclosure property (as defined in section 856(e)), but only to the extent such gross income is not described in subparagraph (A), (B), (C), (D), (E), or (G) of section 856(c)(3), over (ii) the deductions allowed by this chap- ter which are directly connected with the production of the income referred to in clause (I). (5) Imposition of tax in case of failure to meet cer- tain requirements -If section 856(c)(7) applies to a real estate investment trust for any taxable year, there is hereby imposed on such trust a tax in an amount equal to the greater of- (A) the excess of- (i) 95 percent (90 percent in the case of * taxable years beginning before January 1, 1980) of the gross i ncome (excluding gross income from prohibited transactions) of the real estate investment trust, over (ii) the amount of such gross income which is derived from sources referred to in section 856(c)(2); or (B) the excess of- (i) 75 percent of the gross !ncome (ex- cluding gross income from prohibited transactions) of the real estate investment trust, over (ii) the amount of such gross income which is derived from sources referred to in section 856(c)(3), multiplied by a fraction the numerator of which is the real estate investment trust taxable income for the taxable year (deter- mined without regard to the deductions provided in paragraphs (2)(B) and (2)(E), without regard to any net operating loss de- duction, and by excluding any net capital gain) and the denominator of which is the gross income for the taxable year (exclud- ing gross income from prohibited transac- tions; gross income and gain from foreclo- sure property (as defined in section 856(e), but only to the extent such gross income and gain is not described in subparagraph (A), (B), (C), (D), (E), or (G) of section 856(c)(3)); long-term capital gain; and short- term capital gain to the extent of any short- term capital loss). (6) Income from prohibited transactions (A) Imposition of tax There is hereby imposed for each taxable yepr of every real estate investment trust a tax equal to 100 percent of the net income derived from prohibited transactions. (B) Definitions For purposes of this part- (i) the term "net income derived from prohibited transactions" means the excess of the gain from prohibited transactions over the deductions allowed by this chap- ter which are directly connected with pro- hibited transactions; (ii) the term "net loss derived from pro- hibited transactions" means the excess of the deductions allowed by this chapter which are directly connected with prohib- ited transactions over the gain from pro- hibited transactions; and (iii) the term "prohibited transaction" means a sale or other disposition of prop- erty described in section 1221(1) which is not foreclosure property. (7) Loss on sale or exchange of stock held less than 31 days If- (A) under subparagraph (B) of paragraph (3) a shareholder of, or a holder of a benefi- cial interest in, a real estate investment trust is required, with respect to any share or beneficial interest, to treat any amount as a long-term capital gain, and (B) such share or interest is held by the taxpayer for less than 31 days, then any loss on the sale or exchange of such share or interest shall, to the extent of the amount described in subparagraph (A) of this paragraph, be treated as loss from the sale or exchange of a capital asset held for more than 9 months. For purposes of this para- graph, the rules of section 246(c)(3) shall apply in determining whether any share of stock or beneficial interest has been held for less than 31 days; except that "30 days" shall be substituted for the number of days speci- fied in subparagraph (B) of section 246(c)(3). (c) Restrictions applicable to dividends received from real pstate investment trusts For purposes of section 116 (relating to an ex- clusion for dividends received by individuals) and section 243 (relating to deductions for divi- dends received by corporations), a dividend re- ceived from a real estate investment trust which meets the requirements of this part shall not be considered as a dividend. d) Earnings and profits The earnings and profits of a real estate in- vestment trust for any taxable year (but not its accumulated earnings and profits) shall not be reduced by any amount which is not allowable as a deduction in computing its taxable income for such taxable year. For purposes of this sub- section, the term "real estate investment trust" includes a domestic corporation, trust, or asso- ciation which is a real estate investment trust determined withbut regard to the requirements of subsection (a). (e) Cross reference For provisions relating to excise tax based on certain real estate investment trust taxable income not distribut- ed during the taxable year, see section 4981. (Added Pub. L. 86-779, § 10(a), Sept. 14, 1960, 74 Stat. 1006, and amended Pub. L. 88-272, title II, § 201(d)(11), Feb. 26, 1964, 78 Stat. 32, Pub. L. 91-172, title V, §511(c)(3), Dec. 30, 1969, 83 Stat. 637; Pub. L. 93-625, § 6(c), (d)(2)-(4), Jan. 3, 1975, 88 Stat. 2113, 2114; Pub. L. 94-455, title XIV, § 1402(b)(1)(P), title XVI, §§ 1601(c), 1602(b), 1603(b), (c)(5), 1604(c)(2), (f)(3)(B), (j), (k)(2)(B), 1605(b)(2), 1606(a), (d), 1607(a), (b)(1)(A), (2), (3), title XIX, §§ 1901(a)(112), 8 57 Page 550
TITLE 26-INTERNAL REVENUE CODE (b)(1)(V), (33)(K), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1732, 1746-1748, 1750-1757, 1783, 1792, 1801, 1834.) TAXABLE YEARS AFTER 1977 Subsecs. (b)(3)(B) and (7) of this section amended by Pub. L. 94-455, title XIV, § 1402(b)(2), Oct. 4, 1976, 90 Stat. 1732, effec- tive with respect to taxable years beginning after Dec. 31, 1977, by substituting "1 year" for "9 months". AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, §§ 1604(j), (k)(2)(B), 1906(b)(13)(A), substituted "(other than sub- section (d) of this section and subsection (g) of section 856)" for "(other than subsection (d) of this section)" in the provisions preceding par. (1), in par. (1) redesig- nated existing subpars. (A) and (B) as cls. (i) and (ii), respectively, of subpar. (A), added subpar. (B), in both cls. (i) and ii) of subpar. (A) as redesignated raised the percentage to 95 percent for taxable years beginning on and after Jan. 1, 1980, and, in cl. (i) of subpar. (A) as redesignated, added provision for the exclusion of net capital gain, and struck out "or his delegate" fol- lowing "Secretary" in par. (2). Subsec. (b)(1). Pub. L. 94-455, § 1901(b)(1)(V), struck out provision that, for purposes of computing the normal tax under section 11, the taxable Income and the dividends paid deduction of such real estate invest- ment trust for the taxable year (computed without regard to capital gains dividends) would be reduced by the deduction provided by section 22 (relating to par- tially tax-exempt interest. Subsec. (b)(2). Pub. L. 94-455, §§ 1602(b)(2), 1603(c)(5), 1606(a), (d), 1607(b)(1)(A), (2), struck out subpar. (A) which provided for the exclusion of the excess, if any, of the net long-term capital gain over the net short-term capital loss, and subpar, (E) which prohibited the allowance of the net operating loss de- duction provided in section 172, redesignated subpars. (B), (C), (D), and (P) as subpars. (A), (B), (C), and (D), respectively, added slibpars. (E) and (F), and in subpar. (B) as redesignated substituted "subparagraph (D)" for "paragraph (F)" and struck out "shall be computed without regard to capital gains dividends and" following "shall be allowed, but". Subsec. (b)(3)(A). Pub. L. 94-455, § 1607(a), substitut- ed provisions setting an alternative tax in case of cap- ital gains under which, if for any taxable year, a real estate Investment trust has a net capital gain, then, In lieu of the tax Imposed by subsection (b)(1), there Is Imposed a tax (if such tax is less than the tax Imposed by such subsection) to consist of the sum of a tax, computed as provided In subsection (b)(1), on the real estate Investment trust taxable income (determined by excluding such net capital gain and by computing the deduction for dividends paid without regard to capital gain dividends), and a tax of 30 percent of the excess of the net capital gain over the deduction for divi- dends paid (as defined in section 561) determined with reference to capital gains dividends only, for provi- sions posing a tax for each taxable year determined as provided In section 1201(a), on the excess, if any, of the net long-term capital gain over the sum of the net short-term capital loss and the deduction for dividends paid (as defined in section 561) determined with refer- ence to capital gains dividends only. Subsec. (b)(3)(B). Pub. L. 94-455, § 1402(b)(1)(P), provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977. Subsec. (b)(3)(C). Pub. L. 94-455, §§ 1601(c), 1607(b)(3), 1901(a)(112), (b)(33)(K), added "; except that, If there Is an increase in the excess described in subparagraph (A)(Ii) of this paragraph for such year which results from a determination (as defined in sec- tion 859(c)), such designation may be made with re- spect to such increase at any time before the expira- tion of 120 days after the date of such determination" following "30 days after the close of its taxable year", substituted "net capital gain" for "excess of the net long-term capital gain over the net short-term capital loss" in the provision covering the portion of distribu- tions which shall 1:2 capital gain dividends, added pro- vision that the net capital gain be deemed not to exceed the real estate investment trust taxable Income, and struck out provision which specified the source of deductions for dividends paid in the case of taxable years beginning before Jan. 1, 1975. Subsec. (b)(4)(B)(i). Pub. L. 94-455, §1604(c)(2), added reference to subparagraph (G) of section 856(c)(3). Subsec. (b)(5). Pub. L. 94-455, §1602(b)(1), added subsec. (b)(5). Former subsec. (b)(5) redesignated (b)(7) and amended. Subsec, (b)(6). Pub. L. 94-455, § 1603(b), added subsec. (b)(6). Subsec. (b)(7). Pub. L. 94-455, §§ 1402(b)(1)(P), 1602(b)(1), redesignated subsec. (b)(5) as (b)(7) and in subsec. (b)(7) as so redesignated provided that "6 months" would be changed to "9 months" for taxable years beginning in 1977. Subsec. (d). Pub. L. 94-455, § 1604(f)(3)(B), substitut- ed "a domestic corporation, trust," for "a domestic un- incorporated trust". Subsec. (e). Pub. L. 94-455, § 1605(b)(2), added subsec. (e). 1975-Subsec. (a)(1). Pub. L. 93-625, §6(d)(2), Incor- porated existing par. (1) provisions In par. (1) intro- ductory text and provisions designated as subpar. (A), substituted In subpar. (A) "(determined without regard to the deduction for dividends paid (as defined in section 561))" for "(determined without regard to subsection (b)(2)(C))", and added subpar. (B). Subsec. (b)(2)(C). Pub. L. 93-625, § 6(d)(4), provided for computation of deduction for dividends paid with- out regard to that portion of such deduction which is attributable to the amount excluded under subpara- graph (F). Subsec. (b)(2)(F). Pub. L. 93-625, § 6(d)(3), added subpar. (F). Subsec. (b)(4), (5). Pub. L. 93-625, § 6(c), added par. (4) and redesignated former par. (4) as (5). 1969-Subsec. (b)(3)(A). Pub. L. 91-172, §511(c)(3)(A), substituted "determined as provided In section 1201(a), on" for "of 25 percent of." Subsec. (b)(3)(C). Pub. L. 91-172, §511(c)(3)(B), added provision requiring for the purposes of the de- duction for capital gains dividends paid, in the case of a taxable year beginning before Jan. 1, 1975, the de- duction for dividends paid shall first be made from the amount subject to tax in accordance with section 1201(a)(1)(B), to the extent thereof, and then from the amount subject to tax In accordance with section 1201(a)(1)(A). 1964-Subsec. (c). Pub. L. 88-272 deleted "section 34(a) (relating to credit for dividends received by Indi- viduals)," preceding "section 116." EFFECTIVE DATE OF 1976 AMENDMENT Section 1402(b)(1) of Pub. L. 94-455 provided In part that the substitution of "9 months" for "6 months" in subsec. (b)(3)(B) and (7) of this section by section 1402(b)(1)(P) of Pub. L. 94-455 Is effective with respect to taxable years beginning in 1977. For effective date of amendment of subsec. (b)(3)(C) by section 1601(c) of Pub, L. 94-455, see section 1608(a) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 859 of this title. For effective date of amendment of subsec. (b)(2), (5), (7) by section 1602(b)(1), (2) of Pub, L. 94-455, see section 1608(b) of Pub. L. 94-455, set out as a Trust Not Disqualified in Certain Cases Where Income Tests Not Met note under section 856 of this title. For effective date of subsecs. (a), (b)(2), (4)(B)(i), (6), (d), (e) by sections 1603, 1604 and 1605 of Pub. L. 94- 455, see section 1608(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 856 of this title. Page 551 § 857
TITLE 26-INTERNAL REVENUE CODE Section 1608(c) of Pub. L. 94-455 provided that: "The amendments made by sections 1606 and 1607 (enacting section 172(b)(1)(E)(d)(7) of this title, amending subsec. (b)(2)(B), (3)(A), (C) of this section and sections 46(e)(2) and 443(e)(5) of this title, and re- pealing subsecs. (b)(2)(A), (E) of this section] shall apply to taxable years ending after the date of the en- actment of this Act [Oct. 4, 1976]; except that in the case of a taxpayer which has a net operating loss (as defined in section 172(c) of the Internal Revenue Code of 1954) [section 172(c) of this title] for any taxable year ending after the date of enactment of this Act [Oct. 4, 1976J for which the provisions of part II of subchapter M of chapter 1 of subtitle A of such Code [this title] apply to such taxpayer, such loss shall not be a net operating loss carryback under section 172 of such Code to any taxable year ending on or before the date of enactment of this Act [Oct. 4, 1976]." Amendment of subsec. (b)(1), (3)(C) by sectfon 1901(a)(112), (b)(1)(V), (33)(K) of Pub. L. 94-455 effec. tive for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effec- tive Date of 1976 Amendment note under section 2 of this title. EFFECTxVE DATE OF 1975 AMENDMENT Amendment by Pub. L. 93-625 applicable to foreclo- sure property acquired after Dec. 31, 1973, see section 6(e) of Pub. :,. 93-625, set out as an Effective Date of 1975 Amendment note under section 856 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Amendment by Pub. L. 91-172 applicable with re- spect to taxable years beginning after Dec. 31, 1969, see section 511(d) of Pub. L. 91-172, set out as an Ef- fective Date note under section 1201 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272 applicable with re- spect to dividends received after Dec. 31, 1964, in tax- able years ending after such date, see section 201(e) of Pub. L. 88-272, set out as Effective Date of 1964 Amendment note under section 37 of this title. EFFECTIVE DATE Section applicable with respect to taxable years of real estate investment trusts beginning after Dec. 31, 1960, see section 10(k) of Pub. L. 86-779, set out as an Effective Date note under section 856 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 46, 58, 172, 443, 1201, 4981 of this title. SECTION REFERRED TO IN D.C. CODE This section is referred to in section 47-1557b of the District of Columbia Code. § 858. Dividends paid by real estate investment trust after close of taxable year (a) General rule For purposes of this part, if a real estate in- vestment trust- (1) declares a dividend before the time pre- scribed by law for the filing of its return for a taxable year (including the period of any ex- tension of time granted for filing such return), and (2) distributes the amount of such dividend to shareholders or holders of beneficial inter- ests in the 12-month period following the close of such taxable year and not later than the date of the first regular dividend payment made after such declaration, the amount so declared and distributed shall, to the extent the trust elects in such return (and specifies in dollar amounts) in accordance with regulations prescribed by the Secretary, be con- sidered as having been paid only during such taxable year, except as provided in subsections (b) and (c). (b) Receipt by shareholder Amounts to which subsection (a) applies shall be treated as received by the shareholder or holder of a beneficial interest in the taxable year in which the distribution is made. (c) Notice to shareholders In the case of amounts to which subsection (a) applies, any notice to shareholders or hold- ers of beneficial interests required under this part with respect to such amounts shall be made not later than 30 days after the close of the taxable year in which the distribution is made. (Added Pub. L. 86-779, § 10(a), Sept. 14, 1960, 74 Stat. 1008, and amended Pub. L. 94-455, title XVI, §§ 1604(h), title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1752, 1834.) AMENDMENTS 1976-Subsec. (a). Pub. L, 94-455, §§ 1604(h), 1906(b)(13)(A), added "(and specifies ie dollar amounts)" following "to the extent the trust elects in such return" and substituted "paid only during such taxable year" for "paid during such taxable year', and struck out "or his delegate" following "Secretary". EFFECTIVE DATE OF 1976 AMENDMENT For effective date of amendment of subsec. (a) by section 1604(h) of Pub. L. 94-455, see section 1608(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 856 of this title. EFFECTIVE DATE Section applicable with respect to taxable years of real estate investment trusts beginning after Dec. 31, 1960, see section 10(k) of Pub. L. 86-779, set out as an Effective Date note under section 856 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 857 of this title. SECTION REFERRED TO IN D.C. CODE This section is referred to in section 47-1557b of the District of Columbia Code. § 859. Deduction for deficiency dividends (a) General rule If a determination (as defined in subsection (c)) with respect to a real estate investment trust results in any adjustment (as defined in subsection (b)(1)) for any taxable year, a deduc- tion shall be allowed to such trust for the amount of deficiency dividends (as defined in subsection (d)) for purposes of determining the deduction for dividends paid (for purposes of section 857) for such year. (b) Rules for application of section (1) Adjustment For purposes of this section, the term "ad- justment" means- (A) any Increase In the sum of- (i) the real estate investment trust tax- able income of the real estate investment trust (determined without regard to the deduction for dividends paid (as defined in section 561) and by excluding any net capital gain), and § 858 Page 552
TITLE 26-INTERNAL REVENUE CODE (ii) the excess of the net income from foreclosure property (as defined in section 857(b)(4)(B)) over the tax on such income imposed by section 857(b)(4)(A), (B) any increase in the amount of the excess described in section 857(b)(3)(A)(ii) (relating to the excess of the net capital gain over the deduction for capital gains dividends paid), and (C) any decrease in the deduction for divi- dends paid (as defined in section 561) deter- mined without regard to capital gains divi- dends. (2) Interest and additions to tax determined with respect to the amount of deficiency dividend deduction allowed For purposes of determining interest, addi- tions to tax, and additional amounts- (A) the tax imposed by this chapter (after taking into account the deduction allowed by subsection (a)) on the real estate invest- ment trust for the taxable year with respect to which the determination is made shall be deemed to be increased by an amount equal to the deduction allowed by subsection (a) with respect to such taxable year, (B) the last date prescribed for payment of such increase in tax shall be deemed to have been the last date prescribed for the payment of tax (determined in the manner provided by section 6601(c)) for the taxable year with respect to which the determina- tion is made, and (C) such increase in tax shall be deemed to be paid as of the date the claim for the deficiency dividend deduction is filed. (3) Credit or refund If the allowance of a deficiency dividend de- duction results in an overpayment of tax for any taxable year, credit or refund with re- spect to such overpayment shall be made as if on the date of the determination 2 years re- mained before the expiration of the period of limitations on the filing of claim for refund for the taxable year to which the overpay- ment relates. (c) Determination For purposes of this section, the term "deter- mination" means- (1) a decision by the Tax Court, or a judg- ment, decree, or other order by any court of competent Jurisdiction, which has become final; (2) a closing agreement made under section 7121; or (3) under regulations prescribed by the Sec- retary, an agreement signed by the Secretary and by, or on behalf of, the real estate invest- ment trust relating to the liability of such trust for tax. (d) Deficiency dividends (1) Definition For purposes of this section, the term "defi- ciency dividends" means a distribution of property made by the real estate investment trust on or after the date of the determina- tion and before filing claim under subsection (e), which would have been includible in the computation of the deduction for dividends paid under section 561 for the taxable year with respect to which the liability for tax re- sulting from the determination exists, if dis- tributed during such taxablc year. No distri- bution of property shall be considered as defi- ciency dividends for purposes of subsection (a) unless distributed within 90 days after the determination, and unless a claim for a defi- ciency dividend deduction with respect to such distribution is filed pursuant to subsec- tion (e). (2) Limitations (A) Ordinary dividends The amount of deficiency dividends (other than deficiency dividends qualifying as capital gain dividends) paid by a real estate investment trust for the taxable year with respect to which the liability for tax resulting from the determination exists shall not exceed the sum of- (i) the excess of the amount of increase referred to in subparagraph (A) of subsec- tion (b)(1) over the amount of any in- crease in the deduction for dividends paid (computed without regard tc capital gain dividends) for such taxable year which re- sults from such determination, and (ii) the amount of decrease referred to in subparagraph (C) of subsection (b)(1). (B) Capital gain dividends The amount of deficiency dividends quali- fying as capital gain dividends paid by a real estate investment trust for the taxable year with respect to which the liability for tax resulting from the determination exists shall not exceed the amount by which (I) the increase referred to in subparagraph (B) of subsection (b)(1) exceeds (ii) the amount of any dividends paid during such taxable year which are designated as capital gain dividends after such determination. (3) Effect on dividends paid deduction (A) For taxable year in which paid Deficiency dividends paid in any taxable year shall not be included in the amount of dividends paid for such year for purposes of computing the dividends paid deduction for such year. (B) For prior taxable year Deficiency dividends paid in any taxable year shall not be allowed for purposes of section 858(a) in the computation of the dividends paid deduction for the taxable year preceding the taxable year in which paid. (e) Claim required No deficiency dividend deduction shall be al- lowed under subsection (a) unless (under regu- lations prescribed by the Secretary) claim therefor is filed within 120 days after the date of the determination. (f) Suspension of statute of limitations and stay of collection (1) Suspension of running of statute If the real estate investment trust files a claim as provided in subsection (e), the run- ning of the statute of limitations provided in section 6501 on the making of assessments, and the bringing of distraint or a proceeding in court for collection, in respect of the defi- Page 553 § 859
TITLE 26-INTERNAL REVENUE CODE ciency established by a determination under this section, and all interest, additions to tax, additional amounts, or assessable penalties in respect thereof, shall be suspended for a period of 2 years after the date of the deter- mination. (2) Stay of collection In the case of any deficiency established by a determination under this section- (A) the collection of the deficiency, and all interest, additions to tax, additional amounts, and assessable penalties in respect thereof, shall, except in cases of jeopardy, be stayed until the expiration of 120 days after the date of the determination, and (B) if claim for a deficiency dividend de- duction is filed under subsection (e), the collection of such part of the deficiency as is not i educed by the deduction for deficien- cy dividends provided in subsection (a) shall be stayed until the date the claim is disal- lowed (in whole or in part), and if disal- lowed in part collection shall be made only with respect to the part disallowed. No distraint or proceeding in court shall be begun for the collection of an amount the col- lection of which is stayed under subpara- graph (A) or (B) during the period for which the collection of such amount is stayed. (g) Deduction denied in case of fraud No deficiency dividend deduction shall be al- lowed under subsection (a) if the determination contains a finding that any part of any defi- ciency attributable to an adjustment with re- spect to the taxable year is due to fraud with intent to evade tax or to willful failure to file an income tax return within the time pre- scribed by law or prescribed by the Secretary in pursuance of law. (h) Penalty For assessable penalty with respect to liability for tax of real estate investment trust which is allowed a deduc- tion under subsection (a), see section 6697. (Added Pub. L. 94-455, title XVI, § 1601(a)(1), Oct. 4, 1976, 90 Stat. 1742.) EFFECTIVE DATE Section 1608(a) of Pub. L. 94-455 provided that: "The amendments made by section 1601 [enacting sections 316(b)(3). 381(c)(25), 859, 6422(14), 6503()(5), and 6515(8) of this title, and amending section 857(b)(3)(C) of this title] shall apply with respect to determinations (as defined in section 859(c) of the In- ternal Revenue Code of 1954) [subsec. (c) of this sec- tion] occurring after the date of the enactment of this Act [Oct. 4, 1976]. If the amendments made by section 1601 apply to a taxable year ending on or before the date of enactment of this Act [Oct. 4, 1976]: "(1) the reference to section 857(b)(3)(A)(ii) [section 857(b)(3)(A)(ii) of this title] in sections 857(b)(3)(C) and 859(b)(1)(B) of such Code [sections 857(b)(3)(C) and 859(b)(1)(B) of this title] as amended; shall be considered to be a reference to section 857(b)(3)(A) of such Code [section 857(b)(3)(A) of this title], as in effect immediately before the enactment of this Act [Oct. 4, 1976], and "(2) the reference to section 857(b)(2)(B) [section 857(b)(2)(B) of this title] in section 859(a) of such Code, as amended [section 859(a) of this title], shall be considered to be a reference to section 857(b)(2)(C) of such Code [section 857(b)(2)(c) of this title], as in effect hmmediatley before the enactment of this Act [Oct. 4,1976]." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 316, 381, 6422, 6515, 6697 of this title. § 860. Adoption of annual accounting period For purposes of this subtitle, a real estate in- vestment trust shall not change to or adopt any annual accounting period other than the calen- dar year. (Added Pub. L. 94-455, title XVI, § 1604(i)(1), Oct. 4, 1976, 90 Stat, 1752.) EFFECTIVE DATE Section effective Oct. 4, 1976, see section 1608(d) of Pub. L. 94-455 set out as an Effective Date of 1976 Amendment note under section 856 of this title. Subchapter N-Tax Based on Income From Sources Within or Without the United States Part I. Determination of sources of income. II. Nonresident aliens and foreign corporations. III. Income from sources without the United States. IV. Domestic international sales corporations.' V. International boycott determinations. AMENDMENTS 1976-Pub. L. 94-455, title X, § 1064(b), Oct. 4, 1976, 90 Stat. 1653, added item V. SUBCHAPTER REFERRED TO IN OTHER SECTIONS This subchapter is referred to in section 555 of this title. PART I-DETERMINATION OF SOURCES OF INCOME Sec. 861. Income from sources within the United States. 862. Income from sources without the United States. 863. Items not specified In section 861 or 862. 864. Definitions. PART REFERRED TO IN OTHER SECTIONS This part is referred to in sections 306, 901, 905, 931, 941, 7654 of this title. § 861. Income from sources within the United States (a) Gross income from sources within United States The following items of gross income shall be treated as income from sources within the United States: (1) Interest Interest from the United States or the Dis- trict of Columbia, and interest on bonds, notes, or other interest-bearing obligations of residents, corporate or otherwise, not includ- ing- (A) interest on amounts described in sub- section (c) received by a nonresident alien individual or a foreign corporation, if such interest is not effectively connected with the conduct of a trade or business within the United States, (B) interest received from a resident alien individual or a domestic corporation, when it is shown to the satisfaction of the Secre- tary that less than 20 percent of the gross income from all sources of such individual or such corporation has been derived from 'Part IV added by Pub. L. 92-178, title V, § 501, Dec. 10, 1971, 85 Stat. 535, without amending Subchapter N analysis to include such Part IV. § 860 Page 554
TITLE 26-INTERNAL REVENUE CODE sources within the United States, as deter- mined under the provisions of this part, for the 3-year period ending with the close of the taxable year of such individual or such corporation preceding the payment of such interest, or for such part of such period as may be applicable, (C) interest received from a foreign corpo- ration (other than interest paid or credited by a domestic branch of a foreign corpora- tion, if such branch is engaged in the com- mercial banking business), when it is shown to the satisfaction of the Secretary that less than 50 percent of the gross income from all sources of such foreign corporation for the 3-year period ending with the close of its taxable year preceding the payment of such interest (or for such part of such period as the corporation has been in exis- tence) was effectively connected with the conduct of a trade or business within the United States, (D) in the case of interest received from a foreign corporation (other than interest paid or credited by a domestic branch of a foreign corporation, if such branch is en- gaged in the commercial banking business), 50 percent or more of the gross income of which from all sources for the 3-year period ending with the close of its taxable year preceding the payment of such interest (or for such part of such period as the corpora- tion has been in existence) was effectively connected with the conduct of a trade or business within the United States, an amount of such interest which bears the same ratio to such interest as the gross income of such foreign corporation for such period which was not effectively connected with the conduct of a trade or busines3 within the United States bears to its gross income from all sources, (E) income derived by a foreign central bank of issue from bankers' acceptances, and (F) interest on deposits with a foreign branch of a domestic corporation or a do- mestic partnership, if such branch is en- gaged in the commercial banking business. (G) interest on a debt obligation which was part of an issue with respect to which an election has been made under subsection (c) of section 4912 (as in effect before July 1, 1974) and which, when issued (or treated as issued under subsection (c)(2) of such section), had a maturity not exceeding 15 years and, when issued, was purchased by one or more underwriters with a view to dis- tribution through resale, but only with re- spect to interest attributable to periods after the date of such election, and (H) interest on a debt obligation which was part of an issue which- (I) was part of an issue outstanding on April 1, 1971, (ii) was guaranteed by a United States person, (iii) was treated under chapter 41 as a debt obligation of a foreign obligor, (iv) as of June 30, 1974, had a maturity of not more than 15 years, and (v) when issued, was purchased by one or more underwriters for the purpose of distribution through resale. (2) Dividends The amount received as dividends- (A) from a domestic corporation other than a corporation which has an election in effect under section 936, and other than a corporation less than 20 percent of whose gross income is shown to the satisfaction of the Secretary to have been derived from sources within the United States, as deter- mined under the provisions of this part, for the 3-year period ending with the close of the taxable year of such corporation pre- ceding the declaration of such dividends (or for such part of such period as the corpora- tion has been in existence), or (B) from a foreign corporation unless less than 50 percent of the gross income from all sources of such foreign corporation for the 3-year period ending with the close of its taxable year preceding the declaration of such dividends (or for such part of such period as the corporation has been in exis- tence) was effectively connected with the conduct of a trade or business within the United States; but only in an amount which bears the same ratio to such dividends as the gross income of the corporation for such period which was effectively connected with the conduct of a trade or business within the United States bears to its gross income from all sources; but dividends (other than dividends for which a deduction is allowable under section 245(b)) from a foreign corporation shall, for purposes of subpart A of part III (relating to foreign tax credit), be treated as income from sources without the United States to the extent (and only to the extent) exceeding the amount which is 100/85ths of the amount of the deduction allowable under section 245 in respect of such dividends, or (C) from a foreign corporation to the extent that such amount is required by sec- tion 243(d) (relating to certain dividends from foreign corporations) to be treated as dividends from a domestic corporation which is subject to taxation under this chapter, and to such extent subparagraph (B) shell not apply to such amount. (D) from a DISC or former DISC (as de- fined in section 992(a)) except to the extent attributable (as determined under regula- tions prescribed by the Secretary) to quali- fied export receipts described in section 993(a)(1) (other than interest and gains de- scribed in section 995(b)(1)). (3) Personal services Compensation for labor or personal services performed in the United States; except that compensation for labor or services performed in the United States shall not be deemed to be income from sources within the United States if- (A) the labor or services are performed by a nonresident alien individual temporarily present in the United States for a period or periods not exceeding a total of 90 days during the taxable year, § 861 Page 555
TITLE 26-INTERNAL REVENUE CODE (B) such compensation does not exceed $3,000 in the aggregate, and (C) the compensation is for labor or ser- vices performed as an employee of or under a contract with- (I) a nonresident alien, foreign partner- ship, or foreign corporation, not engaged in trade or business within the United States, or (ii) an individual who is a citizen or resi- dent of the United States, a domestic partnership, or a domestic corporation, if such labor or services are performed for an office or place of business maintained in a foreign country or in a possession of the United States by such individual, partnership, or corporation. (4) Rentals and royalties Rentals or royalties from property located in the United States or from any interest in such property, including rentals or royalties for the use of or for the privilege of using in the United States patents, copyrights, secret processes and formulas, good will, trade- marks, trade brands, franchises, and other like property. (5) Sale or exchange of real property Gains, profits, and income from the sale or exchange of real property located in the United States. (6) Sale or exchange of personal property Gains, profits, and income derived from the purchase of personal property without the United States (other than within a possession of the United States) and its sale or exchange within the United States. (7) Amounts received as underwriting income (as defined in section 832(b)(3)) de- rived from the insurance of United States risks (as defined in section 953(a)). (b) Taxable income from sources within United States From the items of gross income specified in subsection (a) as being income from sources within the United States there shall be deduct- ed the expenses, losses, and other deductions properly apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income. The re- mainder, if any, shall be included in full as tax- able income from sources within the United States. (c) Interest on deposits, etc. For purposes of subsection (a)(1)(A), the amounts described in this subsection are- (1) deposits with persons carrying on the banking business, (2) deposits or withdrawable accounts with savings institutions chartered and supervised as savings and loan or similar associations under Federal or State law, but only to the extent that amounts paid or credited on such deposits or accounts are deductible under sec- tion 591 (determined without regard to sec- tion 265) in computing the taxable income of such institutions, and (3) amounts held by an insurance company under an agreement to pay interest thereon. (d) Special rules for application of paragraphs (1)(B), (1)(C), (1)(D), and (2)(B) of subsection (a) (I) New entities For purposes of paragraphs (1)(B), 'j)(C), (1)(D), and (2)(B) of subsection (a), if the resi- dent alien individual, domestic corporation, or foreign corporation, as the case may be, has no gross income from any source for the 3- year period (or part thereof) specified, the 20 percent test or the 50 percent test, as the case may be, shall be applied with respect to the taxable year of the payor in which payment of the interest or dividends, as the case may be, is made. (2) Transition rule For purposes of paragraphs (1)(C), (1)(D), and (2)(B) of subsection (a), the gross income of the foreign corporation for any period before the first taxable year beginning after December 31, 1966, which is effectively con- nected with the conduct of a trade or business within the United States is an amount equal to the gross income for such period from sources within the United States. (e) Election to treat income from certain aircraft and vessels as income from sources within the United States. (1) In general For purposes of subsection (a) and section 862(a), if a taxpayer owning an aircraft or vessel which is section 38 property (or would be section 38 property but for section 48(a)(5)) leases such aircraft or vessel to a United States person, other than a member of the same controlled group of corporations (as defined in section 1563) as the taxpayer, and if such aircraft or vessel is manufactured or constructed in the United States, the taxpay- er may elect, for any taxable year ending after the commencement of such lease, to treat all amounts includible in gross income with respect to such aircraft or vessel (wheth- er during or after the period of any such lease), including gain from sale, exchange, or other disposition of such aircraft or vessel, as income from sources within the United States. (2) Effect of election An election under paragraph (1) made with respect to any aircraft or vessel shall apply to the taxable year for which made and to all subsequent taxable years. Such election may not be revoked except with the consent of the Secretary. (3) Manner and time of election and revocation An election under paragraph (1), and any revocation of such election, shall be made in such manner and at such time as the Secre- tary prescribes by regulations. (4) Certain transfers involving carryover basis If the taxpayer transfers or distributes an aircraft or vessel which is subject to an elec- tion under paragraph (1) and the basis of such aircraft or vessel in the hands of the transferee or distributee is determined by ref- erence to its basis in the hands of the trans- feror or distributor, the transferee or distri- butee shall, for purposes of paragraph (1), be § 861 Page 556
TITLE 26-INTERNAL REVENUE CODE8 treated, as having made an election with re- spect to such aircraft or vessel. (Aug. 16, 1954, ch. 736, 68A Stat. 275; Sept. 14, 1960, Pub, L. 86-779, § 3(b), 74 Stat. 998; Oct. 16, 1962, Pub. L. 87-834, § 9(c), 76 Stat, 1001; Nov. 13, 1963, Pub. L. 89-809, title I, § 102(a)(1)-(3), (b), (c), 80 Stat. 1541-1543; Dec. 30, 1969, Pub. L. 91-172, title IV, § 435(a), 83 Stat. 625; Apr. 1, 1971, Pub. L. 92-9, § 3(a)(2), 85 Stat. 15; Dec. 10, 1971, Pub. L. 92-178, title III, § 314(a), title V, § 503, 85 Stat. 528, 550; Jan. 3, 1975, Pub. L. 93- 625, §§ 8, 9(a), 88 Stat. 2116; Oct. 4, 1976, Pub. L. 94-455, title X, §§ 1036(a), 1041, 1051(h)(3), title XIX, §§ 1901(b)(26)(A), (B), (c)(7), 1904(b)(10)(B), 1906(b)(13)(A), 90 Stat. 1633, 1634, 1647, 1798, 1803, 1817, 1834.) AMENDMENTS 1976-Subsec. (a)(1). Pub. L. 94-455, §§ 1901(c)(7), 1904(b)(10)(B), struck out ", any Territory, any politi- cal subdivision of a Territory," following "United States" in the provisions preceding subpar. (A) and, in subpar. (G), substituted "subsection (c) of section 4912 (as in effect before July 1, 1974)" for "section 4912(c)" and "subsection (c)(2) of such section" for "section 4912(c)(2)". Subsec. (a)(2)(A), Pub, L. 94-455, §§ 1051(h)(3), 1906(b)(13)(A), substituted "other than a corporation ,,hich has an election in effect under section 936" for "other than a corporation entitled to the benefits of section 931" and struck out "or his delegate" following "Secretary". Subsec. (a)(2)(D). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (a)(5), (6). Pub. L. 94-455, § 1901(b)(26)(A), substituted "sale or exchange" for "sale" in headings and text. Subsec. (a)(7). Pub. L. 94-455, § 1036(a), added subsec. (a)(7). Subsec. (c)(3). Pub. L. 94-455, § 1041, struck out pro- vision that subsec. (a)(1)(A) and (c) would cease to apply effective with respect to amounts paid or cred- ited after Dec. 31, 1976. Subsec. (e)(l). Pub. L. 94-455, § 1901(b)(26)(B), sub- stituted "sale, exchange, or other disposition" for "sale or other disposition". Subsecs. (e)(2), (3). Pub, L. 94-455, § 1906(b)(13)(A), struck out or his delegate" following "Secretary". 1975-Subsec. (a)(1)(H). Pub. L. 93-625, § 9(a), added subpar. (H). Subsec. (c)(3). Pub. L. 93-625, § 8, substituted "1976" for "1975". 1971-Subsec. (a)(1)(G). Pub. L. 92-9 added subpar. (G). Subsec. (a)(2)(D). Pub. L. 92-178s § 503, added subpar. (D). Subsec. (el. Pub. L. 92-178, § 314(a), added subsec. (e). 1969-Subset, (a)(1). Pub. L. 91-172, §435(a)(1), struck out "after December 31, 1972," following "inter- est paid or credited" in parenthetical material follow- ing "interest received from a foreign corporation" in subpars. (C) and (D). Subsec. (c)(3). Pub. L. 91-172, § 435(a)(2), substituted "1975" for "1972". 1966-Subsec. (a)(1)(A). Pub. L. 89-809, § 102(a)(1)(A), substituted "interest on amounts de- scribed in subsection (c) received by a nonresident alien individual or a foreign corporation, if such inter- est is not effectively connected with the conduct of a trade or business within the United States" for "inter- est on deposits with persons carrying on the banking business paid to persons not engaged in business within the United States". Subsec. (a)(1)(B). Pub. L. 89-809, § 102(a)(2), elimi- nated interest received from a resident foreign corpo- ration, and substituted "gross income from all sources of such individual or such corporation" for "gross income of such resident payor or domestic corpora- tion", and "taxable year of such individual or such corporation" for "taxable year of such payor". Subsec. (a)(1)(C). Pub. L. 89-809, § 102(a)(2), added subsec. (a)(1)(C), and redesignated former subsec. (a)(1)(C) as (a)(1)(E). Subsec. (a)(1)(D). Pub. L. 89-809, § 102(a)(2), added subsec. (a)(1)(D). Subsec. (a)(1)(E). Pub. L. 89-809, § 102(a)(2), redesig- nated former subsec. (a)(1)(C) as (a)(1)(E). Subsec. (a)(1)(F). Pub. L. 89-809, § 102(a)(2), added subsec. (a)(1)(F). Subsec. (a)(2)(B). Pub. L. 89-809, § 102(b), substitut- ed "50 percent of the gross income from all sources" * for "50 percent of the gross income", "effectively con- nected with the conduct of a trade or business within the United States" for "derived from sources within the United States as determined from the provisions of this part", and "ratio to such dividends as the gross income of the corporation for such period which was effectively connected with the conduct of a trade or business within the United States bears to its gross income from all sources" for "ratio to such dividends as the gross income of the corporation for such period derived from sources within the United States bears to its gross income from all sources" and inserted "(other than dividends for which a deduction is allowable under section 245(b))" after "dividends" and "(and only to the extent)" after "extent". Subsec. (a)(3)(C)(Hi). Pub. L. 89-809, § 102(c), inserted "an individual who is a citizen or resident of the United States, a domestic partnership, or" before "a domestic corporation" and "individual, partnership, or" after "United States by such". Subsec. (c). Pub. L. 89-809, § 102(a)(1)(B), added subsec. (c). Subsec. (d). Pub. L. 89-809, § 102(a)(3), added subsec. (d). 1962-Subsec. (a)(2)(B). Pub. L. 87-834 substituted "to the extent exceeding the amount which is 100/ 85ths of the amount of the deduction allowable under section 245 in respect of such dividends" for "to the extent exceeding the amount of the deduction allowa- ble under section 245 in respect of such dividends." 1960-Subsec. (a)(2)(C). Pub. L. 86-779 added subpar. (C). EFFECTIVE DATE OF 1976 AMENDMENT Section 1036(c) of Pub. L. 94-455 provided that: "The amendments made by this section [enacting subsec. (a)(7) of this section and section 862(a)(7) of this title] shall apply to taxable years beginning after December 31, 1976." For effective date of amendment of subsec. (a)(2)(A) by section 1051(h)(3) of Pub. L. 94-455, see section 1051(0)(1) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 33 of this title. Amendment of subsecs. (a)(1), (5). (6), (e)(1) by sec- tion 1901(b)(26)(A), (B), (c)(7) of Pub. L. 94-455 effec- tive for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effec- tive Date of 1976 Amendment note under section 2 of this title. Amendment of subsec. (a)(1) by section 1904(b)(10)(B) of Pub. L. 94-455 effective on the first day of the first month which begins more than 90 days after the date of the enactment of this Act [Oct. 4, 19761, see section 1904(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 4041 of this title. EFFECTIVE DATE OF 1975 AMENDMENT Section 9(c) of Pub. L. 93-625 provided that: "The amendment made by subsection (a) [to this section] applies to interest paid after the date of enactment of this Act [Jan. 3, 19751, and the amendment made by subsection (b) [to section 2104(c) of this title] applies with respect to estates of decedents dying after such date." Page 557 § 861
TITLE 26-INTERNAL REVENUE CODE EFFECTIVE DATE or 1971 AMENDMENT Section 3(a)(3) of Pub. L. 92-9 provided that: "The amendments made by this subsection [which enacted subsec. (a)(1)(G) of this section and section 4912(c) of this title] shall take effect on the date of the enact- ment of this Act [Apr. 1, 1971]." Enactment of subsec. (a)(2)(D) of this section by Pub. L. 92-178 applicable with respect to taxable years ending after Dec. 31, 1971, except that a corporation may not be a DISC for any taxable year beginning before Jan. 1, 1972, see section 507 of Pub. L. 92-178, set out as an Effective Date note under section 901 of this title. Section 314(c) of Pub. L. 92-178 provided that: "The. amendments made by this section [enacting subsec. (e) of this section, and section 862(c) of this title] shall apply to taxable years ending after August 15, 1971, but only with respect to leases entered into after such date." EFFECTIVE DATE OF 1969 AMENDMENT Section 435(a)(1) of Pub. L. 91-172 provided in part that the amendments to subsec. (a)(1)(C), (D), by sec- tion 435(a)(1) of Pub, L. 91-172, were effective with re- spect to amounts paid or credited after Dec. 31, 1969. EFFECTIVE DATE OF 1966 AMENDMENT Section 102(e) of Pub. L. 89-809 provided that: "(1) The amendments made by subsections (a), (c), and (d) [amending subsec. (a)(1)(A), (a)(1)(B) and (a)(3)(CMi) of this section and 895 of this title, rede- signating subsec. (a)(1)(C) and (F) and subsecs. (c) and (d) of this section and section 864 (b) and (c) of this title] shall apply with respect to taxable years begin- ning after December 31, 1966; except that in applying section 864(c)(4)(B)(iii) of the Internal Revenue Code of 1954 (section 864(c)(4)(B)(ii) of this title] (as added by subsection (d)) with respect to a binding contract entered into on or before February 24, 1966, activities in the United States on or before such date in negoti- ating or carrying out such contract shall not be taken into account. "(2) The amendments made by subsection (b) (amending subsec. (a)(2)(B) of this section) shall apply with respect to amounts received after Decem- ber 31, 1966." EFFECTIVE DATE OF 1962 AMENDMENT Amendment of subsec. (a)(2)(B) of this section by Pub. L. 87-834 applicable in respect of any distribution received by a domestic corporation after Dec. 31, 1964, and in respect of any distribution received by a domes- tic corporation before Jan. 1, 1965, in a taxable year of such corporation beginning after Dec. 31, 1962, but only to the extent that such distribution is made out of the accumulated profits of a foreign corporation for a taxable year (of such foreign corporation) beginning after Dec. 31, 1962, see section 9(e) of Pub. L. 87-834, set out as an Effective Date of 1962 Amendment note under section 902 of this title. EFFECTIVE DATE OF 1960 AMENDMENT Amendment by Pub. L. 86-779 applicable to divi. dends received after Dec. 31, 1959, in taxable years ending after such date, see section 3(c) of Pub. L. 86- 779, set out as an Effective Date of 1960 Amendment note under section 243 of this title, SHORT TITLE OF 1971 AMENDMENT Section 1(a) of Pub. L. 92-9 provided that: "This Act (amending sections 861, 4911, 4912, 4914 to 4916, 4919 to 4921, 6651, 6680, and 6681 of this title and enacting provisions set out as notes under this section and sec- tions 6680 and 6681 of this title] may be cited as the 'Interest Equalization Tax Extension Act of 1971'." SHORT TITLE OF 1966 AMENDMENT Section 101 of Pub. L, 89-809 provided that: "This title [adding sections 877, 896, 906, 981, 2107, 2108, and 6683 of this title, amending sections 1, 11, 116, 154, 245, 301, 512, 542, 543, 545, 819, 821, 822, 831, 832, 841, 842, 861, 864, 871, 872, 873, 874, 875, 881, 882, 884, 894, 895, 901, 904, 911, 931, 932, 952, 953, 1248, 1249, 1441, 1442, 1461, 2014, 2101, 2102, 2104, 2105, 2106, 2501, 2511, 3401, 6015, 6016, 6018, 6501, 6513, and 7701 of this title, redesignating former section 877 as 878 re- pealing section 1493, and enacting provisions set out as notes under this section and sections 11, 871, 874, 894, 901, 904, 931, 2101, 2501, and 6501 of this title] may be cited as the 'Foreign Investors Tax Act of 1966'," CONFORMITY OF AMENDMENTS MADE BjY FOREIGN INVES- TORS TAX ACT OF 1966 WITH TREATY OBLIGATIONS OF THE UNITED STATES Section 110 of Pub. L. 89-809 provided that: "No amendment made by this title [see Short Title note above] shall apply in any case where its application would be contrary to any treaty obligation of the United States. For purposes of the preceding sentence, the extension of a benefit provided by any amendment made by this title shall not be deemed to be contrary to a treaty obligation of the United States." CROSS REFERENCES Income from sources without the United States- Generally, see section 901 et seq. of this title. Determination of source, see section 862 of this title. Items not specified in section 861 or 862, see section 863 of this title. Personal holding companies defined, exception if a foreign corporation with gross income from sources within United States, see section 542 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 410, 638, 862 to 864, 907, 2104, 2105, 4948 of this title. § 862, Income from sources without the United States (a) Gross income from sources without United States The following items of gross income shall be treated as income from sources without the United States: (1) interest other than that derived from sources within the United States as provided in section 861(a)(1); (2) dividends other than those derived from sources within the United States as provided in section 861(a)(2); (3) compensation for labor or personal ser- vices performed without the United States; (4) rentals or royalties from property locat- ed without the United States or from any in- terest in such property, including rentals or royalties for the use of or for the privilege of using without the United States patents, copyrights, secret processes and formulas, good will, trade-marks, trade brands, fran- chises, and other like properties; (5) gains, profits, and income from the sale or exchange of real property located without the United States; and (6) gains, profits, and income derived from the purchase of personal property within the United States and its sale or exchange with- out the United States. (7) Underwriting income other than that derived from sources within the United States as provided in section 861(a)(7). (b) Taxable income from sources without United States From the items of gross income specified in subsection (a) there shall be deducted the ex- penses, losses, and other deductions properly § 862 Page 558
TITLE 26-INTERNAL REVENUE CODE apportioned or allocated thereto, and a ratable part of any expenses, losses, or other deduc- tions which cannot definitely be allocated to some item or class of gross income. The remain- der, if any, shall be treated in full as taxable income from sources without the United States. (c) Cross reference For source of amounts attributable to certain aircraft and vessels, see section 861(e). (Aug. 16, 1954, ch. 736, 68A Stat. 276; Dec. 10, 1971, Pub. L. 92-178, title III,§ 314(b), 85 Stat. 528; Oct. 4, 1976, Pub. L. 94-455, title X, § 1036(b), title XIX, § 1901(b)(26)(C), 90 Stat. 1633, 1798.) AMENDMENTS 1976-Subsecs. (a)(5), (6). Pub. L. 94-455, §1901(b)(26)(C), inserted "or exchange" following "sale". Subsec. (a)(7). Pub. L. 94-455, §1036(b), added subsec. (a)(7). 1971-Subsec. (c). Pub. L. 92-178 added subsec. (c). EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (a)(7) by section 1036(b) of Pub. L. 94-455 applicable to taxable years beginning after Dec. 31, 1976, see section 1036(c) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 861 of this title. Amendment of subsecs. (a)(5), (6) by section 1901(b)(26)(C) of Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1971 AMENDMENT Enactment of subsec. (c) of this section by Pub. L. 92-178 applicable to taxable years ending after Aug. 15, 1971, but only with respect to leases entered into after such date, see section 314(c) of Pub. L. 92-178, set out as an Effective Date of 1971 Amendment note under section 861 of this title. CRoss RE,'EnENCEs Income from sources within the United States, see section 861 of this title. Income from sources without the United States, see section 901 et seq. of this title. Items not specified in section 861 or 862, see section 863 of this title. SECTION REFERRED TO IN OTHER SECTIONS ThL section is referred to in sections 638, 861, 863, 864 of this title. § 863. Items not specified in section 861 or 862 (a) Allocation under regulations Items of gross income, expenses, losses, and deductions, other than those specified in sec- tions 861(a) and 862(a), shall be allocated or ap- portioned to sources within or without the United States, under regulations prescribed by the Secretary. Where items of gross income are separately allocated to sources within the United States, there shall be deducted (for the purpose of computing the taxable income therefrom) the expenses, losses, and other de- ductions properly apportioned or allocated thereto and a ratable part of other expenses, losses, or other deductions which cannot defi- nitely be allocated to some item or class of gross income. The remainder, if any, shall be included in full as taxable income from sources within the United States. (b) Income partly from within and partly from with- out the United States In the case of gross income derived from sources partly within and partly without the United States, the taxable income may first be computed l-y deducting the expenses, losses, or other deductions apportioned or allocated thereto and a ratable part of any expenses, losses, or other deductions which cannot defi- nitely be allocated to some item or class of gross income; and the portion of such taxable income attributable to sources within the United States may be determined by processes or formulas of general apportionment pre- scribed by the Secretary. Gains, profits, and income- (1) from transportation or other services rendered partly within and partly without the United States, (2) from the sale or exchange of personal property produced (in whole or in part) by the taxpayer within and sold or exchanged without the United States, or produced (in whole or in part) by the taxpayer without and sold or exchanged within the United States, or (3) derived from the purchase of personal property within a possession of the United States and its sale or exchange within the United States, shall be treated as derived partly from sources within and partly from sources without the United States. (Aug. 16, 1954, ch. 736, 68A Stat. 277; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(b)(26)(C), (D), 1906(b)(13)(A), 90 Stat. 1798, 1799, 1834.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec, (b). Pub. L. 94-455, §§ 1901(b)(26)(C), (D), 1906(b)(13)(A), struck out "or his delegate" following "Secretary" in the provisions preceding par. (1), and inserted "or exchange" following "sale" in pars. (2) and (3), and "or exchanged" following "sold" in par. (2) wherever appearing. EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (b) by section 1901(b)(26)(C), (D) of Pub. L. 94-455 effective for taxable years begin- ning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amend- ment note under section 2 of this title. § 864. Definitions (a) Produced For purposes of this part, the term "pro- duced" includes created, fabricated, manufac- tured, extracted, processed, cured, or aged. (b) Trade or business within the United States For purposes of this part, part II, and chapter 3, the term "trade or business within the United States" includes the performance of personal services within the United States at any time within the taxable year, but does not include- (1) Performance of personal services for foreign employer The performance of personal services- (A) for a nonresident alien individual, for- eign partnership, or foreign corporation, Page 559
TITLE 26-INTERNAL REVENUE CODE not engaged in trade or business within the United States, or (B) for an office or place of business maintained in a foreign country or in a pos- session of the United States by an individ- ual who is a citizen or resident of the United States or by a domestic partnership or a domestic corporation, by a nonresident alien individual temporarily present in the United States for a period or periods not exceeding a total of 90 days during the taxable year and whose compensa- tion for such services does not exceed in the aggregate $3,000. (2) Trading in securities or commodities (A) Stocks and securities (I) In general Trading in stocks or securities through a resident broker, commission agent, cus- todian, or other independent agent. (it) Trading for taxpayer's own account Trading in stocks or securities for the taxpayer's own account, whether by the taxpayer or his employees or through a resident broker, commission agent, custo- dian, or other agent, and whether or not any such employee or agent has discre- tionary authority to make decisions in ef- fecting the transactions. This clause shRll not apply in the case of a dealer in stocks or securities, or in the case of a corpora- tion (other than a corporation which Is, or but for section 542(c)(7) or 543(b)(1)(C) would be, a personal holding company) the principal business of which Is trading in stocks or securities for its own account, if its principal office is in the United States. (B) Commodities (i) In general Trading in commodities through a resi- dent broker, commission agent, custodian, or other Independent agent. (1i) Trading for taxpayer's own account Trading in commodities for the taxpay- er's own account, whether by the taxpay- er or his employees or through a resident broker, commission agent, custodian, or other agent, and whether or not any such employee or agent has discretionary au- thority to make decisions in effecting the transactions. This clause shall not apply in the case of a dealer in commodities. (iiI) Limitation Clauses (i) and (Ii) shall apply only if the commodities are of a kind customarily dealt in on an organized commodity ex- change and if the transaction is of a kind customarily consummated at such place. (C) Limitation Subparagraphs (A)(i) and (B)(i) shall apply only if, at no time during the taxable year, the taxpayer has an office or other fixed place of business in the United States through which or by the direction of which the transactions in stocks or securities, or In commodities, as the case may be, are effect- ed. (c) Effectively connected income, etc. (1) General rule For purposes of this title- (A) In the case of a nonresident alien indi- vidual or a foreign corporation engaged in trade or business within the United States during the taxable year, the rules set forth in paragraphs (2), (3), and (4) shall apply in determining the income, gain, or loss which shall be treated as effectively connected with the conduct of a trade or business within the United States. (B) Except as provided in section 871(d) or sections 882(d) and (e), in the case of a nonresident alien individual or a foreign corporation not engaged in trade or busi- ness within the United States during the taxable year, no income, gain, or loss shall be treated as effectively connected with the conduct of a trade or business within the United States. (2) Periodical, etc., income from sources within United States-factors In determining whether income from sources within the United States of the types described in section 871(a)(1) or section 881(a), or whether gain or loss from sources within the United States from the sale or ex- change of capital assets, is effectively con- nected with the conduct of a trade or business within the United States, the factors taken into account, shall include whether- (A) the income, gain, or loss is derived from assets used in or held for use in the conduct of such trade or business, or (B) the activities of such trade or business were a material factor in the realization of the income, gain, or loss. In determining whether an asset is used in or held for use in the conduct of such trade or business or whether the activities of such trade or business were a material factor in re- alizing an item of income, gain, or loss, due regard shall be given to whether or not such asset or such income, gain, or loss was ac- counted for through such trade or business. In applying this paragraph and paragraph (4), interest referred to in section 861(a)(1)(A) shall be considered income from sources within the United States. (3) Other income from sources within United States All income, gain, or loss from sources within the United States (other than income, gain, or loss to which'paragraph (2) applies) shall be treated as effectively connected with the conduct of a trade or business within the United States. (4) Income from sources without United States (A) Except as provided in subparagraphs (B) and (C), no income, gain, or loss from sources without the United States shall be treated as effectively connected with the conduct of a trade or business within the United States. (B) Income, gain, or loss from sources without the United States shall be treated as effectively connected with the conduct of a trade or business within the United States by a nonresident alien individual or a for- eign corporation if such person has an Page 560 §864
TITLE 26-INTERNAL REVENUE CODE office or other fixed place of business within the United States to which such income, gain, or loss is attributable and such income, gain, or loss- (I) consists of rents or royalties for the use of or for the privilege of using intangi- ble property described in section 862(a)(4) (including any gain or loss realized on the sale or exchange of such property) de- rived in the active conduct of such trade or business; (i) consists of dividends or interest, or gain or loss from the sale or exchange of stock or notes, bonds, or other evidences of indebtedness, and either is derived in the active conduct of a banking, financ- ing, or similar business within the United States or is received by a corporation the principal business of which is trading in stocks or securities for its own account; or (Ili) is derived from the sale or exchange (without the United States) through such office or other fixed place of business of personal property described in section 1221(1), except that this clause shall not apply if the property is sold or exchanged for use, consumption, or disposition out- side the United States and an office or other fixed place of business of the tax- payer outside the United States partici- pated materially in such sale or exchange. (C) In the case of a foreign corporation taxable under part I of subchapter L, any income from sources without the United States which is attributable to its United States business shall be treated as effective- ly connected with the conduct of a trade or business within the United States. (D) No income from sources without the United States shall be treated as effectively connected with the conduct of a trade or business within the United States if it either- (I) consists of dividends, interest, or roy- alties paid by a foreign corporation in which the taxpayer owns (within the meaning of section 958(a)), or is consid- ered as owning (by applying the owner- ship rules of section 958(b)), more than 50 percent of the total combined voting power of all classes of stock entitled to vote, or (i) is subpart F income within the meaning of section 952(a). (5) Rules for application of paragraph (4)(B) For purposes of subparagraph (B) of para- graph (4)- (A) in determining whether a nonresident alien individual or a foreign corporation has an office or other fixed place of business, an office or other fixed place of business of an agent shall be disregarded unless such agent (i) has the authority to negotiate and conclude contracts in the name of the non- resident alien individual or foreign corpora- tion and regularly exercises that authority or has a stock of merchandise from which he regularly fills orders on behalf of such individual or foreign corporation, and (ii) is not a general commission agent, broker, or other agent of independent status acting in the ordinary course of his business, (B) income, gain, or loss shall not be con- sidered as attributable to an office or other fixed place of business within the United States unless such office or fixed place of business is a material factor in the produc- tion of such income, gain, or loss and such office or fixed place of business regularly carries on activities of the type from which such income, gain, or loss is derived, and (C) the income, gain, or loss which shall be attributable to an office or other fixed place of business within the United States shall be the income, gain, or loss property allocable thereto, but, in the case of a sale or exchange described in clause (1ii) of such paragraph, the income which shall be treat- ed as attributable to an offIce or other fixed place of business within the United States shall not exceed the income which would be derived from sources within the United States if the sale or exchange were made in the United States. (Aug. 16, 1954, ch. 736, 68A Stat. 278; Nov. 13, 1966, Pub. L. 89-809, title I, § 102(d), 80 Stat, 1544; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(a)(113), 90 Stat. 1783.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, §gO1(a)(113)(A), substituted in subsec. catchline "Produced" for "Sale, etc." and struck out in text provisions relating to the definition of sale and sold. Subsec. (c)(4)(B)(i). Pub. L. 94-455, § 190(a)(113)(B), substituted "sale or exchange" for "sale". Subsec. (c)(4)(B)(ii). Pub. L. 94-455, § 1901(a)(113)(B), (C), substituted "sold or exchanged" for "sold" and "sale or exchange" for "sale" wherever appearing. Subsec. (c)(5)(C). Pub. L. 94-455, § 1901(a)(113)(B), substituted "sale or exchange" for "sale" wherever ap- pearing. 1966-Pub. L. 89-809 designated existing provisions as subsec. (a) and added subsecs. (b) and (c). EFFECTIvE DATE OF 1976 AMENDMENT Amendment of section by Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see sec- tion 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-809 applicable with re- spect to taxable years beginning after Dec. 31, 1966, except that in applying section 864(c)(4)(B)(III) of this title with respect to a binding contract entered into on or before Feb. 24, 1966, activities in the United States on or before such date in negotiating or carrying out such contract shall not be taken into account, see sec- tion 102(e)(1) of Pub. L. 89-809, set out as an Effective Date of 1966 Amendment note under section 861 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 871 of this title. PART II-NONRESIDENT ALIENS AND FOREIGN CORPORATIONS Subpart A. Nonresident alien individuals. B. Foreign corporations. C. Miscellaneous provisions. § 864 Page 561
TITLE 26-INTERNAL REVENUE CODE SUBPART A-NONRESIDENT ALIEN INDIVIDUALS Sec. 871. Tax on nonresident alien individuals. 872. Gross income. 873. Deductions. 874. Allowance of deductions and credits. 875. Partnerships; beneficiaries of estates and trusts, 876. Alien residents of Puerto Rico. 877. Expatriation to avoid tax. 878. Foreign educational, charitable, and certain other exempt organizations. 879. Tax treatment of certain community income in the case of a resident or citizen of the United States who is married to a nonresident alien in. dividual. AMENDMENTS 1976-Pub. L. 94-455, title X, § 1012(b)(3)(A), Oct. 4, 1976, 90 Stat. 1614, added item 879. 1966-Pub. L. 89-809, title I, § 103(e)(2), (f)(2), Nov. 13, 1966, 80 Stat. 1551, 1552, inserted "; beneficiaries of estates and trusts" in item 875, added item 877, and re- designated former item 877 as 878. § 871. Tax on nonresident alien individuals (a) Income not connected with United States busi. ness-30 percent tax (1) Income other than capital gains There is hereby imposed for each taxable year a tax of 30 percent of the amount re- ceived from sources within the United States by a nonresident alien individual as- (A) interest (other than original issue dis- count as defined in section 1232(b)), divi- dends, rents, salaries, wages, premiums, an- nuities, compensations, remunerations, emoluments, and other fixed or determin- able annual or periodical gains, profits, and income. (B) gains described in section 402(L.;(2), 403(a)(2), or 631(b) or (c), and gains on transfers described in section 1235 made on or before October 4, 1966, (C) in the case of- (i) bonds or other evidences of indebted- ness issued after September 28, 1965, and before April 1, 1972, amounts which under section 1232(a)(2)(B) are considered as or- dinary income, and, in the case of corpo- rate obligations issued after May 27, 1969, and before April 1, 1972, amounts which would be so considered but for the fact the obligations were issued after May 27, 1969, (i1) bonds or other evidences of indebt- edness issued after March 31, 1972, and payable more than 6 months from the date of original issue (without regard to the period held by the taxpayer), amounts which under section 1232(a)(2)(B) would be considered as ordi- nary income but for the fact such obliga- tions were issued after May 27, 1969, and (iii) the payment of interest on an obli- gation described in clause (it), an amount equal to the original issue discount (but not in excess of such interest less the tax imposed by subparagraph (A) thereon) ac- crued on such obligation since the last payment of interest thereon, and (D) gains from the sale or exchange after October 4, 1966, of patents, copyrights, secret processes and formulas, good will, trademarks, trade brands, franchises, and other like property, or of any interest in any such property, to the extent such gains are from payments which are contingent on the productivity, use, or disposition of the property or interest sold or exchanged, or from payments which are treated as being so contingent under subsection (e), but only to the extent the amount so received is not effectively connected with the conduct of a trade or business within the United States. (2) Capital gains of aliens present in the United States 183 days or more In the case of a nonresident alien individual present in the United States for a period or periods aggregating 183 days or more during the taxable year, there is hereby imposed for such year a tax of 30 percent of the amount by which his gains, derived from sources within the United States, from the sale or ex- change at any time during such ycar of cap- ital assets exceed his losses, allocable to sources within the United States, from the sale or exchange at any time during such year of capital assets. For purposes of this para- graph, gains and losses shall be taken into ac- count only if, and to the extent that, they would be recognized and taken into account if such gains and losses were effectively con- nected with the conduct of a trade or business within the United States, except that such gains and losses shall be determined without regard to section 1202 (relating to deduction for capital gains) and such losses shall be de- termined without the benefits of the capital loss carryover provided in section 1212. Any gain or loss which is taken into account in de- termining the tax under paragraph (1) or sub- section (b) shall not be taken into account in determining the tax under this paragraph. For purposes of the 183-day requirement of this paragraph, a nonresident alien individual not engaged in trade or business within the United States who has not established a tax- able year for any prior period shall be treated as having a taxable year which is the calen- dar year. (b) Income connected with United States business- graduated rate of tax (1) Imposition of tax A nonresident alien individual engaged in trade or business within the United States during the taxable year shall be taxable as provided in section 1, 402(e)(1), or 1201(b) on his taxable income which is effectively con- nected with the conduct of a trade or business within the United States. (2) Determination of taxable income In determining taxable income for purposes of paragraphl (1), gross income includes only gross income which is effectively connected with the conduct of a trade or business within the United States. (c) Participants in certain exchange or training pro- grams For purposes of this section, a nonresident alien individual who (without regard to this subsection) is not engaged in trade or business within the United States and who is temporar- § 871 Page 562
TITLE 26-INTERNAL REVENUE CODE ily present in the United States as a nonimmi- grant under subparagraph (F) or (J) of section 101(a)(15) of the Immigration and Nationality Act, as amended (8 U.S.C. 1101(a)(15)(F) or (J)), shall be treated as a nonresident alien individ- ual engaged in trade or business within the United States, and any income described in sec- tion 1441(b)(1) or (2) which is received by such individual shall, to the extent derived from sources within the United States, be treated as effectively connected with the conduct of a trade or business within the United States. (d) Election to treat real property income as income connected with United States business (1) In general A nonresident alien individual who during the taxable year derives any income- (A) from real property held for the pro- duction of income and located in the United States, or from any interest in such real, property, including (i) gains from the sale or exchange of such real property or an in- terest therein, (i) rents or royalties from mines, wells, or other natural deposits, and (iii) gains described in section 631(b) or (c), and (B) which, but for this subsection, would not be treated as income which is effective- ly connected with the conduct of a trade or business within the United States, may elect for such taxable year to treat all such income as income which is effectively connected with the conduct of a trade or busi- ness within the United States. In such case, such income shall be taxable as provided in subsection (b)(1) whether or not such individ- ual is engaged in trade or buisness with.-i the United States during the taxable year. An election under this paragraph for any taxable year shall remain in effect for all subsequent taxable years, except that it may be revoked with the consent of the Secretary with re- spect to any taxable year. (2) Election after revocation If an election has been made under para- graph (1) and such election has been revoked, a new election may not be made under such paragraph for any taxable year before the 5th taxable year which begins after the first taxable year for which such revocation is ef- fective, unless the Secretary consents to such new election. (3) Form and time of election and revocation An election under paragraph (1). and any revocation of such an election, may be made only in such manner and at such time as the Secretary may by regulations prescribe. (e) Gains from sale or exchange of certain intangible property For purposes of subsection (a)(1)(D), and for purposes of sections 881(a)(4), 1441(b), and 1442(a)- (1) Payments treated as contingent on use, etc. If more than 50 percent of the gain for any taxable year from the sale or exchange of any patent, copyright, secret process or formula, good will, trademark, trade brand, franchise, or other like property, or of any interest in any such property, is from payments which are contingent on the productivity, use, or disposition of such property, or interest, all of the gain for the taxable year from the sale or exchange of such property or interest shall be treated as being from payments which are contingent on the productivity, use, or dispo- sition of such property or interest. (2) Source rule In determining whether gains described in subsection (a)(1)(D) and section 881(a)(4) are received from sources within the United States, such gains shall be treated os rentals or royalties for the use of, or privilege of using, property or an interest in property. (f) Certain annuities received under qualified plans For purposes of this section, gross income does not include any amount received as an an. nuity under a qualified annuity plan described in section 403(a)(1), or from a qualified trust described in section 401(a) which is exempt from tax under section 501(a), if- (1) all of the personal services by reason of which such annuity is payable were either (A) personal services performed outside the United States by an individual who, at the time of performance of such personal ser- vices, was a nonresident alien, or (B) personal services described in section 864(b)(1) per- formed within the United States by such indi- vidual, and (2) at the time the first amount is paid as such annuity under such annuity plan, or by such trust, 90 percent or more of the employ- ees for whom contributions or benefits are provided under such annuity plan, or under the plan or plans of which such trust is a part, are citizens or residents of the United States. (g) Cross references (1) For tax treatment of certain amounts distributed by the United States to nonresident alien individuals, see section 402(a)(4). (2) For taxation of nonresident alien individuals who are expatriated United States citizens, see section 877. (3) For doubling of tax on citizens of certain foreign countries, see section 891. (4) For adjustment of tax in case of nationals or resi. dents of certain foreign countries, see section 896. (5) For withholding of tax at source on nonresident alien individuals, see section 1441. (6) For the requirement of making a declaration of es- timated tax by certain nonresident alien individuals, see section 6015(i). (7) For election to treat married nonresident alien in- dividual as resident of United States in certain cases, see subsections (g) and (h) of section 6013. (Aug. 16, 1954, ch. 736, 68A Stat. 278; Sept. 2, 1958, Pub. L. 85-866, title I, §§40(a), 41(a), 72 Stat. 1638, 1639; Apr. 22, 1960, Pub. L. 86-437, § 2(b), 74 Stat. 79; Sept. 21, 1961, Pub. L. 87-256, § 110(b), 75 Stat. 535; Feb. 26, 1964, Pub. L. 88- 272, title I, § 113(b), title II, § 201(d)(12), 78 Stat. 24, 32; Nov. 13, 1966, Pub. L. 89-809, title I, § 103(a)(1), 80 Stat. 1547; Dec. 10, 1971, Pub. L. 92-178, title III, § 313(a), (b), 85 Stat. 526, 527; Sept, 2, 1974, Pub. L. 93-406, title II, § 2005(c)(8), 88 Stat. 992; Oct. 4, 1976, Pub. L. 94-455, title X, § 1012(a)(2), title XIX, §§ 1901(b)(3)(I), 1906(b)(13)(A), 90 Stat. 1613, 1793, 1834.) Page 563
TITLE 26-INTERNAL REVENUE CODE AMENDMENTS 1976-Subsec. (a)(1)(C)(i), (it). Pub. L. 94-455, §1901(b)(3)(I), substituted "ordinary income" for "gain from the sale or exchange of property which is not a capital asset". Subsec. (d). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary", each time appearing. Subsec. (g)(7). Pub. L. 94-455, § 1012(a)(2), added subsec. (g)(7). 1974-Subsec. (b)(1). Pub. L. 93-406 inserted refer- ence to section 402(e)(1). 1971-Subsee. (a)(1)(A). Pub. L. 92-178, § 313(a). in- serted after "interest" the parenthetical phrase "(other than original issue discount as defined in sec- tion 1232(b))".. Subsec. (a)(1)(C). Pub. L. 92-178, § 313(b), designated existing provisions as cl. (i), inserted therein "and before April 1, 1972," after "September 28, 1965,", sub- stituted "section 1232(a)(2)(B)" for "section 1232", and inserted ", in the case of corporate obligations issued after May 27, 1969, and before April 1, 1972, amounts which would be so considered but for the fact the obli., gations were issued after May 27, 1969,", and added cls. (1i) and (iii). 1966-Subsecs. (a), (b). Pub. L. 89-809 consolidated the substance of former subsecs. (a) to (c) and, as part of the consolidation, revised the overall income tax treatment of nonresident alien individuals by substi- tuting provisions dividing their income for tax pur- poses into two basic groups according to whether or not the income is effectively connected with a United States trade or business for provisions calling for dif- ferent tax treatment based upon whether or not they are, or are not, engaged in a trade or business in the United States, with a further breakdown of those not engaged in trade or business in the United States as to whether their income is over or under $21,200. Subsec. (c). Pub. L. 89-809 redesignated former subsec. (d) as subsec. (c) and, in subsec. (c) as so rede- signated, added provisions that any income described in section 1441(b)(1) or (2) which is received by such individual shall, to the extent derived from sources wittin the United States, be treated as effectively con- nected with the conduct of a trade or business within the United States. Substance of former subsec. (c) re- vised and incorporated into subsecs. (a) and (b). Subsec. (d). Pub. L. 89-809 added subsec. (d). Former subsec. (d) redesignated as subsec. (c) and amended. Subsec. (e). Pub. L. 89-809 added subsec. (e). Former subsec. (e) redesignated as subsec. (g) and amended. Subsec. (f). Pub. L. 89-809 added subsec. (f). Subsec. (g). Pub. L. 89-801) redesignated former subsec. (e) as subsec. (g) and, In subsec. (g) as so rede- signated, added pars. (2) and (4) to (6) while redesig- nating former pars. (1) and (2) as (3) and (1) respec- tively. 1964-Subsee. (a). Pub. L. 88-272, § 113(b)(2), substi- tuted "30 percent tax" for "and gross income of not more than $15,400" in the subsection catchline. Subsec. (b). Pub. L. 88-272, §§ 113(b)(1), (3), 201(d)(12), substituted "$19,000 in the case of a tax- able year beginning in 1964 or more than $21,200 in the case of a taxable year beginning after 1964" for "$15,400", "the credit under section 35" for "the sum of the credits under sections 34 and 35" in the text, and "Regular tax" for "and gross income of more than $15,400" in the subsection catchline. 1961-Subsec. (d). Pub. L. 87-256 added subsec. (d) and redesignated former subsec. (d) as (e). Subsec. (e). Pub. L. 87-256 redesignated iormer subsec. (d) as (e). 1960-Subsec. d). Pub. L. 86-437 substituted "Cross references" for "Doubling of tax" in subsection catch- line, and added the cross reference to section 402(a)(4). 1958-Subsec. (a)(1). Pub. L. 85-866, § 40(a), inserted "section 403(a)(2)," after "section 402(a)(2),". Subsec. (b) Pub. L. 85-866, §41(a), added last par. covering former provisions of par. (3), which was de- leted by the amendment, and containing new provi- sions with references to credits under section 34 and 35 and exclusion under section 116 of this title. EFFECTIVE DATE OF 1976 AMENDMENT Enactment of subsec. (g)(7) by section 1012(a)(2) of Pub. L. 94-455 applicable to taxable years ending on or after Dec, 31, 1975, see section 1012(d) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 6013 of this title. Amendment of subsec. (a)(1)(C)(i), (if) by section 1901(b)(3)(I) of Pub. L, 94-455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1974 AMENDMENT Amendment by Pub. L. 93-406 applicable only with respect to distributions or payments made after Dec. 31, 1973, in taxable years beginning after Dec. 31, 1973, see section 2005(d) of Pub. L. 93-406, set out as an Effective Date of 1974 Amendment note under sec- tion 402 of this title. EFFECTIVE DATE OF 1971 AMENDMENT Section 313(f) of Pub. L. 92-178 provided that: "The amendments to section 871 and 881 of the Internal Revenue Code of 1954 made by this section [to subsec. (a)(1)(A), 'C) of this section and section 881(a)(1), (3) of this title] shall apply with respect to taxable years beginning after December 31, 1966. The amendments to sections 1441 and 1442 of such Code made by this section [to sections 1441 and 1442 of this title] shall apply with respect to payments occurring on or after April 1 1972." EFFECTIVE DATE OF 1966 AMENDMENT Section 103(n) of Pub. L. 89-809 provided that: "(1) The amendments made by this section (other than the amendments made by subsections (h), (i), and (k)) [amending sections 1. 116, 154, 871 to 874, 875, 932, 6015, and 7701 of this title, redesignating section 877 as 878 and adding section 877 of this title and re- pealing section 1493 of this title] shall apply with re- spect to taxable years beginning after December 31, 1966. "(2) The amendments made by subsection (h) [amending section 1441 of this title] shall apply with respect to payments made in taxable years of recipi- ents beginning after December 31, 1966. "(3) The amendments made by subsection (i) [amending section 1461 of this title] shall apply with respect to payments occurring after December 31, 1966. "(4) The amendments made by subsection (k) [amending section 3401 of this title] shall apply with respect to remuneration paid after December 31, 1966." EFFECTIVE DATE OF 1964 AMENDMENT Amendment of subsec. (b) by section 113(b)(1) of Pub. L. 88-272, except for purposes of section 21 of this title, effective with respect to taxable years begin- ning after Dec. 31, 1963, see section 131 of Pub. L. 88- 272, set out as an Effective Date of 1964 Amendment note under section 1 of this title. Amendment of subsec. (b) by section 201(d)(12) of Pub. L. 88-272, which substituted "the credit under section 35" for the "sum of the credits under sections 34 and 35," applicable with respect to dividends re- ceived after Dec. 31, 1964, in taxable years ending after such dafe, see section 201(e) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 37 of this title. EFFRCTIVE DATE OF 1961 AMENDMENT Amendment by Pub. L. 87-256 applicable to taxable years beginning after Dec. 31, 1961, see section 110(h)(1) of Pub. L. 87-256, set out as an Effective Date of 1961 Amendment note under section 117 of this title. § 871 Page 564
TITLE 26-INTERNAL REVENUE CODE EFFECTIVE DATE OF 1960 AMENDMENT Amendment of subsec. (d) of this section by Pub. L. 86-437 applicable only with respect to taxable years beginning after Dec. 31, 1959, see section 3 of Pub. L. 86-437, set out as an Effective Date of 1960 Amend- ment note under section 402 of this title. EFFECTIVE DATE OF 1958 AMENDMENT Section 40(c) of Pub. L. 85-866 provided that: "The amendment made by subsection (a) [to subsec. (a)(1) of this section] shall apply only with respect to tax- able years ending after the date of the enactment of this Act [Sept. 2, 19581. The amendments made by subsection (b) [to section 1441(b), (c)(5) of this title] shall take effect on the day following the date of the enactment of this Act [Sept. 2, 1958]." Section 41(c) of Pub. L. 85-866 provided that: "The amendments made by this section [to subsec. (b) of this section and section 35(c), (d) of this title] shall apply only with respect to taxable years beginning after December 31, 1957." CROSS REFERENCES Consent dividends, nonresident aliens and foreign corporations, see section 565 of this title. Dispositions of certain stock, source of gain, see sec- tion 306 of this title. Income tax returns, persons required to make re- turns of income, see section 6012 of this title. Judicial proceedings, production of records in case of foreign corporations, foreign trusts or estates and non- resident alien individuals, see section 7456 of this title. Partial exclusion of dividends received by indivduals, certain nonresident aliens ineligible for exclusion, see section 116 of this title. Retirement income, nonresident alien ineligible for credit, see section 37 of this title. Standard deduction for individuals, nonresident alien as ineligible, see section 142 of this title. Time for filing income tax returns, nonresident aliens and foreign corporations, see section 6072 of this title. Withholding tax on- Foreign corporations, see section 1442 of this title. Nonresident aliens, see section 1441 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 2. 5, 43, 116, 306, 864, 873, 877, 881, 882, 891, 906, 1235, 1441, 1442, 6012 of this title. § 872. Gross income (a) General rule In the case of a nonresident alien individual, gross income includes only- (1) gross income which is derived from sources within the United States and which is not effectively connected with the conduct of a trade or business within the United States, and (2) gross income which is effectively con- nected with the conduct of a trade or business within the United States. (b) Exclusions The following items shall not be included in gross income of a nonresident alien individual, and shall be exempt from taxation under this subtitle: (1) Ships under foreign flag Earnings derived from the operation of a ship or ships documented under the laws of a foreign country which grants an equivalent exemption to citizens of the United States and to corporations organized in the United States. (2) Aircraft of foreign registry Earnings derived from the operation of air- craft registered under the laws of a foreign country which grants an equivalent exemp- tion to citizens of the United States and to corporations organized in the United States. (3) Compensation of participants in certain ex- change or training programs Compensation paid by a foreign employer to a nonresident alien individual for the period he is temporarily present in the United States as a nonimmigrant under subpara- graph (F) or (J) of section 101(a)(15) of the Immigration and Nationality Act, as amend- ed. For purposes of this paragraph, the term "foreign employer" means- (A) a nonresident alien individual, foreign partnership, or foreign corporation, or (B) an office or place of business main- tained in a foreign country or in a posses- sion of the United States by a domestic cor- poration, a domestic partnership, or an indi- vidual who is a citizen or resident of the United States. (4) Certain bond income of residents of the Ryukyu Islands or the Trust Territory of the Pacific Is. lands Income derived by a nonresident alien indi- vidual from a series E or series H United States savings bond, if such individual ac- quired such bond while a resident of the Ryukyu Islands or the Trust Territory of the Pacific Islands. (Aug. 16, 1954, ch. 736, 68 A Stat. 280; Sept. 21, 1961, Pub. L. 87-256, § 110(c), 75 Stat. 536; Nov. 13, 1966, Pub. L. 89-809, title I, § 103(b), 80 Stat. 1550.) REFERENCES IN TEXT Section 101 of the Immigration and Nationality Act, referred to in subsec. (b)(3), is classified to section 1101 of Title 8, Aliens and Nationality. AMENDMENTS 1966-Subsec. (a). Pub. L. 89-809, § 103(b)(1), limited the inclusion of gross income which is derived from sources within the United States to such income which is not effectively connected with the conduct of a trade or business within the United States and added provision including gross income without the limita- tion as to source which is effectively connected with the conduct of a trade or business within the United States. Subsec. (b)(3)(B). Pub. L. 89-809, § 103(b)(2), substi- tuted "by a domestic corporation, a domestic partner- ship, or an individual who is a citizen or resident of the United States" for "by a domestic corporation". Subsec. (b)(4). Pub. L. 89-809. § 102(b)(3), added par. (4). 1961-Subsec. (b). Pub. L. 87-256 added par. (3). EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-809 applicable with re- spect to taxable years beginning after Dec. 31, 1966, see section 103(n)(1) of Pub. L. 89-809, set out as an Effective Date of 1966 Amendment note under section 871 of this title. EFFECTIVE DATE OF 1961 AMENDMENT Amendment by Pub. L. 87-256 applicable to taxable years beginning after Dec. 31, 1961, see section 110(h)(1) of Pub. L. 87-256, set out as an Effective Date of 1961 Amendment note under section 117 of this title. 71-999 O - 78 - 38 (Vol. 7) Page 565
TITLE 26-INTERNAL REVENUE CODE SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 877 of this title. § 873. Deductions (a) General rule In the case of a nonresident alien individual, the deductions shall be allowed only for pur- poses of section 871(b) and (except as provided by subsection (b)) only if and to the extent that they are connected with income which is effec- tively connected with the conduct of a trade or business within the United States; and the proper apportionment and allocation of the de- ductions for this purpose shall be determined as provided in regulations prescribed by the Secretary. (b) Exceptions The following deductions shall be allowed whether or not they are connected with income which is effectively connected with the conduct of a trade or business within the United States: (1) Losses The deduction, for losses of property not connected with the trade or business if aris- ing from certain casualties or theft, allowed by section 165(c)(3), but only if the loss is of property located within the United States. (2) Charitable contributions The deduction for charitable contributions and gifts allowed by section 170. (3) Personal exemption The deduction for personal exemptions al- lowed by section 151, except that only one ex- emption shall be allowed under section 151 unless the taxpayer is a resident of a contig- uous country or is a national of the United States. (c) Cross references (1) For disallowance of standard deduction, see section 142(b)(1). (2) For rule that certain foreign taxes are not to be taken into account in determining deduction or credit, see section 006(b)(1). (Aug. 16, 1954, ch. 736, 68A Stat. 280; Nov. 13, 1966, Pub. L. 89-809, title I, § 103(c)(1), 80 Stat. 1550; Oct. 27, 1972, Pub. L. 92-580, § 1(b), 86 Stat. 1276; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455 struck out "or his delegate" following "Secretary". 1972-Subsec. (b)(3). Pub. L. 92-580 substituted ex- ception that only one exemption be allowed under sec- tion 151 unless the taxpayer is a resident of a contig- uous country or is a national of the United States, for exception that in the case of a non-resident alien indi- vidual who is not a resident of a contiguous country only one exception be allowed under section 151. 1966-Pub. L. 89-809 substituted "connected with income which is effectively connected with the con- duct of a trade or business within the United States" for "connected with income from sources within the United States" in subsec. (a), deleted provisions relat- ing to the deduction of losses not connected with a trade or business but incurred in transactions entered into for profit in subsec. (b), made the casualty loss de- duction available even if the property giving rise to the loss is not effectively connected with the conduct of a trade or business In the United States if the prop- erty is located in this country, made the charitable contribution deduction available even though not re- lated to the trade or business, and added subsec. (c)(2) making a cross reference to section 906(b)(1) for rule that certain foreign taxes are not to be taken Into ac- count in determining deduction or credit. EFFECTIVE DATE OF 1972 AMENDMENT Amendment by Pub. L. 92-580 applicable to taxable years beginning after Dec. 31, 1971, see section 1(c) of Pub. L. 92-580, set out as an Effective Date of 1972 Amendment note under section 152 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-809 applicable with re- spect to taxable years beginning after Dec. 31, 1966, see section 103(n)(1) of Pub. L, 89-809, set out as an Effective Date of 1966 Amendment note under section 871 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 153, 170, 877, 906 of this title. § 874. Allowance of deductions and credits (a) Return prerequisite to allowance A nonresident alien individual shall receive the benefit of the deductions and credits al- lowed to him in this subtitle only by filing or causing to be filed with the Secretary a true and accurate return, in the man;ter prescribed in subtitle F (sec. 6001 and following, relating to procedure and administration), including therein all the information which the Secretary may deem necessary for the calculation of such deductions and credits. This subsection shall not be construed to deny the credits provided by sections 31 and 32 for tax withheld at source or the credit provided by section 39 for certain uses of gasoline, special fuels, and lubricating oil. (b) Tax withheld at source The benefit of the deduction for exemptions under section 151 may, in the discretion of the Secretary, and under regulations prescribed by the Secretary, be received by a non-resident alien individual entitled thereto, by filing a claim therefor with the withholding agent. (c) Foreign tax credit Except as provided in section 906, a nonresi- dent alien individual shall not be allowed the credits against the tax for taxes of foreign countries and possessions of the United States allowed by section 901. (Aug. 16, 1954, ch. 736, 68A Stat. 281; June 21, 1965, Pub. L. 89-44, title VIII, §809(d)(3), 79 Stat. 167; Nov. 13, 1966, Pub. L. 89-809, title I, §§ 103(d), 106(a)(3), 80 Stat. 1551, 1569; May 21, 1970, Pub. L. 91-258, title II, § 207(d)(1), 84 Stat. 248; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Subsecs. (a), (b). Pub. L. 94-455 struck out "or his delegate" following "Secretary". 1970-Subsec. (a). Pub. L. 91-258 included provision against construction of subsec. (a) to deny credit pro- vided by section 39 for certain uses of special fuels. 1966-Subsec. (a). Pub. L. 89-809, 1 103(d), struck out "of his total income received from all sources in the United States" following "true and accurate return". Subsec. (c). Pub. L. 69-809, § 106(a)(3), substituted "Foreign tax credit" for "Foreign tax credit not al- lowed" as the subsection heading and inserted refer- ence to an exception provided in section 906. § 873 Page 566
TITLE 26-INTERNAL REVENUE CODE 1965-Subsec. (a). Pub. L. 89-44 inserted "or the credit provided by section 39 for certain uses of gaso- line and lubricating oil" before the period at the end. EFFECTIVE DATE OF 1970 AMENDMENT Amendment by Pub. L. 91-258 effective on July 1, 1970, see section 211(a) of Pub. L. 91-258, set out as an Effective Date of 1970 Amendment note under section 4041 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendment of subsec. (a) by Pub. L. 81-809 applica- ble with respect to taxable years beginning after Dec. 31, 1966, see section 103(n)(1) of Pub. L. 89-809, set out as an Effective Date of 1966 Amendment note under section 871 of this title. Section 106(a)(6) of Pub. L. 89-809 provided that: "The amendments made by this subsection [adding sections 901(b)(4) and 906 of this title and amending subsec. c) of this section] shall apply with respect to taxable years beginning after Dec. 31, 1966. In apply- ing section 904 of the Internal Revenue Code of 1954 [section 904 of this title] with respect to section 906 of such Code [section 906 of this title], no amount may be carried from or to any taxable year beginning before Jan. 1, 1967, and no such year shall be taken into account." EFFECTIVE DATE OF 1965 AMENDMENT Amendment of subsec. (a) by Pub. L. 89-44 applica- ble to taxable years beginning on or after July 1, 1965, see section 809(f) of Pub. L. 89-44, set out as an Effec- tive Date of 1966 Amendment note under section 6420 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 1441, 1451 of this title. § 875. Partnerships; beneficiaries of estates and trusts For purposes of this subtitle- (1) a nonresident alien individual or foreign corporation shall be considered as being en- gaged in a trade or business within the United States if the partnership of which such indi- vidual or corporation is a member is so en- gaged, and (2) a nonresident alien individual or foreign corporation which is a beneficiary of an estate or trust which is engaged in any trade or business within the United States shall be treated as being engaged in such trade or business within the United States. (Aug. 1E. 1954, ch. 736, 68A Stat. 281; Nov. 13, 1966, Pub. L. 89-809, title I, § 103(e)(1), 80 Stat. 1551.) AMENDMENTS 1966-Pub. L. 89-809 designated existing provisions as par. (1). substituted reference to nonresident alien individuals or foreign corporations for reference simply to nonresident alien individuals in par. (1) as so designated, and added par. (2). EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-809 applicable with re- spect to taxable years beginning after Dec. 31. 1966, see section 103(n)(1) of Pub. L. 89-809, set out as an Effective Date of 1966 Amendment note under section 871 of this title. § 876. Alien residents of Puerto Rico (a) No application to certain alien residents of Puerto Rico This subpart shall not apply to an alien indi- vidual who is a bona fide resident of Puerto Rico during the entire taxable year, and such alien shall be subject to the tax imposed by sec- tion 1. (b) Cross reference For exclusion from gross income of income derived from sources within Puerto Rico, see section 933. (Aug. 16, 1954, ch. 736, 68A Stat. 281.) SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 901 of this title. § 877. Expatriation to avoid tax (a) In general Every nonresident alien individual who at any time after March 8, 1965, and within the 10- year period immediately preceding the close of the taxable year lost United States citizenship, unless such loss did not have for one of its prin- cipal purposes the avoidance of taxes under this subtitle or subtitle B, shall be taxable for such taxable year in the manner provided in subsection (b) if the tax imposed pursuant to such subsection exceeds the tax which, without regard to this section, is imposed pursuant to section 871. (b) Alternative tax A nonresident alien individual described in subsection (a) shall be taxable for the taxable year as provided in section 1, 402(e)(1), or sec- tion 1201(b), except that- (1) the gross income shall include only the gross income described in section 872(a) (as modified by subsection (W) of this section), and (2) the deductions shall be allowed if and to the extent that they are connected with the gross income included under this section, except that the capital loss carryover pro- vided by section 1212(b) shall not be allowed; and the proper allocation and apportionment of the deductions for this purpose shall be de- termined as provided under regulations pre- scribed by the Secretary. For purposes of paragraph (2), the deductions allowed by section 873(b) shall be allowed; and the deduction (for losses not connected with the trade or business if incurred in transactions entered into for profit) allowed by section 165(c)(2) shall be allowed, but only if the profit, if such transaction had resulted in a profit, would be included in gross income under this section. (c) Special rules of source For purposes of subsection (b), the following items of gross income shall be treated as income from sources within the United States: (I) Sale of property Gains on the sale or exchange of property (other than stock or debt obligations) located in the United States. (2) Stock or debt obligations Gains on the sale or exchange of stock issued by a domestic corporation or debt obli- gations of United States persons or of the United States, a State or political subdivision thereof, or the District of Columbia. Page 567
TITLE 26-INTERNAL REVENUE CODE (d) Exception for loss of citizenship for certain causes Subsection (a) shall not apply to a nonresi- dent alien individual whose loss of United States citizenship resulted from the application of section 301(b), 350, or 355 of the Immigra- tion and Nationality Act, as amended (8 U.S.C. 1401(b), 1482, or 1487). (e) Burden of proof If the Secretary establishes that it is reason- able to believe that an individual's loss of United States citizenship would, but for this section, result in a substantial reduction for the taxable year in the taxes on his probable income for such year, the burden of proving for such taxable year that such loss of citizenship did not have for one of its principal purposes the avoidance of taxes under this subtitle or subtitle B shall be on such individual. (Added Pub. L. 89-809, title I, § 103(f)(1), Nov. 13, 1966, 80 Stat. 1551, and amended Pub. L. 93- 406, title II, § 2005(c)(8), 88 Stat. 992; Pub. L. 94-455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) PRIOR PROVISIONS A prior section 877, act Aug. 16, 1954, ch. 736, 68A Stat. 282, relating to foreign educational, charitable, and other exempt organizations, was renumbered sec- tion 878 of this title. AMENDMENTS 1976-Subsecs. (b)(2), e). Pub. L. 94-455 struck out "or his delegate" following "Secretary". 1974-Subsec. (b). Pub. L. 93-406 inserted reference to section 402(el(1). EFFECTIVE DATE OF 1974 AMENDMENT Amendment by Pub. L. 93-406 applicable only with respect to distributions or payments made after Dec. 31, 1973, in taxable years beginning after Dec. 31, 1973, see section 2005(d) of Pub. L. 93-406, set out as an Effective Date of 1974 Amendment note under sec. tion 402 of this title. EFFECTIVE DATE Section applicable with respect to taxable years be- ginning after Dec. 31, 1966, see section 103(n)(1) of Pub. L. 89-809, set out as an Effective Date of 1966 Amendment note under section 871 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 2. 116, 894 of this title. § 878. Foreign educational, charitable, and certain other exempt organizations For special provisions relating to foreign educational, charitable, and other exempt organizations, see sections 512(a) and 4948. (Aug. 16, 1954, ch. # 30, 68A Stat. 282, § 877, re- numbered § 878, Nov. 13, 1966, Pub. L. 89-809, title I, § 103(f)(1), 80 Stat. 1551, and amended Dec. 30, 1969, Pub. L. 91-172, title I, § 101(j)(20), 83 Stat. 528.) AMENDMENTS 1969-Pub. L. 91-172 substituted provisions requiring reference to organizations in sections 512(a) and 4948 for provisions requiring reference to trusts in section 512(a), and struck out reference to unrelated business income. EFFECTIVE DATE OF 1969 AMENDMENT Amendment by Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1969, see section 101(k)(2)(B) of Pub. L. 91-172, set out as an Effective Date note under section 4940 of this title. § 879. Tax treatment of certain community income in the case of a resident or citizen of the United States who is married to a nonresident alien indi- vidual (a) General rule In the case of a citizen or resident of the United States who is married to a nonresident alien individual and who has community income for the taxable year, such community income shall be treated as follows: (1) Earned income (within the meaning of section 911(b)), other than trade or business income and a partner's distributive share of partnership income, shall be treated as the income of the spouse who rendered the per- sonal services, (2) Trade or business income, and a part- ner's distributive share of partnership income, shall be treated as provided in section 1402(a)(5), (3) Community income not described in paragraph (1) or (2) which is derived from the separate property (as determined under the applicable community property law) of one spouse shall be treated as the income of such spouse, and (4) All other such community income shall be treated as provided in the applicable com- munity property law. (b) Exception where election under section 6013(g) is in effect Subsection (a) shall not apply for any taxable year for which an election under subsection (g) or (h) of section 6013 (relating to election to treat nonresident alien individual as resident of the United States) is in effect. (c) Definitions and special rules For purposes of this section- (1) Community income The term "community income" means income which, under applicable community property laws, is treated as community income. (2) Community property laws The term "community property laws" means the community property laws of a State, a foreign country, or a possession of the United States. (3) Determination of marital status The determination of marital status shall be made under section 143(a). (Added Pub. L. 94-455, title X, § 1012(b)(1), Oct. 4, 1976, 90 Stat. 1613.) EFFECTIVE DATE Section applicable to taxable years beginning after Dec. 31, 1976, see section 1012(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 6013 of this title. § 878 Page 568
TITLE 26-INTERNAL REVENUE CODE SUBPART B-FOREIGN CORPORATIONS 881. Tax on income of foreign corporations not con- nected with United States business. 882. Tax on income of foreign corporations connected with United States business. 883. Exclusions from gross income. 884. Cross references. AMENDMENTS 1966-Pub. L. 89-809, title I, § 104(b)(3), Nov. 13. 1966, 80 Stat. 1557, substituted "Tax on income of for- eign corporations not connected with United States business" for "Tax on foreign corporations not en- gaged in business in United States" in item 881, and "Tax on income of foreign corporations connected with United States business" for "Tax on resident for- eign corporations" In item 882. § 881. Tax on income of foreign corporations not con- nected with United States business (a) Imposition of tax There is hereby imposed for each taxable year a tax of 30 percent of the amount received from sources within the United States by a for. eign corporation as- (1) interest (other than original issue dis- cbunt as defined in section 1232(b)), divi- dends, rents, salaries, wages, premiums, annu- ities, compensations, remunerations, emolu- ments, and other fixed or determinable annual or periodical gains, profits, and income, (2) gains described in section 631(b) or (c), (3) in the case of- (A) bonds or other evidences of indebted- ness issued after September 28, 1965, and before April 1, 1972, amounts which under section 1232(a)(2)(B) are considered as ordi- nary income, and, in the case of corporate obligations issued after May 27, 1969, and before April 1, 1972, amounts which would be so considered but for the fact the obliga- tions were issued after May 27, 1969, (B) bonds or other evidences of indebted- ness issued after March 31, 1972, and pay- able more than 6 months from the date of original issue (without regard to the period held by the taxpayer), amourits which under section 1232(a)(2)(B) would be con- sidered as ordinary income but for the fact such obligations were issued after May 27, 1969, and (C) the payment of interest on an obliga- tion described in subparagraph (B), an amount equal to the original issue discount (but not in excess of such interest less the tax imposed by paragraph (1) thereon) ac- crued on such obligation since the last pay- ment of interest thereon, and (4) gains from the sale or exchange after October 4, 1966, of patents, copyrights, secret processes and formulas, good will, trade- marks, trade brands, franchises, and other like property, or of any interest in any such property, to the extent such gains are from payments which are contingent on the pro- ductivity, use, or disposition of the property or interest sold or exchanged, or from pay- ments which are treated as being so contin- gent under section 871(e), but only to the extent the amount so received is not effectively connected with the conduct of a trade or business within the United States. (b) Exception for Guam corporations For purposes of this section, the term "for- eign corporation" does not Include a corpora- tion created or organized in Guam or under the law of Guam. (c) Doubling of tax For doubling of tax on corporations of certain foreign countries, see section 891. (Aug. 16, 1954, ch. 736, 68A Stat. 282; Nov. 13, 1966, Pub. L. 89-809, title I, § 104(a), 80 Stat. 1555; Dec. 10, 1971, Pub. L. 92-178, title III, § 313(a), (c), 85 Stat. 526, 527; Oct. 31, 1972, Pub. L. 92-606, § l(e)(1), 86 Stat. 1497; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(b)(3)(I), 90 Stat. 1793.) AMENDMENTS 1976-Subsec. (a)(3)(A), (B). Pub. L. 94-455 substitut- ed "ordinary income" for "gain from the sale or ex- change of property which is not a capital asset". 1972-Subsec. (b). Pub. L. 92-606 added subsec. (b). Former subsec. (b) redesignated (c). Subsec. (c). Pub. L. 92-606 redesignated former subsec. (b) as (c). 1971-Subsec. (a)(1). Pub. L. 92-178, § 313(a), insert- ed after "interest" the parenthetical phrase "(other than original issue discount as defined in section 1232(b))". Subsec. (a)(3). Pub. L. 92-178, § 313(c), designated ex- isting provisions as subpar. (A), inserted therein "and before April 1, 1972," after "September 28, 1965,", sub- stituted "section 1232(a)(2)(B)" for "section 1232", and inserted ", in the case of corporate obligations issued after May 27, 1969, and before April 1, 1972, amounts which would be so considered but for the fact that the obligations were issued after May 27, 1969.", and added subpars. (B) and (C). 1966-Subsec. (a). Pub. L. 89-809 substantially re- vised the income tax treatment of foreign corpora- tions, substituted the concept of amounts received from sources within the United States by foreign cor- porations but not effectively connected with the con- duct of a trade or business within the United States for the concept of amounts received from sources within the United States by foreign corporations not engaged in trade or business within the United States as the amount upon which the existing 30 percent levy should be imposed, and added contingent income re- ceived from the sale of patents and other intangibles and amounts of original issue discount which are treated as ordinary income received on retirement or sale or exchange of bonds or other evidences of Indebt- edness issued after Sept. 28, 1965, to the specified types of fixed or determinable income. EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (a)(3)(A), (B) by Pub. L. 94- 455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under sec- tion 2 of this title. EFFECTIVE DATE OF 1972 AMENDMENT Section 2 of Pub. L. 92-606 provided in part that: "The amendments made by section 1(e)(1) [adding subsec. (b) to this section] shall apply with respect to taxable years beginning after December 31, 1971." EFFECTIVE DATE OF 1971 AMENDMENT Amendment of subsec. (a)(1) and (3) of this section by Pub. L. 92-178 applicable with respect to taxable years beginning after Dec. 31, 1966, see section 313(f) of Pub. L. 92-178, set out as an Effective Date of 1971 Amendment note under section 871 of this title. Page 569
TITLE 26-INTERNAL REVENUE CODE EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-809 applicable with re- spect to taxable years beginning after Dec. 31, 1966, see section 104(n) of Pub. L. 89-809, set out as an Ef- fective Date of 1966 Amendment note under section 11 of this title. CROSS REFERENCES Consent dividends, nonresident aliens and foreign corporations, see section 565 of this title. Corporate organizations, foreign corporations, see section 367 of this title. Credit for corporate stockholder in foreign corpora- tion, see section 902 of this title. Distributions by corporations, source of gain when dispositions of certain stock, see section 306 of this title. Dividends received from certain foreign corpora- tions, see section 245 of this title. Income from sources within the United States, see section 861 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 306, 819, 819A, 842, 864, 871, 891. 906, 1442, 1563, 6154 of this title. § 882. Tax on income of foreign corporations connect- ed with United States business (a) Normal tax and surtax (1) Imposition of tax A foreign corporation engaged in trade or business within the United States during the taxable year shall be taxable as provided in section 11 or 1201(a) on its taxable income which is effectively connected with the con- duct of a trade or business within the United States. (2) Determination of taxable income In determining taxable income for purposes of paragraph (1), gross income includes only gross income which is effectively connected with the conduct of a trade or business within the United States. (b) Gross income In the case of a foreign corporation, gross income includes only- (1) gross income which is derived from sources within the United States and which is not effectively connected with the conduct of a trade or business within the United States, and (2) gross income which is effectively con- nected with the conduct of a trade or business within the United States. (c) Allowance of deductions and credits (1) Allocation of deductions (A) General rule In the case of a foreign corporation, the deductions shall be allowed only for pur- poses of subsection (a) and (except as pro- vided by subparagraph (B)) only if and to the extent that they are connected with income which is effectively connected with the conduct of a trade or business within the United States; and the proper appor- tionment and allocation of the deductions for this purpose shall be determined as pro- vided in regulations prescribed by the Sec- retary. (B) Charitable contributions The deduction for charitable contribu- tions and gifts provided by section 170 shall be allowed whether or not connected with income which is effectively connected with the conduct of a trade or business within the United States. (2) Deductions and credits allowed only if return filed A foreign corporation shall receive the benefit of the deductions and credits allowed to it in this subtitle only by filing or causing to be filed with the Secretary a true and accu- rate return, in the manner prescribed in sub. title F, including therein all the information which the Secretary may deem necessary for the calculation of such deductions and cred- its. The preceding sentence shall not apply for purposes of the tax imposed by section 541 (relating to personal holding company tax), and shall not be construed to deny the credit provided by section 32 for tax withheld at source or the credit provided by section 39 for certain uses of gasoline and lubricating oil. (3) Foreign tax credit Except as provided by section 906, foreign corporations shall not be allowed the credit against the tax for taxes of foreign countries and possessions of the United States allowed by section 901. (4) Cross reference For rule that certain foreign taxes are not to be taken into account in determining deduction or credit, see sec. tion 906(b)(1). (d) Election to treat real property income as income connected with United States business (1) In general A foreign corporation which during the tax- able year derives any income- (A) from real property located in the United States, or from any interest in such real property, including (i) gains from the sale or exchange of real property or an In- terest therein, (ii) rents or royalties from mines, wells, or other natural deposits, and (iii) gitins described in section 631(b) or (c), and (B) which, but for this subsection, would not be treated as income effectively con- nected with the conduct of a trade or busi- ness within the United States, may elect for such taxable year to treat all such income as income which is effectively connected with the conduct of a trade or busi- ness within the United States. In such case, such income shall be taxable as provided in subsection (a)(1) whether or not such corpo- ration is engaged in trade or business within the United States during the taxable year. An election under this paragraph for any taxable year shall remain in effect for all subsequent taxable years, except that it may be revoked with the consent of the Secretary with re- spect to any taxable year. (2) Election after revocation, etc. Paragraphs (2) and (3) of section 871(d) shall apply in respect of elections under this subsection in the same manner and to the Page 570 § 882
TITLE 26-INTERNAL REVENUE CODE same extent as they apply in respect of elec- tions under section 871(d). (e) Interest on United States obligations received by banks organized in possessions In the case of a corporation created or orga- nized in, or under the law of, a possession of the United States which is carrying on the banking business in a possession of the United States, interest on obligations of the United States shall- (1) for purposes of this subpart, be treated as income which is effectively connected with the conduct of a trade or business within the United States, and (2) shall be taxable as provided In subsec- tion (a)(1) whether or not such corporation is engaged in trade or business within the United States during the taxable year. (f) Returns of tax by agent If any foreign corporation has no office or place of business in the United States but has an agent in the United States, the return re- quired under section 6012 shall be made by the agent. (Aug. 16, 1954, ch. 736, 68A Stat. 282; Nov. 13, 1966, Pub. L. 89-809, title I, § 104(b)(1), 80 Stat. 1555; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1906(b)(13)(A), 90 Stat. 1834.) AMENDMENTS 1976-Subsecs. (c)(1)(A), (2), (d). Pub. L. 94-455 struck out "or his delegate" following "Secretary". 1966-Pub. L. 89-809 substantially revised the income tax treatment of foreign corporations, intro- duced the concept of taxable income effectively con- nected with the conduct of a trade or business within the United States into provisions dealing with the Im- position of tax, substituted a concept of gross income that included gross income derived from sources within the United States not effectively connected with the conduct of a trade or business within the United States and gross income effectively connected with the conduct of a trade or business within the United States for a concept of gross income that in- cluded only gross income from sources within the United States, and inserted provisions for an election to treat real property income as income connected with United States business, treatment of interest on United States obligations received by banks organized in possessions, and the returns of tax by agents, and added cross reference to section 906(b)(1). EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-809 applicable with re- spect to taxable years beginning after Dec. 31, 1966, see section 104(n) of Pub. L. 89-809, set out as an Ef- fective Date of 1966 Amendment note under section 11 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 11, 819A, 864, 906, 1442 of this title. § 883. Exclusions from gross income (a) Income of foreign corporations from ships and aircraft The following items shall not be included in gross income of a foreign corporation, and shall be exempt from taxation under this subtitle: (1) Ships under foreign flag Earnings derived from the operation of a ship or ships documented under the laws of a foreign country which grants an equivalent exemption to citizens of the United States and to corporations organized in the United States. (2) Aircraft of foreign registry Earnings derived from the operation of air- craft registered under the laws of a foreign country which grants an equivalent exemp- tion to citizens of the United States and to corporations organized in the United States. (3) Railroad rolling stock of foreign corporations Earnings derived from payments by a common carrier for the use on a temporary basis (not expected to exceed a total of 90 days in any taxable year) of railroad rolling stock owned by a corporation of a foreign country which grants an equivalent exemp- tion to corporations organized in the United States, (b) Earnings derived from communications satellite System The earnings derived from the ownership or operation of a communications satellite system by a foreign entity designated by a foreign gov- eminent to participate in such ownership or op- eration shall be exempt from taxation under this subtitle, if the United States, through its designated entity, participates in such system pursuant to the Communications Satellite Act of 1962 (47 U.S.C. 701 and following). (Aug. 16, 1954, ch. 736, 68A Stat. 283: Oct. 22, 1968, Pub. L. 90-622, § l(a), 82 Stat. 1311; Dec. 23, 1975, Pub. L. 94-164, § 6(a), 89 Stat. 975.) REFERENCES IN TEXT The Communications Satellite Act of 1962, referred to in subsec. (b), is Pub. L. 87-624, Aug. 31, 1962, 76 Stat. 419, as amended, which is classified generally to chapter 6 (§ 701 et seq.) of Title 47, Telegraphs, Tele- phones, and Radiotelegraphs. For complete classifica- tion of this Act to the Code, see Short Title note set out under section 701 of Title 47 and Tables volume. AMENDMENTS 1975-Subsec. (a). Pub. L. 94-164 added par. (3). 1968-Subsec. (a). Pub. L. 90-622 denominated exist- ing provisions as subsec. (a) and added the subsec. catchline "Income of foreign corporations from ships and aircraft". Subsec. (b). Pub. L. 90-622 added subsec. (b). EFFECTIVE DATE OF 1975 AMENDMENT Section 6(b) of Pub. L. 94-164 provided that: "The amendment made by this section [amending this sec- tion] shall apply to payments made after November 18, 1974." EFFECTIVE DATE OF 1968 AMENDMENr Section l(b) of Pub. L. 90-622 provided that: "The amendment made by subsection (a) (adding subsec. (b) to this section] shall apply with respect to taxable years beginning after December 31, 1966." § 884. Cross references (1) For special provisions relating to foreign corpora- tions carrying on an insurance business within the United States, see section 842. (2) For rules applicable In determining whether any foreign corporation is engaged In trade or business within the United States, see section 864(b). (3) For adjustment of tax in case of corporations of certain foreign countries, see section 896. (4) For allowance of credit against the tax in case of a foreign corporation having income effectively connected Page 571 § 884
TITLE 26-INTERNAL REVENUE t0ODE with the conduct of a trade or business within the United States, see section 906. (5) For withholding at source of tax on income of for- eign corporations, see section 1442. (Aug. 16, 1954., ch. 736, 68A Stat. 283; Nov. 13, 1966, Pub. L. 89-809, title I, § 104(m)(1), 80 Stat. 1563; Dec. 30, 1969, Pub. L. 91-172, title I. § 101(j)(21), 83 Stat. 528.) AMENDMENTS 1969-Par. (1). Pub. L. 91-172 redesignated former par. (2) as par. (1). Former par. (1) referring to section 512(a) was stricken. Pars. (2) to (5), Pub. L. 91-172 redesignated former pars. (3), (4). (5) and (6) as pars. (2), (3), (4) and (5). 1966-Par. (1). Pub. L. 89-809 redesignated former par. (4) as par. (1). Former par. (1) redesignated as par (6). Par. (2). Pub. L. 89-809 redesignated former par. (3) as par. (2) and, in par. (2) as so redesignated, substitut. ed "foreign corporations carrying on an insurance business within the United States, see section 842" for "foreign insurance companies, see subehapter L (see. 801 and following". Former par. (2) redesignated as par. (3). Par. (3). Pub. L. 89-809 redesignated former par. (2) as par. (3) and, in par. (3) as so redesignated, substitut- ed "sect!on 864(b)" for "section 871(c)". Former par. (3) redesignated as par. (2). Pars. (4). (5). Pub. L. 89-809 added pars. (4) and (5). Former par. (4) redesignated as par. (1). Par, (6). Pub. L. 89-809 redesignated former par. (1) as par. (6). EFFECTIVE DATE OF 1969 AMENDMENT Amendment by Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1969, see section 101(k)(2)(B) of Pub. L. 91-172, set out as an Effective Date note under section 4940 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-809 applicable with re- spect to taxable years beginning after Dec. 31, 1966, see section 104(n) of Pub. L. 89-809, set out as an Ef- fective Date of 1966 Amendment note under section 11 of this title. SUBPART C-MISCELLANEOUS PROVISIONS Sec. 891. Doubling of rates of tax on citizens and corpora- tions of certain foreign countries. 892. Income of foreign governments and of interna- tional organizations. 893. Compensation of employees of foreign govern- ments or international organizations. 894. Income affected by treaty. 895. Income derived by a foreign central bank of issue from obligations of the United States or from bank deposits. 896. Adjustment of tax on nationals, residents, and corporations of certain foreign countries. AMENDMENTS 1966-Pub. L. 89-809, title I, §§ 102(a)(4)(B). 105(c). Nov. 13, 1966, 80 Stat. 1543, 1565, substituted "affected by treaty" for "exempt under treaty" in item 894, in- serted "or from bank deposits" in item 895, and added item 896. 1961-Pub. L. 87-29, § 1(b), May 4, 1961, 75 Stat. 64, added Item 895. § 891. Doubling of rates of tax on citizens and corpo- rations of certain foreign countries Whenever the President finds that, under the laws of any foreign country, citizens or corpora- tions of the United States are being subjected to discriminatory or extraterritorial taxes, the President shall so proclaim and the rates of tax imposed by sections 1, 3, 11, 802, 821, 831, 852, 871, and 881 shall, for the taxable year during which such proclamation is made and for each taxable year thereafter, be doubled in the case of each citizen and corporation of such foreign country; but the tax at such doubled rate shall be considered as imposed by such sections as the case may be. In no case shall this section operate to increase the taxes imposed by such sections (computed without regard to this sec- tion) to an amount in excess of 80 percent of the taxable income of the taxpayer (computed without regard to the deductions allowable under section 151 and under part VIII of sub- chapter B). Whenever the President finds that the laws of any foreign country with respect to which the President has made a proclamation under the preceding provisions of this section have been modified so that discriminatory and extraterritorial taxes applicable to citizens and corporations of the United States have been re- moved, he shall so proclaim, and the provisions of this section providing for doubled rates of tax shall not apply to any citizen or corporation of such foreign country with respect to any tax- able year beginning after such proclamation is made. (Aug. 16, 1954, ch. 736, 68A Stat, 283; Mar. 13, 1956, ch. 83, § 5(6), 70 Stat. 49; June 25, 1959, Pub. L. 86-69, § 3(f)(1), 73 Stat. 140.) AMENDMENTS 1959-Pub. L. 86-69 eliminated reference to section 811. 1956-Act Mar. 13, 1956, inserted reference to sec- tion 811. EFFECTIVE DATE OF 1959 AMENDMENT Amendment by Pub. L. 86-69 applicable only with respect to taxable years beginning after Dec. 31, 1957, see section 4 of Pub. L. 86-69, set out an Effective Date note under section 801 of this title. EFFECTIVE DATE OF 1956 AMENDMENT Amendment by act Mar. 13, 1956, as applicable only to taxable years beginning after Dec. 31, 1954, see sec- tion 6 of act Mar. 13, 1956, set out as an Effective Date of 1956 Amendment note under section 821 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 5, 12 of this title. § 892. Income of foreign governments and of interna- tional organizations The income of foreign governments or inter- national organizations received from invest- ments in the United States in stocks, bonds, or other domestic securities, owned by such for- eign governments or by international organiza- tions, or from interest on deposits in banks in the United States of moneys belonging to such foreign governments or international organiza- tions, or from any other source within the United States, shall not be included in gross income and shall be exempt from taxation under this subtitle. (Aug. 16, 1954, ch. 736, 68A Stat. 284.) Page 572
TITLE 26-INTERNAL REVENUE CODE § 893. Compensation of employees of foreign govern- ments or international organizations (a) Rule for exclusion Wages, fees, or salary of any dmployee of a foreign government or of an international orga- nization (including a consular or other officer, or a nondiplomatic representative), received as compensation for official services to such gov- ernment or international organization shall not be included in gross income and shall be exempt from taxation under this subtitle if- (1) such employee is not a citizen of the United States, or is a citizen of the Republic of the Philippines (whether or not a citizen of the United States); and (2) in the case of an emp:)yee of a foreign government, the services are of a character similar to those performed by employees of the Government of the United States in for- eign countries; and (3) in the case of an employee of a foreign government, the foreign government grants an equivalent exemption to employees of the Government of the United States performing similar services in such foreign country. (b) Certificate by Secretary of State The Secretary of State shall certify to the Secretary of the Treasury the names of the for- eign countries which grant an equivalent ex- emption to the employees of the Government of the United States performing services in such foreign countries, and the character of the services performed by employees of the Gov- ernment of the United States in foreign coun- tries. (Aug. 16, 1954, ch. 736, 68A Stat. 284.) § 894. Income affected by treaty (a) Income exempt under treaty Income of any kind, to the extent required by any treaty obligation of the United States, shall not be included in gross income and shall be exempt from taxation under this subtitle. (b) Permanent establishment in United States For purposes of applying any exemption from, or reduction of, any tax provided by any treaty to which the United States is a party with respect to income which is not effectively connected with the conduct of a trade or busi- ness within the United States, a nonresident alien individual or a foreign corporation shall be deemed not to have a permanent establish- ment in the United States at any time during the taxable year. This subsection shall not apply in respect of the tax computed under sec- tion 877(b). (Aug. 16, 1954, ch. 736, 68A Stat. 284; Nov. 13, 1966, Pub. L. 89-809, title I, § 105(a), 80 Stat. 1563.) AMENDMENTS 1966-Pub. L. 89-809 designated existing provisions as subsec. (a) added subsec. (b) and substituted "af- fected by treaty" for "exempt under treaty" in the section catchline. EFFECTIVE DATE OF 1966 AMENDMENT Section 105(d) of Pub. L. 89-809 provided that: "The amendments made by this section (other than subsec- tions (d) and (f)) [amending this section and adding section 896 of this title] shall apply with respect to taxable years beginning after December 31, 1966." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 643, 819 of this title. § 895. Income derived by a foreign central bank of issue from obligations of the United States or from bank deposits Income derived by a foreign central bank of issue from obligations of the United States or of any agency or instrumentality thereof (in- cluding beneficial interests, participations, and other instruments issued under section 302(c) of the Federal National Mortgage Association Charter Act (12 U.S.C. 1717)) which are owned by such foreign central bank of issue, or derived from interest on deposits with persons carrying on the banking business, shall not be included in gross income and shall be exempt from tax- ation under this subtitle unless such obligations or deposits are held for, or used in connection with, the conduct of commercial banking func- tions or other commercial activities. For pur- poses of the preceding sentence the Bank for International Settlements shall be treated as a foreign central bank of issue. (Added Pub. L. 87-29, § l(a), May 4, 1961, 75 Stat. 64, and amended Pub. L. 89-809, title I, § 102(a)(4)(A), Nov. 13, 1966, 80 Stat. 1543.) AMENDMENTS 1966-Pub. L. 89-809 exempted income derived from obligations of agencies or instrumentalities of the United States and income derived from interest on de- posits with persons carrying on the banking business, inserted parenthetical phrase "(including beneficial interests, participations, and other instruments issued under section 302(c) of the Federal National Mortgage Association Charter Act (12 U.S.C. 1717))," and insert- ed sentence requiring the Bank for International Set- tlements to be treated as a foreign central bank of issue. EFFECTIVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-809 applicable with re- spect to taxable years beginning after Dec. 31, 1966, except that in applying section 864(c)(4)(B)(iD) of this title with respect to a binding contract entered into on or before Feb. 24, 1966, activities in the United States on or before such date in negotiating or carrying out such contract shall not be taken into account, see sec- tion 102(e)(1) of Pub. L. 89-809, set out as an Effective Date of 1966 Amendment note under section 861 of this title. EFFECTIVE DATE Section l(c) of Pub. L. 87-29 provided that: "The amendments made by subsections (a) and (b) [adding this section and amending analysis preceding section 891 of this title] shall be effective with respect to income received in taxable years beginning after De- cember 31, 1960." § 896. Adjustment of tax on nationals, residents, and corporations of certain foreign countries (a) Imposition of more burdensome taxes by foreign country Whenever the President finds that- (1) under the laws of any foreign country, considering the tax system of such foreign country, citizens of the United States not resi- dents of such foreign country or domestic cor- porations are being subjected to more burden- Page 573 § 896
TITLE 26-INTERNAL REVENUE CODE some taxes, on any item of income received by such citizens or corporations from sources within such foreign country, than taxes im- posed by the provisions of this subtitle on similar income derived from sources within the United States by residents or corpora- tions of such foreign country, (2) such foreign country, when requested by the United States to do so, has not acted to revise or reduce such taxes so that they are no more burdensome than taxes imposed by the provisions of this subtitle on similar income derived from sources within the United States by residents or corporations of such foreign country, and (3) it is in the public interest to apply pre- 1967 tax provisions in accordance with the provisions of this subsection to residents or corporations of such foreign country, the President shall proclaim that the tax on such similar income derived from sources within the United States by residents or corpo- rations of such foreign country shall, for tax- able years beginning after such proclamation, be determined under this subtitle without regard to amendments made to this subchapter and chapter 3 on or after the date of enactment of this section. (b) Imposition of discriminatory taxes by foreign country Whenever the President finds that- ()- under the laws of any foreign country, citizens of the United States or domestic cor- porations (or any class of such citizens or cor- porations) are, with respect to any item of income, being subjected to a higher effective rate of tax than are nationals, residents, or corporations of such foreign country (or a similar class of such nationals, residents, or corporations) under similar circumstances; (2) such foreign country, when requested by the United States to do so, has not acted to eliminate such higher effective rate of tax; and (3) it is in the public interest to adjust, in accordance with the provisions of this subsec- tion, the effective rate of tax imposed by this subtitle on similar income of nationals, resi- dents, or corporations of such foreign country (or such similar class of such nationals, resi- dents, or corporations), the President shall proclaim that the tax on similar income of nationals, residents, or corpo- rations of such foreign country (or such similar class of such nationals, residents, or corpora- tions) shall, for taxable years beginning after such proclamation, be adjusted so as to cause the effective rate of tax imposed by this subti- tle on such similar income to be substantially equal to the effective rate of tax imposed by such foreign country on such item of income of citizens of the United States or domestic corpo- rations (or such class of citizens or corpora- tions). In implementing a proclamation made under this subsection, the effective rate of tax imposed by this subtitle on an item of income may be adjusted by the disallowance, in whole or in part, of any deduction, credit, or exemp- tion which would otherwise be allowed with re- spect to that item of income or by increasing the rate of tax otherwise applicable to that item of income. (c) Alleviation of more burdensome or discriminatory taxes Whenever the Pregident finds that- (1) the laws of any foreign country with re- spect to which the President has made a proc- lamation under subsection (a) have been modified so that citizens of the United States not residents of such foreign country or do. mestic corporations are no longer subject to more burdensome taxes on the item of income derived by such citizens or corpora- tions from sources within such foreign coun- try, or (2) the laws of any foreign country with re- spect to which the President has made a proc- lamation under subsection (b) have been modified so that citizens of the United States or domestic corporations (or any class of such citizens or corporations) are no longer subject to a higher effective rate of tax on the item of income, he shall proclaim that the tax imposed by this subtitle on the similar income of nationals, resi- dents, or corporations of such foreign country shall, for any taxable year beginning after such proclamation, be determined under this subtitle without regard to such subsection. (d) Notification of Congress required No proclamation shall be issued by the Presi- dent pursuant to this section unless, at least 30 days prior to such proclamation, he has noti- fied the Senate and the House of Representa- tives of his intention to issue such proclama- tion. (e) Implementation by regulations The Secretary shall prescribe such regula- tions as he deems necessary or appropriate to implement this section. (Added Pub. L. 89-809, title I, § 105(b), Nov. 13, 1966, 80 Stat. 1563, and amended Pub. L. 94- 455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) REFERENCES IN TEXT The date of enactment of this section, referred to in the provisions following subsec. (a)(3), is the date of enactment of Pub. L. 89-809, which was approved Nov. 13, 1966. AMENDMENTS 1976-Subsec. (e). Pub. L. 94-455 struck out "or his delegate" following "Secretary". EFFECTIVE DATE Section applicable with respect to taxable years be- ginning after Dec. 31, 1966, see section 105(d) of Pub. L. 89-809, set out as an Effective Date of 1966 Amend- ment note under section 894 of this title. PART III-INCOME FROM SOURCES WITHOUT THE UNITED STATES Subpart A. Foreign tax credit. B. Earned income of citizens of United States. C. Western Hemisphere trade corporations. D. Possessions of tht United States. E. China Trade Act corporations. F. Controlled foreign corporations. [G. Repealed.] § 896 Page 574
TITLE 26-INTERNAL REVENUE CODE 0 TAXABLE YEARS AFTER 1977 Pub. L. 94-455, title X. §§ 1052(c)(7), 1053(d)(5), Oct. 4, 1976, 90 Stat. 1648, 1649, struck out subpart C relat- ing to Western Hemisphere trade corporations, appli- cable to taxable years beginning after Dec. 31, 1979, and subpart E relating to China Trade Act corpora- tions applicable to taxable years beginning after Dec. 31, 1977. AMENDMENTS 1976-Pub. L. 94-455, title X, § 1012(b)(3)(B), Oct. 4. 1976, 90 Stat. 1614, deleted subpart 0 from this analy- sis without a corresponding repeal of the text in such subpart. 1966-Pub. L. 89-809, title I, § 105(e)(2), Nov. 13, 1966, 80 Stat. 1567, added the heading of subpart H. 1962-Pub. L. 87-834, § 12(b)(3), Oct. 16, 1962, 76 Stat. 1031, added the headings of subparts F and G. SUBPART A-FOREIGN TAX CREDIT Sec. 901. Taxes of foreign countries and of possessions of United States. 902. Credit for corporate stockholder in foreign corpo- ration. 903. Credit for taxes in lieu of income, etc,, taxes. 904. Limitation on credit. 905. Applicable rules. 906. Nonresident alien individuals and foreign corpo- rations. 907. Special rules in case of foreign oil and gas income. 908. Reduction of credit for participation in or cooper- ation with an international boycott. AMENDMENTS 1976-Pub. L. 94-455, title X, § 1061(b), Oct. 4, 1976, 90 Stat. 1650, added item 908. 1975-Pub. L. 94-12, title VI, § 601(c), Mar. 29, 1975, 89 Stat. 57, added item 907. 1966-Pub. L. 89-809, title I, § 106(a)(2), Nov. 13, 1966, 80 Stat. 1569, added item 906. SUBPART REFERRED TO IN OTHER SECTIONS This subpart is referred to in sections 78, 172, 1351 of this title. § 901. Taxes of foreign countries and of possessions of United States (a) Allowance of credit If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the limitation of section 904, be credited with the amounts provided in the ap- plicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under sections 902 and 960. Such choice for any taxable year may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for such taxable year. The credit shall not be allowed against the tax imposed by sec- tion 56 (relating to minimum tax for tax prefer- ences), against the tax imposed for the taxable year under section 72(m)(5)(B) (relating to 10 percent tax on premature distributions to owner-employees), against the tax imposed by section 402(e) (relating to tax on lump sum dis- tributions), against the tax imposed for the tax- able year by section 408(f) (relating to addition- al tax on income from certain retirement ac- counts), against the tax imposed by section 531 (relating to the tax on accumulated earnings), against the additional tax imposed for the tax- able year under section 1351 (relating to recov- eries of foreign expropriation losses), or against the personal holding company tax imposed by section 541. (b) Amount allowed Subject to the limitation of section 904, the following amounts shall be allowed as the credit under subsection (a): (1) Citizens and domestic corporations In the case of a citizen of the United States and of a domestic corporation, the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States; and (2) Resident of the United States or Puerto Rico In the case of a resident of the United States and in the case of an individual who is a bona fide resident of Puerto Rico during the entire taxable year, the amount of any such taxes paid or accrued during the taxable year to any possession of the United States; and (3) Alien resident of the United States or Puerto Rico In the case of an alien resident of the United States and in the case of an alien indi- vidual who is a bona fide resident of Puerto Rico during the entire taxable year, the amount of any such taxes paid or accrued during the taxable year to any foreign coun- try; and (4) Nonresident alien individuals and foreign cor- porations In the case of any nonresident alien individ- ual not described in section 876 and in the case of any foreign corporation, the amount determined pursuant to section 906; and (5) Partnerships and estates In the case of any individud described in paragraph (1), (2), (3), or (4), who is a member of a partnership or a beneficiary of an estate or trust, the amount of his propor- tionate share of the taxes (described in such paragraph) of the partnership or the estate or trust paid or accrued during the taxable year to a foreign country or to any possession of the United States, as the case may be. (c) Similar credit required for certain alien residents Whenever the President finds that- (1) a foreign country, in imposing income, war profits, and excess profits taxes, does not allow to citizens of the United States residing in such foreign country a credit for any such taxes paid or accrued to the United States or any foreign country, as the case may be, simi- lar to the credit allowed under subsection (b)(3), (2) such foreign country, when requested by the United States to do so, has not acted to provide such a similar credit to citizens of the United States residing in such foreign coun- try, and (3) it is in the public interest to allow the credit under subsection (b)(3) to citizens or subjects of such foreign country only if it allows such a similar credit to citizens of the United States residing in such foreign coun- try, the President shall proclaim that, for taxable years beginning while the proclamation re- Page 575 § 901
TITLE 26-.INTERNAL REVENUE CODE mains in effect, the credit under subsection (b)(3) shall be allowed to citizens or subjects of such foreign country only if such foreign coun- try, in imposing income, war profits, and excess profits taxes, allows to citizens of the United States residing in such foreign country such a similar credit. (d) Treatment of dividends from a DISC or former DISC For purposes of this subpart, dividends from a DISC or former DISC (as defined in section 992(a)) shall be treated as dividends from a for- eign corporation to the extent such dividends are treated under part I as income from sources without the United States. (e) Foreign taxes on mineral income (1) Reduction in amount allowed Notwithstanding subsection (b), the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or possession of the United States with respect to foreign mineral income from sources within such country or possession which would (but for this para- graph) be allowed under such subsection shall be reduced by the amount (if any) by which- (A) the amount of such taxes (or, if small- er, the amount of the tax which would be computed under this chapter with respect to such income determined without the de- duction allowed under section 613), exceeds (B) the amount of the tax computed under this chapter with respect to such income. (2) Foreign mineral income defined For purposes of paragraph (1), the term "foreign mineral income" means income de- rived from the extraction of minerals from mines, wells, or other natural deposits, the processing of such minerals into their prima- ry products, and the transportation, distribu- tion, or sale of such minerals or primary prod- ucts. Such term includes, but is not limited to- (A) dividends received from a foreign cor- poration in respect of which taxes are deemed paid by the taxpayer under section 902, to the extent such dividends are attrib- utable to foreign mineral income, and (B) that portion of the taxpayer's distrib- utive share of the Income of partnerships attributable to foreign mineral income. (f) Certain payments for oil or gas not considered as taxes Notwithstanding subsection (b) and sections 902 and 960, the amount of any income, or prof- its, and excess profits taxes paid or accrued during the taxable year to any foreign country in connection with the purchase and sale of oil or gas extracted in such country is not to be considered as tax for purposes of section 275(a) and this section if- (1) the taxpayer has no economic interest in the oil or gas to which section 611(a) applies, and (2) either such purchase or sale is at a price which differs from the fair market value for such oil or gas at the time of such purchase or sale. (g) Certain taxes paid with respect to distributions from possessions corporations (1) In general For purposes of this chapter, any tax of a foreign country or possession of the United States which is paid or accrued with respect to any distribution from a corporation, to the extent that such distribution is attributable to periods during which such corporation is a possessions corporation, shall not be treated as income, war profits, or excess profits taxes paid or accrued to a foreign country or pos- session of the United States, and no deduc- tion shall be allowed under this title with re- spect to any amount so paid or accrued. (2) Possessions corporation For purposes of paragraph (1), a corpora- tion shall be treated as a possessions corpora- tion for any period during which an election under section 936 applied to such corporation or during which section 931 (as in effect on the day before the date of the enactment of the Tax Reform Act of 1976) applied to such corporation. (h) Cross reference (I) For deductions of income, war profits, and excess profits taxes paid to a foreign country or a possession of the United States, see sections 164 and 275. (2) For right of each partner to make election under this section, see section 703tb). (3) For right of estate or trust to the credit for taxes imposed by foreign countries and possessions of the United States under this section, see section 642(a)(1). (4) For reduction of credit for failure of a United States person to furnish certain information with respect to a foreign corporation controlled by him, see section 6038. (Aug. 16, 1954, ch. 736, 68A Stat. 285; Sept. 14, 1960, Pub. L. 86-780, §3(a), (b), 74 Stat. 1013; Oct. 16, 1962, Pub. L. 87-834, §§ 9(d)(3). 12(b)(1), 76 Stat. 1001, 1031; Feb. 26, 1964, Pub. L. 88- 272, title II, § 207(b)(7), 78 Stat. 42; Apr. 8, 1966, Pub. L. 89-384, § 1(c)(2), 80 Stat. 102; Nov. 13, 1966, Pub. L. 89-809, title I, § 106(a)(4), (5), (b)(1), (2), 80 Stat. 1569; Dec. 30, 1969, Pub. L. 91-172, title III, § 301(b)(9), title V, § 506(a), 83 Stat. 585, 634; Dec. 10, 1971, Pub. L. 92-178, title V, § 502(b)(1), 85 Stat. 549; Sept. 2, 1974, Pub. L. 93-406, title II, §§ 2001(g)(2)(C), 2002(g)(3), 2005(c)(5), 88 Stat. 957, 968, 991; Mar. 29, 1975, Pub. L. 94-12, title VI, § 601(b), 89 Stat. 57; Oct. 4, 1976, Pub. L. 94-455, title X, §§ 1031(b)(1), 1051(d), title XIX, § 1901(b)(1)(H)(ii), (37)(A), 90 Stat. 1622, 1645, 1791, 1803.) REFERENCES IN TEXT The Tax Reform Act of 1976, referred to in subsec. (g)(2), Is Pub. L. 94-455, Oct. 4, 1976, 90 Stat. 1520, which was enacted Oct. 4, 1976. For complete classifi- cation of this Act to the Code, see Tables volume. AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, §§ 1031(b)(1), 1901(b)(37)(A), struck out "under section 1333 (relat- ing to war loss recoveries) or" following "imposed for the taxable year" and "applicable" following "subject to the". Subsec. (b). Pub. L. 94-455, § 1031(b)(1), struck out "applicable" following "Subject to the". Subsec. (d). Pub. L. 94-455, § 1051(d)(1), struck out provisions relating to corporations receiving a large percentage of their gross receipts from sources within a possession of the United States and a corporation or- § 901 Page 576
TITLE 26-INTERNAL REVENUE CODE ganized under the China Trade Act. 1922 (15 U.S.C. chapter 4). Subsec. (g). Pub. L. 94-455, § 1051(d)(2), added subsec. (g), Former subsec. (g) redesignated subsec. (h). Subsec. (h). Pub, L. 94-455, §§ 1051(d)(2), 1901(b)(1)(H)(ii), redesignated former subsec. (g) as (h) and, as redesignated, substituted "section 642(a)(1)" for "section 642(a)(2)" in par. (3). 1975-Subsee. (M). Pub. L. 94-12 added subsec. i). Former subsec, f) redesignated (g), Subsec. (g). Pub. L. 94-12 redesignated former subsec. (f) as (g). 1974-Subsec. (a). Pub. L. 93-460 inserted references to the tax imposed for the taxable year under section 72(m)(5)(B) (relating to 10 percent tax on premature distributions to owner-employees), the tax imposed for the taxable year by section 408(f) (relating to addi- tional tax on income from certain retirement ac- counts), and the tax imposed by section 402(e) (relat- ing to tax on lump sum distributions). 1971-Subsec. (d). Pub. L. 92-178 added provision for treatment of dividends from a DISC or former DISC as dividends from a foreign corporation to the extent such dividends are treated under part I as income from sources without the United States. 1969-Subsec. (a). Pub, L. 91-172, § 301(b)(9), insert- ed in last sentence "against the tax imposed by section 56 (relating to minimum tax for tax preferences)," after "not be allowed". Subsec. (e). Pub. L. 91-172, §506(a), added subsec. (e). Former subsec. (e) redesignated (f). 1966-Subsec. (a). Pub. L. 89-384 added the addition- al tax imposed under section 1351 (relating to recover- ies of foreign expropriation losses) to the list of taxes against which the foreign tax credit may not be al- lowed. Subsec. (b)(3). Pub. L. 89-809, § 106(b)(1), struck out provisions which made the allowance of the credit de- pendent upon whether the foreign country of which the alien resident was a citizen or subject, in imposing such taxes, allowed a similar credit to citizens of the United States residing in such country. Subsec. (b)(4). Pub. L. 89-809, § 106(a)(4). added subsec. (a)(4). Former subsec. (a)(4) redesignated as (a)(5). Subsec. (b)(5). Pub. L. 89-809, § 106(a)(4), (5), rede- signated former subsec. (b)(4) as (b)(5) and, in subsec. (b)(5) as so redesignated, inserted reference to para- graph (4). Subsec. (c), Pub. L. 89-809, § 106(b)(2), added subsec. (c). Former subsec. (c) redesignated as (d). Subsecs. (d), e). Pub. L. 89-809, § 106(b)(2), redesig- nated former subsecs. (c) and (d) as (d) and (e), respec- tively. 1964-Subsec. (d)(1). Pub. L. 88-272 inserted the ref- erence to section 275. 1962-Subsec. (a). Pub. L. 87-834, § 12(b)(1), substi- tuted "sections 902 and 960" for "section 902". Subsec. (d)(4). Pub. L. 87-834, § 9(d)(3), added subsec. (d)(4). 1960--Subsec. (a). Pub. L. 86-780, § 3(a), (b), inserted "applicable" preceding "limitation" and substituted "Such choice for any taxable year may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax Imposed by this chapter for such taxable year" for "Such choice may be made or changed at any time prior to the expiration of the period prescribed for making a claim for credit or refund of the tax against which the credit is allowa- ble." Subsec. (b). Pub. L. 86-780, § 3(b), inserted "applica- ble" preceding "limitation". EFFErIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (a) and (b) by section 1031(b)(1) of Pub. L. 94-455 applicable to taxable years beginning after Dec. 31, 1975, with certain exceptions, see section 1031(c) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 904 of this title. Amendment of subsec. (d) by sectiou 1051(d)(1) of Pub. L. 94-455 applicable to taxable years beginning after Dec. 31, 1975, with certain exceptions, and the provisions of subsec. (g) not to apply to any tax im- posed by a possession of the United Sttcs with re- spect to the complete liquidation occurring before Jan. 1, 1979, of a corporation to the extent that such tax is attributable to earnings and profits accumulated by such corporation during periods ending before Jan. 1, 1976, see section 1051(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under sec- tion 33 of this title. Amendment of subsecs. (a), (g)(3) by section 1901(b)(1)(H)(iii), (37)(A) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under sec- tion 2 of this title. EFFECTIVE DATE OF 1975 AMENDMENT Amendment by Pub. L. 94-12 applicable to taxable years ending after Dec. 31, 1974, see section 601(d) of Pub. L. 94-12, set out as an Effective Date note under section 907 of this title. EFFECTIVE DATE OF 1974 AMENDMENT Amendment of subsec. (a) by section 2001(g)(2)(C) of Pub. L. 93-406, which inserted reference to the tax im- posed for the taxable year under section 72(m)(5)(B) (relating to 10 percent tax on premature distributions to owner-employees), applicable to distributions made in taxable years beginning after Dec. 31, 1975, see sec- tion 2001(i)(4) of Pub. L. 93-406, set out as an Effec. tive Date of 1974 Amendment note under section 72 of this title. Amendment of subsec. (a) by section 2002(g)(3) of Pub. L. 93-406, which inserted reference to the tax im- posed for the taxable year by section 408(f) (relating to additional tax on income from certain retirement accounts), effective on Jan. 1, 1975, see section 2002(i)(2) of Pub. L. 93-406, set out as an Effective Date note under section 4973 of this title. Amendment of subsec. (a) by section 2005(c)(5) of Pub. L. 93-406, which inserted reference to the tax im- posed for the taxable year under section 402(e) (relat- ing to tax on lump sum distributions), applicable only with respect to distributions or payments made after Dec. 31, 1973. in taxable years beginning after Dec. 31, 1973, see section 2005(d) of Pub. L. 93-406, set out as an Effective Date of 1974 Amendment note under sec- tion 402 of this title. EFFECTIVE DATE OF 1971 AMENDMENT Enactment of subsec. (d) by Pub. L. 92-178 applica- ble with respect to taxable years ending after Dec. 31, 1971, except that a corporation may not be a DISC for any taxable year beginning before Jan. 1, 1972, see sec- tion 507 of Pub. L. 92-178, set out as an Effective Date note under section 991 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Section 506(c) of Pub. L. 91-172 provided that: "The amendments made by this section [amending this sec- tion and section 904 of this title] shall apply with re- spect to taxable years beginning after December 31, 1969." Amendment of subsec. (a) by section 301(b)(9) of Pub. L. 91-172 applicable to taxable years ending after Dec. 31, 1969, see section 301(c) of Pub. L. 91-172, set out as an Effective Date note under section 56 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Amendment of subsec. (a) by Pub. L. 89-384 applica- ble with respect to amounts received after December 31, 1964, in respect of foreign expropriation losses (as defined in section 1351(b) of this title) sustained after December 31, 1958, see section 2 of Pub. L. 89-384, set Page 577
TITLE 26-INTERNAL REVENUE CODE out as an Effective Date note under section 1351 of this title. Addition of par. (4) of subsec. (b), redesignation of former par. (4) as par. (5), and amendment of par. (5) as so redesignated by section 106(a)(4). (5) of Pub. L. 89-809 applicable with respect to taxable years begin- ning after Dec. 31, 1966, see section 106(a)(6) of Pub. L. 89-809, set out as an Effective Date of 1966 Amend- ment note under section 874 of this title. Section 106(b)(4) of Pub. L. 89-809 provided that: "The amendments made by this subsection (other than paragraph (3)) [amending par. (3) of subsec. (b), adding subsec. (c), and redesignating former subsecs. (c) and (d) as (d) and (e), respectively) shall apply with respect to taxable yearE beginning after Decem- ber 31, 1966. The amendment made by paragraph (3) [amending section 2014(a) and adding section 2014(h) of this title] shall apply with respect to estates of de. cedents dying after the date of enactment of this Act [November 13, 1966]." EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272, applicable to taxable years beginning after Dec. 31, 1963, see section 207(c) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 164 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Amendment of subsec. (a) by Pub. L. 87-834 applica- ble with respect to taxable years of foreign corpora- tions beginning after Dec. 31, 1962, and to taxable years of United States shareholders within which or with which such taxable years of such foreign corpo- rations end, see section 12(c) of Pub. L. 87-834, set out as an Effective Date note under section 951 of this title. EFFECTIVE DATE OF 1960 AMENDMENT Amendment of subsecs. (a) and (b) by section 3(a) of Pub. L. 86-780 applicable to taxable years beginning after Dec. 31, 1960, and amendment of subsec. (a) by section 3(b) of Pub. L. 86-780 applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 4 of Pub. L. 86-780, set out as an Effective Date of 1960 Amendment note under sec- tion 904 of this title. ECONOMICALLY LESS DEVELOPED COUNTRIES Designation of certain foreign countries as economi- cally less developed countries, see Ex. Ord. No. 11071, Dec. 27, 1962, 27 F.R. 12875, set out as a note under section 955 of this title. CROSS REFERENCES Credit for foreign taxes, see section 841 of this title. Disallowance of foreign tax credit, see section 942 of this title. Foreign tax credit, applicable rules, see section 905 of this title. Income from sources within possessions of the United States, foreign tax credit, see section 931 of this title. Investment companies, foreign tax credit allowed to shareholder, see section 853 of this title. Limitations, special rules relating to foreign tax credit, see section 6511 of this title. Nonresident aliens, foreign tax credit not allowed, see section 874 of this title. Partners and partnerships, taxes paid or accrued to foreign countries and possessions of the United States, see section 702 of this title. Tax on resident foreign corporations, foreign tax credit, see section 882 of this title. Taxes of foreign countries and possessions of the United States, see sections 33 and 515 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 33, 243, 275, 515, 642, 702, 703, 841, 853, 874, 882, 904 to 908, 931, 960, 1247, 1503, 6038, 6511 of this title. § 902. Credit for corporate stockholder in foreign cor- poration (a) Treatment of taxes paid by foreign corporation For purposes of this subpart, a domestic cor- poration which owns at least 10 percent of the voting stock of a foreign corporation from which it receives dividends in any taxable year shall be deemed to have paid the same propor- tion of any income, war profits, or excess prof- its taxes paid or deemed to be paid by such for- eign corporation to any foreign country or to any pos3ession of the United States, on or with respect to the accumulated profits of such for- eign corporation from which such dividends were paid, which the amount of such dividends (determined without regard to section 78) bears to the amount of such accumulated profits in excess of such income, war profits, and excess profits taxes (other than those deemed paid). (b) Foreign subsidiary of first and second foreign corporation (1) One tier If the foreign corporation described in sub- section (a) (hereinafter in this subsection re- ferred to as the "first foreign corporation") owns 10 percent or more of the voting stock of a second foreign corporation from which it receives dividends in any taxable year, it shall be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be paid by such second foreign corporation to any foreign country or to any possession of the United States, on or with respect to the accumulated profits of such second foreign corporation from which such dividends were paid, which the amount of such dividends bears to the amount of such accumulated profits in excess of such income, war profits, and excess profits taxes (other than those deemed paid). (2) Two tiers If such first foreign corporation owns 10 percent or more of the voting stock of a second foreign corporation which, in turn, owns 30 percent or more of the voting stock of a third foreign corporation from which the second foreign corporation receives dividends in any taxable year, the second foreign corpo- ration shall be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid by such third foreign corporation to any foreign country or to any possession of the United States, on or with re- spect to the accumulated profits of such third foreign corporation from which such divi- dends were paid, which the amount of such dividends bears to the amount of such accu- mulated profits in excess of such income, war profits, and excess profits taxes. (3) Voting stock requirement For purposes of this subpart- (A) paragraph (1) shall not apply unless the percentage of voting stock owned by the domestic corporation in the first foreign corporation and the percentage of voting stock owned by the first foreign corporation in the second foreign corporation when multiplied together equal at least 5 percent, and Page 57/8 § 902
TITLE 26-INTERNAL REVENUE CODE (B) paragraph (2) shall not apply unless the percentage arrived at for purposes of applying paragraph (1) when multiplied by the percentage of voting stock owned by the second foreign corporation in the third for- eign corporation is equal to at least 5 per- cent. (c) Applicable rules (1) Accumulated profits defined For purposes of this section, the term "ac- cumulated profits" means, with respect to any foreign corporation, the amount of its gains, profits, or income computed without reduction by the amount of the income, war profits, and excess profits taxes imposed on or with respect to such profits or income by any foreign country or by any possession of the United States. The Secretary shall have full power to determine from the accumulat- ed profits of what year or years such divi- dends were paid, treating dividends paid in the first 60 days of any year as having been paid from the accumulated profits of the pre- ceding year or years (unless to his satisfaction shown otherwise), and in other respects treat- ing dividends as having been paid from the most recently accumulated gains, profits, or earnings. (2) Accounting periods In the case of a foreign corporation, the income, war profits, and excess profits taxes of which are determined on the basis of an ac- counting period of less than 1 year, the word "year" as used in this subsection shall be con- strued to mean such accounting period. (d) Cross references (1) For inclusion in gross income of an amount equal to taxes deemed paid under subsection (a)(1), see section 78. (2) For application of subsections (a) and b) with re- spect to taxes deemed paid in a prior taxable year by a United States shareholder with respect to a controlled foreign corporation, see section 960. (3) For reduction of credit with respect to dividends paid out of accumulated profits for years for which cer- tain information is not furnished, see section 6038. (Aug. 16, 1954, ch. 736, 68A Stat. 286; Sept. 14, 1960, Pub. L. 86-780, § 6(b)(2), 74 Stat. 1016; Oct. 16, 1962, Pib. L, 87-834, § 9(a), 76 Stat. 999; Jan. 12, 1971, Pub. L. 91-684, §§ 1, 2, 84 Stat. 2068, 2069; Mar. 29, 1975, Pub. L. 94-12, title VI, § 602(c)(6), 89 Stat. 59; Oct. 4, 1976, Pub. L. 94- 455, title X, § 1033(a), 90 Stat. 1626.) AMENDMENTS 1976-Pub. L. 94-455, § 1033(a), struck out provisions by which dividends from less developed country corpo- rations are not grossed-up by the amount of foreign taxes paid on the underlying income and the deemed- paid foreign tax credits attributable to those dividends are reduced proportionately, struck out subsec. (d) which defined less developed country corporations, and redesignated subsec. (e) as (d). 1975-Subsec. (d). Pub. L. 94-12 substituted "para- graph (3) or (4)", "paragraph (3)", "paragraph (3)(A)", and "paragraph (3)(B)" for "section 955(c)(1) or (2)", "section 955(c)(1)", "section 955(c)(1)(A)", and "sec- tion 955(c)(1)(B)", respectively, in existing provisions and added pars. (3), (4), and (5) and provisions follow- ing par. (5). 1971-Subsec. (b). Pub. L. 91-684, § 1, in the subsec- tion catchline substituted "Foreign subsidiary of first and second foreign corporation" for "Foreign subsid- iary of foreign corporation", designated existing provi- sions as par. (1), and, as so designated, added terminol. ogy denominating corporations involved as first for- eign corporation and second foreign corporation, and reduced the ownership percentage requirement in voting stock from 50 percent to 10 percent between the first and second foreign corporations, and added pars. (2), and (3). Subsec. (c(1)(A). Pub. L. 91-684, § 2(1), substituted "(b)(1)(A), and (b)(2)(A)" for "and (b)(1)". Subsec. (c)(1)(B). Pub. L. 91-684, § 2(2), substituted "(b)(1)(B), and (b)(2)(B)" for "and (b)(2)". 1962-Subsec. (a). Pub. L. 87-834 limited provisions which required a domestic corporation owning at least 10 per cent of the voting stock of a foreign corporation from which it receives dividends in any taxable year to be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of the United States which the amount of such dividends bears to the amount of accumulated profits to those cases where a foreign corporation paid such dividends out of accumulated profits of a year for which such foreign corporation is a less developed country corporation, and inserted provisions requiring, in the case of a do- mestic corporation which owns at least 10 percent of the voting stock of a foreign corporation from which it receives dividends in a taxable year, to the extent such dividends are paid by such foreign corporation out of accumulated profits of a year for which such foreign corporation is not a less developed country corpora- tion, to be deemed to have paid the same proportion of any income, war profits, or excess profits taxes paid or deemed to be paid by such foreign corporation to any foreign country or to any possession of the United States on or with respect to such accumulated profits, which the amount of such dividends (determined with- out regard to section 78) bears to the amount of such accumulated profits in excess of such income, war profits, and excess profits taxes (other than those deemed paid). Subsec. (b). Pub. L. 87-834 substituted "from which such dividends were paid which- "(1) for purposes of applying subsection (a)(1), the amount of such dividends bears to the amount of the accumulated profits (as defined in subsection (c)(1)(A)) of such other foreign corporation from which such dividends were paid in excess of such income, war profits, and excess profits taxes, or "(2) for purposes of applying subsection (a)(2), the amount of such dividends bears to the amoulnt of the accumulated profits (as defined in subsect.on (c)(1)(B)) of such other foreign corporation from which such dividends were paid" for "from which such dividends were paid, which the amount of such dividends bears to the amount of such accumulated profits". Subsec. (c). Pub. L. 87-834 defined "accumulated profits" for purposes of subsec. (a)(1) and (b)(1) as meaning the amount of its gains, profits, or income computed without reduction by the amount of the income, war profits, and excess profits taxes imposed on or with respect to such profits or income by and foreign country or any possession of the United States, and limited the provisions defining "accumu- lated profits" as the amount of its gains, profits, or income in excess of the income, war profits, and excess profits taxes imposed on or with respect to such prof- its or income to subsecs. (a)(2) and (b)(2). Subsec. (d). Pub. L. 87-834 substituted provisions de- fining "less developed country corporation" for provi- sions which established special rules for certain wholly-owned foreign corporations. Subsec. (e). Pub. L. 87-834 designated existing provi- sions as par. (3) and added pars, (1) and (2). 1960-Subsec. (e). Pub. L. 86-780 added subsec. (e). EFFECTivE DATE OF 1976 AMENDMENT Section 1033(c) of Pub. L. 94-455 provided that: Page 579 § 902
TITLE 26-INTERNAL REVENUE CODE "The amendments made by this section [amending sections 78, 535(b)(1), 545(b)(1), 902, and 960(a)(1) of this title] shall apply- "(1) in respect of any distribution received by a do- mestic corporation after December 31, 1977, and "(2) in respect of any distribution received by a do- mestic corporation before January 1, 1978, in a tax- able year of such corporation beginning after De- cember 31, 1975, but only to the extent that such distribution is made out of the accumulated profits of a foreign corporation for a taxable year (of such foreign corporation) beginning after December 31, 1975. For purposes of paragraph (2), a distribution made by a foreign corporation out of its profits which are at- tributable to a distribution received from a foreign corporation to which section 902(b) of the Internal Revenue Code of 1954 [subsec. (b) of this section] ap- plies shall be treated as made out of the accumulated profits of a foreign corporation for a taxable year be- ginning before January 1, 1976, to the extent that such distribution was paid out of the accumulated profits of such foreign corporation for a taxable year beginning before January 1, 1976." EFFECTIVE DATE OF 1975 AMENDMENT Amendment by Pub. L. 94-12 applicable to taxable years of foreign corporations beginning after Dec. 31, 1975, and to taxable years of United States sharehold- ers (within the meaning of section 951(b) of this title) within which or with which such taxable years of such foreign corporations end, see section 602(f) of Pub. L. 94-12, set out as an Effective Date of 1975 Amendment note under section 955 of this title. EFFECTIVE DATE OF 1971 AMENDMLT Section 3 of Pub. L. 91-684 provided that: "The amendments made by this Act Eamending subsecs. (b) and (c) of this section] shall apply with respect to all taxable years of domestic corporations, ending after the date of enactment of this Act [Jan. 12, 1971], but only in respect of dividends paid by one corporation to another corporation after the date of the enactment of this Act." EFFECTIVE DATE OF 1962 AMENDMENT Section 9(e) of Pub. L. 87-834 provided that: "The amendments made by this section [adding sec- tion 78 of this title and amending sections 535, 545, 861, 901, and 902 of this title] shall apply- "(1) in respect of any distribution received by a do- mestic corporation after December 31, 1964, and "(2) In respect of any distribution received by a do- mestic corporation before January 1, 1965, in a tax- able year of such corporation beginning after De- cember 31, 1962, but only to the extent that such distribution is made out of the accumulated profits of a foreign corporation for a taxable year (of such foreign corporation) beginning after December 31, 1962. For purposes of paragraph (2), a distribution made by a foreign corporation out of its profits which are at- tributable to a distribution received from a foreign subsidiary to which section 902(b) applies shall be treated as made out of the accumulated profits of a foreign corporation for a taxable year beginning before January 1, 1963, to the extent that such distri- bution was paid out of the accumulated profits of such foreign subsidiary for a taxable year beginning before January 1, 1963." EFFECTIVE DATE OF 1960 AMENDMENT Amendment of section by Pub. L. 86-780 applicable to taxable years beginning after Dec. 31, 1960, see sec. tion 6(c) of Pub. L. 86-780), set out as an Effective Date note under section 6038 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 78, 535, 545, 819A, 901, 906, 907, 908, 954, 960, 1248, 6038 of this title. § 903, Credit for taxes in lieu of income, etc., taxes For purposes of this subpart and of sections 164(a) and 275(a), the term "income, war prof- its, and excess profits taxes" shall include a tax paid in lieu of a tax on income, war profits, or excess profits otherwise generally imposed by any foreign country or by any possession of the United States. (Aug. 16, 1954, ch. 736, 68A Stat. 287; Feb. 26, 1964, Pub. L. 88-272, title II, § 207(b)(8), 78 Stat. 42.) AMENDMENTS 1964-Pub. L. 88-272 substituted "sections 164(a) and 275(a)" for "section 164(b)". EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272 applicable to taxable years beginning after Dec. 31, 1963, see section 207(c) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 164 of this title. § 904. Limitation on credit (a) Limitation The total amount of the credit taken under section 901(a) shall not exceed the same pro- portion of the tax against which such credit is taken which the taxpayer's taxable income from sources without the United States (but not in excess of the taxpayer's entire taxable income) bears to his entire taxable income for the same taxable year. (b) Taxable income for purpose of computing limita. tion (1) Personal exemptions For purposes of subsection (a), the taxable income in the case of an individual, estate, or trust shall be computed without any deduc- tion for personal exemptions under section 151 or 642(b). (2) Capital gains For purposes of subsection (a)- (A) Corporations In the case of a corporation- (1) the taxable income of such corpora- tion from sources without the United States shall include gain from the sale or exchange of capital assets only in an amount equal to foreign source capital gain net income reduced by three-eighths of foreign source net capital gain, (i) the entire taxable income of such corporation shall include gain from the sale or exchange of capital assets only In an amount equal to capital gain net income reduced by three-eighths of net capital gain, and (fit) any net capital loss from sources without the United States to the extent taken into account in determining capital gain net income for the taxable year shall be reduced by an amount equal to three- eighths of the excess of net capital gain from sources within the United States over net capital gain. Page 580
TITLE 26-INTERNAL REVENUE CODE (B) Other taxpayers In the case of a taxpayer other than a taxpayer described in subparagraph (A), taxable income from sources without the United States shall include gain from the sale or exchange of capital assets only to the extent of foreign source capital gain net income. (3) Definitions For purposes of this subsection- (A) Foreign source capital gain net income The term "foreign source capital gain net income" means the lesser of- (I) capital gain net income from sources without the United States, or (ii) capital gain net income. (B) Foreign source net capital gain The term "foreign source net capital gain" means the lesser of- (I) net capital gain from sources without the United States, or (ii) net capital gain. (C) Exception for gain from the sale of certain personal property For purposes of this paragraph, there shall be included as gain from sources within the United States any gain from sources without the United States from the sale or exchange of a capital asset which is personal property which- (i) in the case of an individual, is sold or exchanged outside of the country (or pos- session) of the individual's residence, (ii) in the case of a corporation, is stock in a second corporation sold or exchanged other than in a country (or possession) in which such second corporation derived more than 50 percent of its gross income for the 3-year period ending with the close of such %.econd corporation's taxable year immediately preceding the year during which the sale or exchange oc- curred, or (iii) in the case of any taxpayer, is per- sonal property (other than stock In a cor- poration) sold or exchanged other than in a country (or possession) in which such property is used in a trade or business of the taxpayer or in which such taxpayer derived more than 50 percent of its gross income for the 3-year period ending with the close of its taxable year immediately preceding the year during which the sale or exchange occurred, unless such gain is subject to an income, war profits, or excess profits tax of a for- eign country or possession of the United States, and the rate of tax applicable to such gain is 10 percent or more of the gain from the sale or exchange (computed under this chapter). (D) Section 1231 gains The term "gain from the sale or exchange of capital assets" includes any gain so treat- ed under section 1231. (4) Coordination with section 936 For purposes of subsection (a), in the case of a corporation, the taxable income shall not include any portion thereof taken into ac- count for purposes of the credit (if any) al- lowed by section 936. (c) Carryback and carryover of excess tax paid Any amount by which all taxes paid or ac- crued to foreign countries or possessions of the United States for any taxable year for which the taxpayer chooses to have the benefits of this subpart exceed the limitation under sub- section (a) shall be deemed taxes paid or ac- crued to foreign countries or possessions of the United States in the second preceding taxable year, in the first preceding taxable year, and in the first, second, third, fourth, or fifth succeed- ing taxable years, in that order and to the extent not deemed taxes paid or accrued in a prior taxable year, in the amount by which the limitation under subsection (a) for such preced- ing or succeeding taxable year exceeds the sum of the taxes paid or accrued to foreign coun- tries or possessions of the United States for such preceding or succeeding taxable year and the amount of the taxes for any taxable year earlier than the current taxable year which shall be deemed to have been paid or accrued in such preceding or subsequent taxable year (whether or not the taxpayer chooses to have the benefits of this subpart with respect to such earlier taxable year). Such amount deemed paid or accrued in any year may be availed of only as a tax credit and not as a de- duction and only if the taxpayer for such year chooses to have the benefits of this subpart as to taxes paid or accrued for that year to foreign countries or possessions of the United States. (d) Application of section in case of certain interest income and dividends from a DISC or former DISC (1) In general The provisions of subsections (a), (b), and (c) shall be applied separately with respect to each of the following items of income: (A) the interest income described in para- graph (2), (B) dividends from a DISC or former DISC (as defined in section 992(a)) to the extent such dividends are treated as income from sources without the United States, and (C) income other than the interest income described in paragraph (2) and dividends de- scribed in subparagraph (B). (2) Interest income to which applicable For purposes of this subsection, the interest income described in this paragraph is interest other than interest- (A) derived from any transaction which is directly related to the active conduct by the taxpayer of a trade or business in a foreign country or a possession of the United States, (B) derived in the conduct by the taxpay- er of a banking, financing, or similar busi- ness, (C) received from a corporation In which the taxpayer (or one or more includible cor- porations in an affiliated group, as defined in section 1504, of which the taxpayer is a member) owns, directly or indirectly, at least 10 percent of the voting stock, or (D) received on obligations acquired as a result of the disposition of a trade or busl- 71-999 0 - '7 - 39 (Vol. 7) Page 581 § 904
TITLE 26-INTERNAL REVENUE CODE ness actively conducted by the taxpayer in a foreign country or possession of the United States or as a result of the disposition of stock or obligations of a corporation in which the taxpayer owned at least 10 per- cent of the voting stock. For purposes of subparagraph (C), stock owned, directly or indirectly, by or for a for- eign corporation, shall be considered as being proportionately owned by its shareholders. (e) Transitional rules for carrybacks and carryovers for taxpayers on the per-country limitation (1) Application of subsection This subsection shall apply only to a tax- payer who is on the per-country limitation for his last taxable year beginning before Janu- ary 1, 1976. (2) Carryovers to years beginning after December 31, 1975 In the case of any taxpayer to whom this subsection applies, any carryover from a tax- able year beginning before January 1, 1976, may be used in taxable years beginning after December 31, 1975, to the extent provided in subsection (c), but only to the extent such carryover could have been used in such suc- ceeding taxable years if the per-country limi- tation continued to apply to all taxable years beginning after December 31, 1975. (3) Carrybacks to years beginning before January 1, 1976 In the case of any taxpayer to whom this subsection applies, any carryback from a tax- able year beginning after December 31, 1975, may be used in taxable years beginning before January 1, 1976, to the extent provided in subsection (c), but only to the extent such carryback could have been used in such pre- ceding taxable year if the per-country limita- tion continued to apply to all taxable years beginning after December 31, 1975. (4) Application of limitations For purposes of this subsection- (A) the overall limitation shall be applied before the per-country limitation, and (B) where the amount of any carryback or carryover is reduced by the overall limita- tion, the reduction shall be allocated to the amounts carried from each country or pos- session in proportion to the taxes paid or accrued to such country or possession in the taxable year from which such amount is being carried. (f) Recapture of overall foreign loss (1) General rule For purposes of this subpart and section 936, in the case of any taxpayer who sustains an overall foreign loss for any taxabie year, that portion of the taxpayer's taxable income from sources without the United States for each succeeding taxable year which is equal to the lesser of- (A) the amount of such loss (to the extent not used under this paragraph in prior tax- able years), or (B) 50 percent (or such larger percent as the taxpayer may choose) of the taxpayer's taxable income from sources without the United States for such succeeding taxable year, shall be treated as income from sources within the United States (and not as income from sources without the United States). (2) Overall foreign loss defined For purposes of this subsection, the term "overall foreign loss" means the amount by which the gross income for the taxable year from sources without the United States (whether or not the taxpayer chooses the benefits of this subpart for such taxable year) for such year is exceeded by the sum of the deductions properly apportioned or allocated thereto, except that there shall not be taken into account- (A) any net operating loss deduction al- lowable for such year under section 172(a) or any capital loss carrybacks and car- ryovers to such year under section 1212, and (B) any- (i) foreign expropriation loss for such year, as defined in section 172(h), or (ii) loss for such year which arises from fire, storm, shipwreck, or other casualty, or from theft, to the extent such loss is not compensated for by insurance or otherwise. (3) Dispositions (A) In general For purposes of this chapter, if property which has been used predominantly with- out the United States in a trade or business is disposed of during any taxable year- (i) the taxpayer, notwithstanding any other provision of this chapter (other than paragraph (1)), shall be deemed to have received and recognized taxable income from sources without the United States in the taxable year of the disposi- tion, by reason of such disposition, in an amount equal to the lesser of the excess of the fair market value of such property over the taxpayer's adjusted basis in such property or the remaining amount of the overall foreign losses which were not used under paragraph (1) for such taxable year or any prior taxable year, and (ii) paragraph (1) shall be applied with respect to such income by substituting "100 percent" for "50 percent". In determining for purposes of this subpar- agraph whether the predominant use of any property has been without the United States, there shall be taken into account use during the 3-year period ending on the date of the disposition (or, if shorter, the period during which the property has been used in the trade or business). (B) Disposition defined and special rules (i) For purposes of this subsection, the term "disposition" includes a sale, ex- change, distribution, or gift of property whether or not gain or loss is recognized on the transfer. (ii) Any taxable income recognized solely by reason of subparagraph (A) shall have the same characterization it would have § 904 Page 582
TITLE 26-INTERNAL REVENUE CODE had if the taxpayer had sold or exchanged the property. (iii) The Secretary shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect taxable income recog- nized solely by reason of subparagraph (A). (C) Exceptions Notwithstanding subparagraph (B), the term "disposition" does not include- (I) a disposition of property which is not a material factor in the realization of income by the taxpayer, or (iD a disposition of property to a domes- tic corporation in a distribution or trans- fer described in section 381(a). (4) Determination of foreign oil related loss where section 907 applies In the case of a corporation to which sec- tion 907(b)(1) applies, the foreign oil related loss shall be the amount by which the gross income for the taxable year from sources without the United States and its possessions (whether or not the taxpayer chooses the benefits of this subpart for such taxable year) taken into account in determining the foreign oil related income for such year is exceeded by the sum of the deductions properly appor- tioned or allocated thereto, except that there shall not be taken into account- (A) any net operating loss deduction al- lowable for such year under section 172(a) or any capital loss carrybacks and car- ryovers to such year under section 1212, and (B) any- (i) foreign expropriation loss for such year, as defined in section 1721,h), or (ii) loss for such year which arises from fire, sto'nr, shipwreck, or other casualty, or from theft, to the extent such loss is not compensated for by insurance or otherwise. (g) Coordination with credit for the elderly In the case of an individual, for purposes of subsection (a) the tax against which the credit is taken is such tax reduced by the amount of the credit (if any) for the taxable year allowa- ble under section 37 (relating t credit for the elderly). (h) Cross reference For increase of limitation under subsection (a) for taxes psaid with respect to amounts received which were included in the gross income of thea taxpayer for a prior taxable year as a United States shareholder with respect to a controlled foreign corporation, see section 960(b). (Aug. 16, 1954, ch. 736, 68A Stat. 287; Sept. 2, 1958, Pub. L. 85-866, title 1. §42(a), 72 Stat. 1639; Sept. 14, 1960, Pub. L. 86-780, § 1. 74 Stat. 1010; Oct. 16, 1962, Pub. L. 87-834, §§ 10(a), 12(b)(2), 76 Stat. 1002, 1031; Feb. 26, 1964, Pub. L. 88-272, title II, § 234(b)(6), 78 Stat. 116; Nov. 13, 1966, Pub. L. 89-809, title I, § 106(c)(1), 80 Stat. 1570; Dec. 30, 1969, Pub. L. 91-172, title V, § 506(b), 83 Stat. 635; Dec. 10, 1971, Pub. L. 92- 178, title V, § 502(b)(2)-(4), 85 Stat. 549; Oct. 4, 1976, Pub. L. 94-455, title V, § 503(b)(1), title X, §§ 1031(a), 1032(a), 1034(a), 1051(e), title XIX, § 1901(b)(10)(B), 90 Stat. 1562, 1620, 1624, 1629, 1646, 1795,) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, § 1031(a), struck out provisions allowing the per-country limitation, made the overall limitation applicable to all taxpayers to determine their foreign tax credit limitation, and added reference to section 901(a). Subsec. (b). Pub. L. 94-455, §§ 1031(a), 1034(a), 1051(e), redesignated former subsec. (c) as (b)(1), added provisions that the net United States capital losses would offset net foreign capital gains and, in the case of corporations, that only ao/4e of the net foreign source gain would be included in the foreign tax credit limitation, and that the gain from the sale or ex- change of personal property outside the United States would be considered United States source income unless one of three exceptions applied, and added par. (4). Subsec. W. Pub. L. 94-455, § 1031(a), redesignated former subsec. (d) as (c). and amended the redesignat- ed subsec. (c) generally to conform to the elimination of the per-country limitation in subsec. (a), Former subsec. c) was redesignated (b)(1). Subsec. d). Pub. L. 94-455, § 1031(a), redesignated former subsec. (f)(1), (2), as (d). Former subsec. (d) was redesignated (c). Subsec. (e. Pub. L. 94-455, § 1031(a), added subsec. (e). Former subsec. (e) was eliminated in view of the amendment of subsec. (a). Subsec. f). Pub. L. 94-455, §§1031(a), 1032(a), 1901(b)(10)(B), added subsec. f), and substituted "sec- tion 172(h)" for "section 172(k)(1)" in pars. (2)(B)(I) and (4)(B)(i). Former subsec. f)(1), (2), was redesig- nated d). Former subsecs. (f)(3), (4), (5) were omitted. Subsec. (g). Pub. L. 94-455, §§1032(a), 503(b)(1), added subsec. (g). Former subsec. f), redesignated (g), further redesignated as subsec. (h). Subsec. (h). Pub. L. 94-455, § 503(b)(1), redesignated former subsec. (g) as (h). 1971-Subsec. (f). Pub. L. 92-178. § 502(b)(2), inserted "and dividends from a DISC or former DISC" follow- ing "interest income" in the heading. Subsec. (f)(1). Pub. L. 92-178, § 502(b)(2), inserted "each of the following items of income" in the intro- ductory text, added subpar. (B), and redesignated former subpar. (B) as (C), inserting therein provisions respecting dividends described in subparagraph (B). Subsec. (f)(3). Pub. L. 92-178, § 502(b)(3), provided that the limitation provided by subsec. (a)(2) shall not apply to dividends described in paragraph (1)(B) and substituted "limitation provided by subsection (a)(2) applies with respect to income described in paragraph (1)(B) and (C)" for "limitation provided by subsection (a)(2) applies with respect to income other than the interest income described in paragraph (2)". Subsec. (f)(5). Pub. L. 92-178, § 502(b)(4), added par. (5). 1969-Subsec. (b)(1). Pub. L. 91-172, § 506(b)(1), sub- stituted "(A) with the consent of the Secretary or his delegate with respect -to any taxable year or (B) for the taxpayer's first taxable year beginning after De- cember 31, 1969" for "with the consent of the Secre- tary or his delegate with respect to any taxable year". Subsec. (b)(2). Pub. L. 91-172, § 506(b)(2), substituted "Except in a case to which paragraph (1)(B) applies, if the taxpayer" for "If a taxpayer". 1966--Subsec. (f)(2). Pub. L. 89-809 inserted refer- ence to ncludible corporations in an affiliated group, as defined in section 1504, of which the taxpayer is a member and inserted reference to both direct and indi- rect ownership in subpar. (C) and added provision that, for purposes of subpar. (C), stock owned directly or indirectly by or for a foreign corporation shall be considered as being proportionately owned by its shareholders. 1964-Subsec. (g)(2). Pub. L. 88-272 substituted "sec- tion 1503(b)" for "section 1503(d)". 1962--Subsec. (f). Pub. L. 87-834, § 10(a), added subsec, f) and redesignated former subsec. (f) as (g). Subsec. (g). Pub. L. 87-834, §§ 10(a), 12(b)(2), redesig- nated former subsec. (f) as (g), designated existing provisions as par. (2), and added par. (1). § 904 Page 583
TITLE 26-INTERNAL REVENUE CODE 1960-Subsec. (a). Pub. L. 86-780, § 1(a), designated existing provisions as par. (1), added the introductory clause "In the case of any taxpayer who elects the limitation provided by this paragraph" and inserted the words "foreign", "or possession of the United States" and "or possession" therein and added par. (2). Subsec. (b). Pub. L. 86-780, § l(a), added subsec. (b), Former subsec. (b) redesignated (c). Subsec. (c). Pub. L. 86-780, § 1(b), redesignated former subsec. (b) as (c) and inserted "applicable" pre- ceding "limitation" therein, Former subsec. (c) rede- signated (d). Subsec. Cd). Pub. L. 86-780, § 1(c), redesignated former subsec. (c) as (d) and inserted "applicable" pre- ceding "limitation" in two instances therein. Subsecs. (e), (f). Pub. L. 86-780, § l(d), added subsecs. (e) and f). 1958-Subsec. (c). Pub. L. 85-866 added subsec. (c). EFFECTIVE DATE OF 1976 AMENDMENT Addition of subsec. (g) by section 503(b)(1) of Pub. L. 94-455 applicable to taxable years beginning after Dec. 31, 1975, see section 508 of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 3 of this title. Section 1031(c) of Pub. L. 94-455 provided that: "(I) In general.-Except as provided in paragraphs (2) and (3), the amendments made by this section [amending sections 243(b)(3)(B), 343, 901(a), (b), 904, 907(e)(1), (2), 960(b), 1351(d)(3), 1503(b)(1), 6038(b)(1)(A) and 6501(i) of this title] shall apply to taxable years beginning after December 31, 1975. "(2) Exception for certain mining operations.-In the case of a domestic corporation or includible corpo- ration in an affiliated group (as defined in section 1504 of the Internal Revenue Code of 1954) [section 1504 of this title]) which has as of October 1, 1975- "CA) been engaged in the active conduct of the trade or business of the extraction of minerals (of a character with respect to which a deduction for de- pletion is allowable under section 813 of such Code [section 613 of this title]) outside the United States or its possessions for less than 5 years preceding the date of enactment of this Act [Oct. 4, 1976], "(B) had deductions properly apportioned or allo- cated to its gross income from such trade or business in excess of such gross income in at least 2 taxable years, "(C) 80 percent of its gross receipts are from the sale of such minerals, and "(D) made commitments for substantial expansion of such mineral extraction activities, the amendments made by this section shall apply to taxable years beginning after December 31, 1978. In the case of losses sustained in taxable years beginning before January 1, 1979, by any corporation to which this paragraph applies, the provisions of section 904(f) of such Code [section 904(f) of this title] shall be ap- plied with respect to such losses under the principles of section 904(a)(1) or such Code as in effect before the enactment of this Act (Oct. 4, 1976]. "(3) Exception for income from possessions.-In the case of gross income from sources within a possession of the United States (and the deductions properly ap- portioned or allocated thereto), the amendments made by this section shall apply to taxable years beginning after December 31, 1978. In the case of losses sus- tained in a possession of the United States in taxable years beginning before January 1, 1979, the provisions of section 904(f) of such Code [section 904(f) of this title] shall be applied with respect to such losses under the principles of section 904(a)(1) of such Code as in effect before the enactment of this Act [Oct. 4, 1976]. "(4) Carrybacks and carryovers in the case of mining operations and income from a possession.-In the case of a taxpayer to whom paragraph (2) or (3) of this subsection applies, section 904(e) of such Code [sec- tion 904(e) of this title] shall apply except that 'Janu- ary 1, 1979' shall be substituted for 'January 1, 1976' each place it appears therein. If such a taxpayer elects the overall limitation for a taxable year beginning before January 1, 1979, such section 904(e) shall be ap- plied by substituting 'the January 1, of the last year for which such taxpayer is on the per-country limita. tion' for 'January 1, 1976' each place it appears there- in.', Section 1032(c) of Pub. L. 94-455 provided that: "() In general.-Except as provided in paragraphs (2) and (3), the amendments made by subsections Ca) and (b)(2) [adding subsec. (f) of this section and re- pealing section 907(f) of this title] shall apply to losses sustained in taxable years beginning after December 31, 1975, and the amendment made by subsection (b)(1) (amending section 907(b) of this title] shall apply to taxable years beginning after December 31, 1975. "(2) Obligations of foreign governments.-The amendments made by subsection (a) [adding subsec. (f) of this section] shall not apply to losses on the sale, exchange, or other disposition of bonds, notes, or other evidences of indebtedness issued before May 14, 1976, by a foreign government or instrumentality thereof for the acquisition of property located in that country or stock of a corporation (created or organized in or under the laws of that foreign country) or in- debtedness of such corporation. "(3) Substantial worthlessness before enactment.- The amendments made by subsection (a) shall not apply to losses incurred on the loss from stock or in- debtedness of a corporation in which the taxpayer owned at least 10 percent of the voting stock and which has sustained losses in 3 out of the last 5 tax- able years beginning before January 1, 1976, which has sustained an overall loss for those 5 years, and with respect to which the taxpayer has terminated or will terminate all operations by reason of sale, liquida- tion, or other disposition before January 1, 1977, of such corporation or its assets. "(4) Limitation based on deficit in earnings and prof- its.-If paragraph (3) would apply to a taxpayer but for the fact that the loss is sustained after December 31, 1976, and if the loss is sustained in a taxable year beginning before January 1, 1979, the amendments made by subsection Ca) shall not apply to such loss to the extent that there was on December 31, 1975, a deficit in earnings and profits in the corporation from which the loss arose." Section 1034(b) of Pub. L. 94-455 provided that: "The amendment made by this section (amending subsec. (b) of this section) shall apply to taxable years beginning after December 31, 1975, except that the provisions of section 904(b)(3)(C) shall only apply to sales or exchanges made after November 12, 1975." Addition of par. (4) to subsec. (b) by section 1051(e) of Pub. L. 94-455, applicable to taxable years begin- ning after Dec. 31, 1975, with certain exceptions, see section 1052(i) of Pub. L. 94-455, set out as an Effec- tive Date of 1976 Amendment note under section 33 of this title. Amendment of subsec. (f)(2)(B)(i), (4)(B)(i), by sec- tion 1901(b)(10) of Pub. L. 94-455 applicable with re- spect to taxable years ending after Oct. 4, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effec- tive Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1971 AMENDMENT Amendment of subsec. (f), (f)(1) and (3) and enact- ment of subsec. (f)(5) by Pub. L. 92-178 applicable with respect to taxable years ending after Dec. 31, 1971, except that a corporation may not be a DISC for any taxable year beginning before Jan. 1, 1972, see sec- tion 507 of Pub. L. 92-178, set out as an Effective Date of 1971 Amendment note under section 991 of this title. Er-rivx DATE OF 1969 A MENDMENT Amendment by Pub. L. 91-172 applicable with re- spect to taxable years beginning after Dec. 31, 1969, see section 506(c) of Pub. L. 91-172, set out as an Ef- Page 584 § 904
TITLE 26-INTERNAL REVENUE CODE fective Date of 1969 Amendment note under section 901 of this title. EFFECTIVE DATE OF 1966 AMENDMENT Section 106(c)(2) of Pub. L. 89-809 provided that: "The amendments made by paragraph (1) [amending subsec. (f)(2)) shall apply to interest received after De- cember 31, 1965, in taxable years ending after such date." EFFECTIVE DATE OF 1964 AMENDMENT Amendment by Pub. L. 88-272 applicable to taxable years beginning after Dec. 31, 1963, see section 234(c) of Pub. L. 88-272, set out as an Effective Date of 1964 Amendment note under section 1503 of this title. EFFECTIVE DATE OF 1962 AMENDMENT Section 10(b) of Pub. L. 87-834 provided that: "The amendments made by subsection (a) (redesignating subsec. (f) as (g) and adding subsec. (f)] shall apply with respect to taxable years beginning after the date of the enactment of this Act [Oct. 16, 19621, but only with respect to interest resulting from transactions consummated after April 2, 1962." EFFECTIVE DATE OF 1960 AMENDMENT Section 4 of Pub. L. 86-780 provided that: "The amendments made by the first section [amending this section], section 2 (amending section 1503(d) of this title], and subsection (a) of section 3 of this Act [amending section 901(a), (b) of this title] shall apply with respect to taxable years beginning after Decem. ber 31, 1960. The amendment made by subsection (b) of section 3 of this Act (amending section 901(a) of this title] shall apply with respect to taxable years be- ginning after December 31, 1953, and ending after August 16, 1954. The amendments made by subsection (c) of section 3 of this Act [adding section 6501(i) of this title] shall apply with respect to taxable years be. ginning after December 31, 1957." EFFECTIVE DATE OF 1958 AMENDMENT Section 42(c) of Pub. L. 85-866 provided that: "The amendments made by subsections (a) and (b) [adding subsec. (c) of this section and amending section 6611(g)(h) of this title] shall apply only with respect to taxable years beginning after December 31, 1957." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 383, 841, 901, 906, 907, 936, 960. 6038, 6501 of this title. § 905. Applicable rules (a) Year in which credit taken The credits provided in this subpart may, at the option of the taxpayer and irrespective of the method of accounting employed in keeping his books, be taken in the year in which the taxes of the foreign country or the possession of the United States accrued, subject, however, to the conditions prescribed in subsection (c). If the taxpayer elects to take such credits in the year in which the taxes of the foreign country or the possession of the United States accrued, the credits for all subsequent years shall be taken on the same basis, and no portion of any such taxes shall be allowed as a deduction in the same or any succeeding year. (b) Proof of credits The credits provided in this subpart shall be allowed only if the taxpayer establishes to the satisfaction of the Secretary- (1) the total amount of income derived from sources without the United States, deter- mined as provided in part I, (2) the amount of income derived from each country, the tax paid or accrued to which is claimed as a credit under this subpart, such amount to be determined under regulations prescribed by the Secretary, and (3) all other information necessary for the verification and computation of such credits, (c) Adjustments on payment of accrued taxes If accrued taxes when paid differ from the amounts claimed as credits by the taxpayer, or if any tax paid is refunded in whole or in part, the taxpayer shall notify the Secretary, who shall redetermine the amount of the tax for the year or years affected. The amount of tax due on such redetermination, if any, shall be paid by the taxpayer on notice and demand by the Secretary, or the amount of tax overpaid, if any, shall be credited or refunded to the tax- payer in accordance with subchapter B of chap- ter 66 (see. 6511 and following). In the case of such a tax accrued but not paid, the Secretary, as a condition precedent to the allowance of this credit, may require the taxpayer to give a bond, with sureties satisfactory to and to be ap- proved by the Secretary, in such sum as the Secretary may require, conditioned on the pay- ment by the taxpayer of any amount of tax found due on any such redetermination; and the bond herein prescribed shall contain such further conditions as the Secretary may re- quire. In such redetermination by the Secretary of the amount of tax due from the taxpayer for the year or years affected by a refund, the amount of the taxes refunded for which credit has been allowed under this section shall be re- duced by the amount of any tax described in section 901 imposed by the foreign country or possession of the United States with respect to such refund; but no credit under this subpart, and no deduction under section 164 (relating to deduction for taxes) shall be allowed for any taxable year with respect to such tax imposed on the refund. No interest shall be assessed or collected on any amount of tax due on any re- determination by the Secretary, resulting from a refund to the taxpayer, for any period before the receipt of such refund, except to the extent interest was paid by the foreign country or pos- session of the United States on such refund for such period. (Aug. 16, 1954, ch. 736, 68A Stat. 288; Sept. 2, 1958, Pub. L. 85-866, title I, § 103(b), 72 Stat. 1675; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(a)(114), 1906(b)(13)(A), 90 Stat. 1784, 1834.) AMENDMENTS 1976-Subsec. (bW. Pub. L. 94-455, §§ 1901(a)(114), 1906(b)(13)(A), struck out provision allowing credits to be taken for tax on royalties paid, accrued and derived from sources within the United Kingdom of Britain and Northern Ireland and struck out "or his delegate" following "Secretary", in two places. Subsec. (c). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" in eight places. 1958-Subsec. (b). Pub. L. 85-866 added sentence deeming recipient of a royalty or other amount for use of copyright, patent, and other like property derived from sources within United Kingdom, to have paid or accrued taxes paid or accrued to United Kingdom with respect to royalty if recipient elects to include in its gross income the amount of such United Kingdom tax. Page 585 § 905
TITLE 26-INTERNAL REVENUE CODE EFnEcTxv- DATE OF 1976 AMENDMENT Amendment of subsec. (b) by section 1901(a)(114) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFrEcTIvE DATE OF 1958 AMENDMENT Section 103(c) of Pub. L. 95-866 provided that: "The amendment made by subsection (a) of this section [to section 131(e) of Internal Revenue Code of 1939] shall apply for all taxable years beginning on or after Janu- ary 1, 1950, as to which section 131 of the Internal Revenue Code of 1939 is the applicable provision. The amendment made by subsection (b) of this section [to subsec. (b) of this section] shall apply with respect to taxable years beginning after December 31, 1953, and ending after August 16, 1954. No interest shall be al- lowed or paid on any overpayment resulting from the amendments made by subsections (a) and b) of this section." SECTION REFEREM TO IN OTHER SECTIONS This section is referred to in sections 6040. 6213, 6501. 6504 of this title. § 906. Nonresident alien individuals and foreign cor- porations (a) Allowance of credit A nonresident alien individual or a foreign corporation engaged in trade or business within the United States during the taxable year shall be allowed a credit under section 901 for the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year (or deemed, under section 902, paid or ac- crued during the taxable year) to any foreign country or possession of the United States with respect to income effectively connected with the conduct of a trade or business within the United States. (b) Special rules (1) For purposes of subsection (a) and for purposes of determining the deductions al- lowable under sections 873(a) and 882(c), In determining the amount of any tax paid or accrued to any foreign country or possession there shall not be taken into account any amount of tax to the extent the tax so paid or accrued is imposed with respect to income from sources within the United States which would not be taxed by such foreign country or possession but fojkthe fact that- (A) in the case of a nonresident alien indi- vidual, such individual is a citizen or resi- dent of such foreign country or possession, or (B) in the case of a foreign corporation, such corporation was created or organized under the law of such foreign country or possession or is domiciled for tax purposes in such country or possession. (2) For purposes of subsection (a), In apply- ing section 904 the taxpayer's taxable income shall be treated as consisting only of the tax- able income effectively connected with the taxpayer's conduct of a trade or business within the United States. (3) The credit allowed pursuant to subsec- tion (a) shall not be allowed'against any tax imposed by section 871(a) (relating to income of nonresident alien individual not connected with United States business) or 881 (relating to income of foreign corporations not con- nected with United States business). (4) For purposes of sections 902(a) and 78, a foreign corporation choosing the benefits of this subpart which receives dividends shall, with respect to such dividends, be treated as a domestic corporation. (Added Pub. L. 89-809, title I, § 106(a)(1), Nov. 13, 1966, 80 Stat. 1568.) EFFECTIVE DATE Section applicable with respect to taxable years be- ginning after Dec. 31, 1966, and, in applying section 904 of this title with respect to this section, no amount to be carried from or to any taxable year beginning before Jan. 1, 1967, and no such year to be taken into account, see section 106(a)(6) of Pub. L. 89-809, set out as an Effective Date of 1966 Amendment note under section 874 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 841, 874, 882, 901 of this title. § 907. Special rules in case of foreign oil and gas income (a) Reduction in amount allowed as foreign tax under section 901 In applying section 901, the amount of any oil and gas extraction taxes paid or accrued (or deemed to have been paid) during the taxable year with respect to foreign oil and gas extrac- tion income which would (but for this subsec- tion) be taken into account for purposes of sec- tion 901 shall be reduced by the amount (if any) by which the amount of such taxes ex- ceeds the product of- (1) the amount of the foreign oil and gas ex- traction income for the taxable year, multi- plied by (2) the percentage which is the sum of the normal tax rate and the surtax rate for the taxable year specified in section 11. (b) Application of section 904 limitation (1) Corporations In the case of a corporation, the provisions of section 904 shall be applied separately with respect to- (A) foreign oil related income, and (B) other taxable income. (2) Other taxpayers In the case of a taxpayer other than a cor- poration, the provisons of subsection (a) shall not apply and the provisions of section 904 shall be applied separately with respect to- (A) foreign oil and gas extraction income, and (B) other taxable income (including other foreign oil related income). (c) Foreign income definitions and special rules For purposes of this section- (1) Foreign oil and gas extraction income The term "foreign oil and gas extraction income" means the taxable income derived from sources without the United States and its possessions from- (A) the extraction (by the taxpayer or any other person) of minerals from oil or gas wells, or § 906 Page 586
TITLE 26-INTERNAL REVENUE CODE (B) the sale or exchange of assets used by the taxpayer in the trade or business de- scribed in subparagraph (A). (2) Foreign oil related Income The term "foreign oil related income" means the taxable income derived from sources outside the United States and its pos- sessions from- (A) the extraction (by the taxpayer or any other person) of minerals from oil or gas wells, (B) the processing of such minerals into their primary products, (C) the transportation of such minerals or primary products, (D) the distribution or sale of such miner- als or primary products, or (E) the sale or exchange of assets used by the taxpayer in the trade or business de- scribed in subparagraph (A), (B), (C), or (D). (3) Dividends, interest, partnership distribution, etc. The term "foreign oil and gas extraction income" and the term "foreign oil related income" Include- (A) dividends and interest from a foreign corporation in respect of which taxes are deemed paid by the taxpayer under section 902, (B) dividends from a domestic corporation which are treated under section 861(a)(2)(A) as income from sources with- out the United States, (C) amounts with respect to which taxes are deemed paid under section 960(a), and (D) the taxpayer's distributive share of the income of partnerships. I to the extent such dividends, interest, amounts, or distributive share is attributable to foreign oil and gas extraction income, or to foreign oil related income, as the case may be; except that interest described in subpara- graph (A) and dividends described in subpara- graph (B) shall not be taken into account in computing foreign oil and gas extraction income but shall be taken into account in computing foreign oil-related income. (4) Certain losses If for any foreign country for any taxable year the taxpayer would have a net operating loss if only items from sources within such country (including deductions properly appor- tioned or allocated thereto) which relate to the extraction of minerals from oil or gas wells were taken into account, such items- (A) shall not be taken into account in computing foreign oil and gas extraction income for such year, but (B) shall be taken into account in comput- ing foreign oil related income for such year. (5) Oil and gas extraction taxes The term "oil and gas extraction taxes" means any income, war profits, and excess profits tax paid or accrued (or deemed to have been paid under section 902 or 960) during the taxable year with respect to for- eign oil and gas extraction income (deter- mined without regard to paragraph (4)) or 'So in original, the period should probably be a comna. loss which would be taken into account for purposes of section 901 without regard to this section. (d) Disregard of certain posted prices, etc. For purposes of this chapter, in determining the amount of taxable income in the case of foreign oil and gas extraction income, if the oil or gas is disposed of, or is acquired other than from the govenrment of a foreign country, at a posted price (or other pricing arrangement) which differs from the fair market value for such oil or gas, such fair market value shall be used in lieu of such posted price (or other pric- ing arrangement). (e) Transitional rules (1) Taxable years ending after December 31, 1974 In applying subsections (d) and (e) of sec- tion 904 (as in effect on the day before the date of the enactment of the Tax Reform Act of 1976) for purposes of determining the amount which may be carried over from a taxable year ending before January 1, 1975, to any taxable year ending after December 31, 1974- (A) subsection (a) of this section shall be deemed to have been in effect for such prior taxable year and for all taxable years there- Pfter, and (B) the carryover from such prior year shall be divided (effective as of the first day of the first taxable year ending after De- cember 31, 1974) into- (i) a foreign oil related carryover, and (it) another carryover, on the basis of the proportionate share of the foreign oil related income, or the other taxable income, as the case may be, of the total taxable income taken into account in computing the amount of such carryover. (2) Taxable years ending after December 31, 1975 In applying subsections (d) and (e) of sec- tion 904 (as in effect on the day before the date of the enactment of the Tax Reform Act of 1976) for purposes of determining the amount which may be carried over from a taxable year ending before January 1, 1976, to any taxable year ending after December 31, 1975, if the per-country limitation pro- vided by section 904(a)(1) (as so in effect) ap- plied to such prior taxable year and to the taxpayer's last taxable year ending before January 1, 1976. then in the case of any for- eign oil related carryover- (A) the first sentence of section 904(e)(2) (as so in effect) shall not apply, but (B) such amount may not exceed the amount which could have been used in such succeeding taxable year if the per-country limitation continued to apply. (f) Carryback and carryover of disallowed credits (1) In general If the amount of the oil and gas extraction taxes paid or accrued during any taxable year exceeds the limitation provided by subsection (a) for such taxable year (hereinafter In this subsection referred to as the "unused credit year"), so much of such excess as does not exceed 2 percent of foreign oil and gas extrac- tion income for such taxable year shall be Page 587 § 907
TITLE 26-INTERNAL REVENUE CODE deemed to be oil and gas extraction taxes paid or accrued in the second preceding taxable year, in the first preceding taxable year, and in the first, second, third, fourth, or fifth suc- ceeding taxable year, in that order and to the extent not deemed tax paid or accrued in a prior taxable year by reason of the limitation imposed by paragraph (2). Such amount deemed paid or accrued In any taxable year may be availed of only as a tax credit and not as a deduction and only if the taxpayer for such year chooses to have the benefits of this subpart as to taxes paid or accrued for that year to foreign countries or possessions. For purposes of this subsection, the terms "second preceding taxable year", and "first preceding taxable year" do not include any taxable year ending before January 1, 1975. For purposes of determining the amount of such taxes which may be deemed paid or ac- crued in any taxable year ending in 1975, 1976, or 1977, the first sentence of this para- graph shall be applied by substituting "such excess" for "so much of such excess as does not exceed 2 percent of the foreign oil and gas extraction income for such taxable year",. (2) Limitation The amount of the unused oil and gas ex- traction taxes which under paragraph (1) may be deemed paid or accrued in any preced- ing or succeeding taxable year shall not exceed the lesser of- (A) the amount by which the limitation provided by subsection (a) for such taxable year exceeds the sum of- (i) the oil and gas extraction taxes paid or accrued during such taxable year, plus (I) the amounts of the oil and kas ex- traction taxes which by reason of this subsection are deemed paid or accrued in such taxable year and are attributable to taxable years preceding the unused credit car; or (B) the amount by which the limitation provided by section 904 on taxes paid or ac- crued with respect to foreign oil-related income for such taxable year exceeds the sum of- (i) the taxes paid or accrued (or deemed to have been paid under section 902 or 960) to all foreign countries and posses- sions of the United States with respect to such income during such taxable year, (Hi) the amount of such taxes which were deemed paid or accrued in such tax- able year under section 904(c) and which are attributable to taxable years preced- ing the unused credit year, plus (iii) the amount of the oil and gas ex- traction taxes which by reason of this subsection are deemed paid or accrued in such taxable year and are attributable to taxable years preceding the unused credit year. (3) Special rules (A) In the case of any taxable year which is an unused credit year under this subsection and which is an unused credit year under sec- tion 904(c) with respect to oil-related income, the provisions of this subsection shall be ap- plied before section 904(c). (B) For purposes of determining the amount of oil-related taxes paid or accrued in any taxable year which may be deemed paid or accrued in a preceding or succeeding tax- able year under section 904(c), any tax deemed paid or accrued in such preceding or succeeding taxable year under this subsection shall be considered to be tax paid or accrued in such preceding or succeeding taxable year. (C) For purposes of determining the amount of the unused oil and gas extraction taxes which under paragraph (1) may be deemed paid or accrued In any taxable year ending before January 1, 1977, subparagraph (A) of paragraph (2) shall be applied as if the amendment made by section 1035(a) of the Tax Reform Act of 1976 applied to such tax- able year. (g) Western Hemisphere trade corporations which are members of an affiliated group If a Western Hemisphere trade corporation is a member of an affiliated group for the taxable year, then in applying section 901, the amount of any income, war profits, and excess profits taxes paid or accrued (or deemed to have been paid) during the taxable year with respect to foreign oil and gas extraction income which would (but for this section and section 1503(b)) be taken into account for purposes of section 901 shall be reduced by the greater of- (1) the reduction with respect to such taxes provided by subsection (a) of this section, or (2) the reduction determined under section 1503(b) by applying section 1503(b) separately with respect to such taxes, but not by both such reductions. (Added Pub. L. 94-12, title VI, § 601(a), Mar. 29, 1975, 89 Stat. 54, and amended Pub. L. 94-455, title X, §§ 1031(b)(6), 1032(b), 1035(a)-(d)(1), (2), Oct. 4, 1976, 90 Stat. 1623, 1626, 1630-1632.) REPEAL OF SUBSECTION (g) Pub. L. 94-455, title X, § 1052(c)(4), Oct. 4, 1976, 90 Stat. 1648, repealed subsec. (g) of this section, effective with respect to taxable years beginning after Dec. 31, 1979. REFERENCEs IN TEXT The Tax Reform Act of 1976, referred to in subsecs. (e)(1), (2), (f)(3)(C), is Pub. L. 94-455, Oct. 4, 1976, 90 Stat. 1520. which was enacted Oct. 4, 1976. Section 1035(a) of the Tax Reform Act of 1976 amended subsec. (a) of this section. For complete classification of this Act to the Code, see Tables volume. AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, § 1035(a), substitut- ed "oil and gas extraction taxes" for "income, war profits, and excess profits taxes" following "the amount of any" and, in par. (2). substituted "the per- centage which is the sum of the normal tax rate and the surtax rate for the taxable year specified in sec- tion 11" for provisions giving the percentage multipli- er for years ending 1975, 1976, and after 1976. Subsec. (b). Pub. L. 94-455, §§ 1032(b)(1), 1035(b), added provisions making a distinction between corpo- rations and other taxpayers and rules applicable to each and, as amended, struck out provision requiring the overall limitation, rather than the per-country limitation, be applied in the case of a corporation to foreign oil-related income and, a taxpayer other than a corporation, to foreign oil and gas extraction income. Subsec. (c)(5). Pub. L. 94-455, § 1035(d)(2), added par. (5). Page 588
TITLE 26-INTERNAL REVENUE CODE Subsec. (e)(1). Pub. L. 94-455, § 1031(b)(6)(A), substi- tuted "d) and (e) of section 904 (as in effect on the day before the date of enactment of the Tax Reform Act of 1976)" for "(d) and (e) of section 904" following "In applying subsections". Subsec. (e)(2). Pub. L. 94-455, § 1031(b)(6), substitut- ed "(d) and (e) of section 904 (as in effect on the day before the date of enactment of the Tax Reform Act of 1976)" for "(d) and (e) of section 904" following "In applying subsections", "section 904(a)(1) (as so in effect)" for "section 904(a)(1)" following "provided by section" and, in subpar. (A), "section 904(e)(2) (as so in effect)" for "section 904(e)(2)" following "sentence of section". Subsec. f). Pub. L. 94-455, §§ 1032(b)(2), 1035(d)(1). added subsec. f). Former subsec. (f) relating to recap- ture of foreign oil related loss was stricken. Subsec. (g). Pub. L. 94-455, §§ 1032(b)(2). 1035(d)(1), 1052(c)(4), struck out subsec. (g) relating to Western Hemisphere trade corporations which are members of an affiliated group. EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (e) by section 1031(b)(6)(A) of Pub. L. 94-455 applicable to taxable years beginning after Dec. 31. 1975, with exceptions for certain mining operations, income from possessions, and carryback and carryover In the case of mining operations and income from a possession, see section 1031(c) of Pub. L. 94-455, set out as an Effective Date of 1976 Amend- ment note under section 904 of this title. Amendment of subsec. Cb) by section 1032(b)(1) of Pub. L. 94-455 applicable to taxable years beginning after Dec. 31, 1975, and amendment of subsecs. (f) and (g) by section 1032(b)(2) of Pub. L. 94-455 applicable to losses sustained in taxable years beginning after Dec. 31, 1975, see section 1032(c) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 904 of this title. Section 1035(e) of Pub. L. 94-455 provided that: "CM) The amendment made by subsection (a) [amending subsee. (a) of this section] shall apply to taxable years ending after December 31, 1976. "(2) The amendment made by subsection Cb) [amending subsec. (b) of this section] shall apply to taxable years ending after December 31, 1974; except that the last sentence of section 907(b) of the Internal Revenue Code of 1954 [subsec. (b) of this section] shall only apply to taxable years ending after Decem- ber 31, 1975. "(3) The amendment made by subsection Cc) [enact- Ing note set out under this section] shall apply to tax- able years beginning after June 29, 1976. "(4) The amendments made by subsection Cd) [adding subsecs. (c)(5) and Cf) of this section] shall apply to taxes paid or accrued during taxable years ending after the date of the enactment of this Act [Oct. 4, 1976]." EFFECTIVE DATE Section 601(d) of Pub. L. 94-12 provided that: "The amendments made by this section shall apply to taxable years ending after December 31, 1974; except that- "(1) the second sentence of section 907(b) [subsec. (b) of this section] shall apply to taxable years ending after December 31, 1975, and "(2) the provisions of section 907(f) (subsec. f) of this section] shall apply to losses sustained in tax- able years ending after December 31, 1975." TAx CREDIT FOR PRODUCTION-SHARING CONTRACTS Section 1035(c) of Pub. L. 94-455 provided that: "(1) For purposes of section 901 of the Internal Rev- enue Code of 1954 [section 901 of this title], there shall be treated as income, war profits, and excess profits taxes to be taken into account under section 907(a) of such Code Esubsec. (a) of this section] amounts designated as income taxes of a foreign gov- ernment by such government (which otherwise would not be treated as taxes for purposes of section 901 of such Code) with respect to production-sharing con. tracts for the extraction of foreign oil or gas. "(2) The amounts specified in paragraph (1) shall not exceed the lesser of- "(A) the product of the foreign oil and gas extrac- tion income with respect to all such production-shar- ing contracts multiplied by the sum of the normal tax rate and the surtax rate for the taxable year specified in section 11 of such Code [section 11 of this title], or "(B) the excess of the total amount of foreign oil and gas extraction income (as defined in section 907(c)(1) of such Code [section 907(c)(1) of this title]) for the taxable year multiplied by the sum of the normal tax rate and the surtax rate for the tax- able year specified in section 11 of such Code over the amount of any income, war profits, and excess profits taxes paid or accrued (or deemed to have been paid) without regard to paragraph (1) during the taxable year with respect to foreign oil and gas extraction income. "(3) The production-sharing contracts taken into ac- count for purposes of paragraph (1) shall be those contracts which were entered into before April 8, 1976, for the sharing of foreign oil and gas production with a foreign government (or an entity owned by such gov- ernment) with respect to which amounts claimed as taxes paid or accrued to such foreign government for taxable years beginning before June 30, 1976, will not be disallowed as taxes. No such contract shall be taken into account for any taxable year ending after Decem- ber 31, 1977." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 904, 6501 of this title. § 908. Reduction of credit for participation in or co- operation with an international boycott (a) In general If a person, or a member of a controlled group (within the meaning of section 993(a)(3)) which includes such person, participates in or cooperates with an international boycott during the taxable year (within the meaning of section 999(b)), the amount of the credit allowable under section 901 to such person, or under sec- tion 902 or 960 to United States shareholders of such person, for foreign taxes paid during the taxable year shall be reduced by an amount equal to the product of- (1) the amount of the credit which, but for this section, would be allowed under section 901 for the taxable year, multiplied by (2) the international boycott factor (deter- mined under section 999). (b) Application with sections 275(a)(4) and 78 Section 275(a)(4) and section 78 shall not apply to any amount of taxes denied credit under subsection (a). (Added Pub. L. 94-455, title X, § 1061(a), Oct. 4, 1976, 90 Stat. 1649.) EFFECTIVE DATE Section 1066(a) of Pub. L. 94-455 provided that: "l() General rule.-The amendments made by this part (other than by section 1065) [enacting this sec- tion and section 999 of this title and amending sec- tions 952(a)(1) to (3) and 995()(1)(D) of this title] apply to participation in or cooperation with an inter- national boycott more than 30 days after the date of enactment of this Act [Oct. 4, 1976]. "(2) Existing contracts.-In the case of operations which constitute participation in or cooperation with an international boycott and which are carried out in accordance with the terms of a binding contract en- Page 589
TITLE 26-INTERNAL REVENUE CODE tered into before September 2, 1976, the amendments made by this part (other than by section 1065) apply to such participation or cooperation after December 31, 1977." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 999 of this title. SUBPART B-EARNED INCOME OF CITIZENS OF UNITED STATES See. 911. Earned income from sources without the United States. 912. Exemption for certain allowances. §911. Earned income from sources without the United States (a) General rule The following items shall not be included in gross income and shall be exempt from tax- ation under this subtitle: (1) Bona fide resident of foreign country In the case of an individual citizen of the United States who establishes to the satisfac- tion of the Secretary that he has been a bona fide resident of a foreign country or countries for an uninterrupted period which includes an entire taxable year, amounts received from sources without the United States (except amounts paid by the United States or any agency thereof) which constitute earned income attributable to services performed during such uninterrupted period. The amount excluded under this paragraph for any taxable year shall be computed by apply- ing the special rules contained in subsection (c). (2) Presence in foreign country for 17 months In the case of an individual citizen of the United States who during any period of 18 consecutive months is present in a foreign country or countries during at least 510 full days in such period, amounts received from sources without the United States (except amounts paid by the United States or any agency thereof) which constitute earned income attributable to services performed during such 18-month period. The amount ex- cluded under this paragraph for any taxable year shall be computed by applying the spe- cial rules contained in subsection (c). An individual shall not be allowed as a deduc- tion from his gross income any deductions (other than those allowed by section 151, relat- ing to personal exemptions), or as a credit against the tax imposed by this chapter any credit for the amount of taxes paid or accrued to a foreign country or possession of the United States, to the extent that such deductions or credit is properly allocable to or chargeable against amounts excluded from gross income under this subsection. (b) Definition of earned income For purposes of this section, the term "earned income" means wages, salaries, or pro- fessional fees, and other amounts received as compensation for personal services actually rendered, but does not include that part of the compensation derived by the taxpayer for per- sonal services rendered by him to a corporation which represents a distribution of earnings or profits rather than a reasonable allowance as compensation for the personal services actually rendered. In the case of a taxpayer engaged In a trade or business in which both personal ser. vices and capital are material income-producing factors, under regulations prescribed by the Secretary, a reasonable allowance as compensa- tion for the personal services rendered by the taxpayer, not in excess of 30 percent of his share of the net profits of such trade or busi- ness, shall be considered as earned income. (c) Special rules For purposes of computing the amount ex- cludable under subsection (a), the following rules shall apply: (1) Limitations on amount of exclusion (A) In general Except as provided in subparagraphs (B) and (C), the amount excluded from the gross income of an individual under subsec- tion (a) for any taxable year shall not exceed an amount which shall be computed on a daily basis at an annual rate of $15,000. (B) Employees of charitable organizations If any individual performs qualified chari- table services during any taxable year, the amount of the earned income attributable to such services excluded from the gross income of the individual under subsection (a) for the taxable year shall not exceed an amount which shall be computed on a daily basis at an annual rate of $20,000. (C) Special rule If any individual performs qualified chari- table services and other services during any taxable year, the amount of the earned income attributable to such other services excluded from the gross income of the indi- vidual under subsection (a) for the taxable year shall not (after the application of sub- paragraph (A) with respect to such earned income) exceed $15,000 reduced by the amount of the earned income attributable to qualified charitable services excluded from gross income under subsection (a) for the taxable year. (D) Qualified charitable services For purposes of this subsectior, the term "qualified charitable services" means ser- vices performed by an employee for an em- ployer created or organized in the United States, or under the law of the United States, any State, or the District of Colum- bia, which meets the requirements of sec- tion 501(c)(3). (2) Attribution to year in which services are per. formed For purposes of applying paragraph (1), amounts received shall be considered received in the taxable year in which the services to which the amounts are attributable are per- formed. (3) Treatment of community income In applying paragraph (1) with respect to amounts received for services performed by a husband or wife which are community income under community property laws applicable to such income, the aggregate amount exclud- able under subsection (a) from the gross Page 590
TITLE 26-INTERNAL REVENUE CODE income of such husband and wife shall equal the amount which would be excludable if such amounts did not constitute such commu- nity income. (4) Requirement as to time of receipt No amount received after the close of the taxable year following the taxable year in which the services to which the amounts are attributable are performed may be excluded under subsection (a). (5) Certain amounts not excludable No amount- (A) received as a pension or annuity, or (B) included in gross income by reason of section 402(b) (relating to taxability of beneficiary of non-exempt trust), section 403(c) (relating to taxability of beneficiary under a non-qualified annuity), or section 403(d) (relating to taxability of beneficiary under certain forfeitable contracts pur- chased by exempt organizations), may be excluded under subsection (a). (6) Test of bona fide residence A statement by an individual who has earned income from sources within a foreign country to the authorities of that country that he is not a resident of that country, if he is held not subject as a resident of that coun- try to the income tax of that country by its authorities with respect to such earnings, shall be conclusive evidence with respect to such earnings that he is not a bona fide resi- dent of that country for purposes of subsec- tion (a)(1). [(7) Repealed. Pub. L. 94-455, title XIX, § 1901(a)(115), Oct. 4, 1976, 90 Stat. 1784] (8) Requirement as to place of receipt No amount received by an individual during the taxable year which constitutes earned income (entitled to the exclusion under sub- section (a)) attributable to services performed in a foreign country or countries shall be ex- cluded under subsection (a) if such amount is received by such individual outside of the for- eign country or countries where such services were performed and if one of the purposes is the avoidance of any tax imposed by such for- eign country or countries on such amount. (d) Amount excluded under subsection (a) included in computation of tax (1) Computation of tax If for any taxable year an individual has earned income which is excluded from gross income under subsection (a), the tax imposed by section 1 or section 1201 shall be the excess of- (A) the tax imposed by section 1 or sec- tion 1201 (whichever is applicable) on the amount of net taxable income, over (B) the tax imposed by section 1 or sec- tion 1201 (whichever is applicable) on the amount of net excluded earned income. (2) Definitions For purposes of this subsection- (A) the term "net taxable income" means an amount equal to the sum of the amount of taxable income for the taxable year plus the amount of net excluded earned income of such individual for such taxable year; and (B) the term "net excluded earned income" means the excess of the amount of earned income excluded under subsection (a) for the taxable year over the amount of the deductions disallowed with respect to such excluded earned income for such tax- able year under subsection (a). (e) Section not to apply (1) In general An individual entitled to the benefits of this section for a taxable year may elect, in such manner and at such time as shall be pre- scribed by the Secretary, not to have the pro- visions of this section apply. (2) Effect of election An election under paragraph (1) shall apply to the taxable year for which made and to all subsequent taxable years. Such election may not be revoked except with the consent of the Secretary. (f) Cross reference (1) For administrative and penal provisions relating to the exclusion provided for in this section, see sections 6001, 6011, 6012(c), and the other provisions of subtitle F. (2) For elections as to treatment of income subject to foreign community property laws, see section 981. (Aug. 16, 1954, ch. 736, 68A Stat. 289; Sept. 2, 1958, Pub. L. 85-866, title I, §72(b), 72 Stat. 1660; Oct. 16, 1962, Pub. L. 87-834, § 11(a), 76 Stat. 1003; Feb. 26, 1964, Pub. L. 88-272, title II, § 237(a), 78 Stat. 128; Nov. 13, 1966, Pub. L. 89- 809; title I, § 105(e)(3), 80 Stat. 1567; Oct. 4, 1976, Pub. L. 94-455, title X, § 1011(a), (b), title XIX, §§ 1901(a)(115), 1906(b)(13)(A), 90 Stat. 1610, 1784, 1834.) REmEN cEs iN TExT Section 981 of this title, referred to in subsec. (f)(2), was repealed by section 1012(b)(2) of Pub. L. 94-455, Oct. 4, 1976, 90 Stat. 614. AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, §§ 1011(b)(l), 1906(b)(13)(A), struck out "or his delegate" following "Secretary" in par. (1), and in provisions following par, (2), added "or as a credit against the tax imposed by this chapter any credit for the amount of taxes paid or accrued to a foreign country or possession of the United States, to the extent that such deductions or credit is" following "personal exemptions)". Subsec. (b). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c)(1). Pub. L. 94-455, § 1011(a), reduced the amount excludable from individual's gross income from $20,000 to $15,000 and $20,000 for employees of charitable organizations, added special rule to be ap- plied to income from charitable sources and other sources combined, added definition of "qualified chari- table services" and, struck out provisions relating to $25,000 exclusion for individual who has been a bona fide resident in a foreign country for an uninterrupted period of 3 years. Subsec. (c)(7). Pub. L. 94-455, § 1901(a)(115), struck out par. (7) relating to certain noncash remuneration from sources outside the United States. Subsec. (c)(8). Pub. L. 94-455, § 1011(b)(2), added par. (8). Subsec. (d). Pub. L. 94-455, § 1011(b)(3), added subsec. (d). Former subsec. (d) redesignated subsec. (fM. Subsec. e). Pub. L. 94-455, § 1011(b)(3), added subsec. (e). Subsec. (f). Pub. L. 94-455, § 1011(b)(3), redesignated former subsec. (d) as (f). Page 591 § 911
TITLE 26-INTERNAL REVENUE CODE 1966-Subsec. (d). Pub. L. 89-809 designated existing par. as par. (1) and added par. (2). 1964-Subsec. (c)(1)(B). Pub. L. 88-272 substituted "$25,000" for "$35.000". 1962-Subsec. (a). Pub. L. 87-834 substituted "which constitute earned income attributable to services per- formed during such uninterrupted period" for "if such amounts constitute earned income (as defined in sub. section (b)) attributable to such period" in par. (1), and "which constitute earned income attributable to services performed during such 18-month period" for "if such amounts constitute earned income (as defined in subsection (b)) attributable to such period" in par. (2), inserted provisions in pars. (1) and (2) requiring the amount excluded under such paragraphs to be computed by applying the special rules contained in subsec. (c), and eliminated provisions from par. (2) which limited the amount excluded under such para- graph to not more than $20,000 if the 18-month period includes the entire taxable year, and to not more than an amount which bears the same ratio to $20,000 as the number of days in the part of the taxable year within the 18-month period bears to the total number of days in such year if the 18-month period does not include the entire taxable year. Subsec. (c). Pub. L. 87-834 added subsec. Cc) and re- designated former subsec. (c) as Cd). Subsec (d). Pub. L. 87-834 redesignated former subsec. (c) as (d). 1958-Subsec. (c). Pub. L. 85-866 added subsec. (c). EFFECTIVE DATE O 1976 AMENDMENT Section 1011(d) of Pub. L. 94-455 provided that: "The amendments made by this section [amending subsecs. (a), (c)(1), (8), (d) to (f) of this section and sec- tion 36 of this title] shall apply to taxable years begin- ning after December 31, 1975." Amendment of subsec. (c)(7) by section 1901(a)(115) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFcETIVE DATE OF 1964 AMENDMENT Section 237(b) of Pub. L. 88-272 provided that: "The amendment made by subsection (a) [to this section] shall apply to taxable years beginning after December 31, 1964." EFFECTIVE DATE OF 1962 AMENDMENT Section 11(c)(1) of Pub. L. 87-834 provided that: "The amendment made by subsection (a) [to this section] shall apply to taxable years ending after Sep- tember 4, 1962, but only with respect to amounts- "(A) received after March J2, 1962, which are at- tributable to services performLd after December 31, 1962, or "(B) received after December 31, 1962, which are attributable to services performed on or before De- cember 31, 1962, unless on March 12, 1962, there ex- isted a right (whether forfeitable or nonforfeitable) to receive such amounts." EFFECTIVE DATE OF 1958 AMENDMENT Amendment by Pub. L. 85-866, which added subsec. (c), applicable to taxable years beginning after Dec. 31, 1957, see section 72(c) of Pub. L. 85-866 set out as an Effective Date of 1958 Amendment note under sec. tion 6012 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 37, 43, 72, 141, 220, 403, 410, 415. 1302, 1303, 1304, 1348, 1402, 3401, 6012, 6091 of this title; title 29 section 1322: title 42 section 411. § 912. Exemption for certain allowances The following Items shall not be included in gross income, and shall be exempt from tax- ation under this subtitle: (1) Foreign areas allowances In the case of civilian officers and employ- ees of the Government of the United States, amounts received as allowances or otherwise (but not amounts received as post differen- tials) under- (A) title IX of the Foreign Service Act of 1946, as amended (22 U.S.C., sec. 1131 and following), (B) section 4 of the Central Intelligence Agency Act of 1949, as amended (50 U.S.C., sec. 403e), (C) title II of the Overseas Differentials and Allowances Act, or (D) subsection (e) or f) of the first sec- tion of the Administrative Expenses Act of 1946, as amended, or section 22 of such Act. (2) Cost-of-living allowances In the case of civilian officers or employees of the Govenmnent of the United States sta- tioned outside the continental United States (other than Alaska), amounts (other than amounts received under title II of the Over- seas Differentials and Allowances Act) re- ceived as cost-of-living allowances in accor- dance with regulations approved by the Presi- dent, (3) Peace Corps allowances In the case of an individual who is a volun- teer or volunteer leader within the meaning of the Peace Corps Act and members of his family, amounts received as allowances under section 5 or 6 of the Peace Corps Act other than amounts received as- (A) termination payments under section 5(c) or section 6(1) of such Act, (B) leave allowances, (C) if such individual is a volunteer leader training in t:he United States, allowances to members of his family, and (D) such portion of living allowances as the President may determine under the Peace Corps Act as constituting basic com- pensation. (Aug. 16, 1954, ch. 736, 68A Stat. 290; Sept. 6, 1960, Pub. L. 86-707, title V, § 523(a), 74 Stat. 802; Sept. 22, 1961, Pub. L. 87-293, title II, § 201(a), 75 Stat. 625.) REFERENCES IN TEXT The Foreign Service Act of 1946, as amended, re- ferred to in par. (1)(A), is act Aug. 13, 1946, ch. 957, titles I to X, 60 Stat. 999, which is classified principal- ly to chapter 14 C! 801 et seq.) of Title 22, Foreign Re- lations and Intercourse. Title IX of the Foreign Ser- vice Act of 1946 is classified generally to subehapter IX (§ 1131 et seq.) of chapter 14 of Title 22. For com- plete classification of this Act to the Code, see Short Title note set out under section 801 of Title 22 and Tables volume. Title II of the Overseas Differentials and Allowances Act, referred to in pars. (1)(C) and (2), was title II of Pub. L. 86-707. Sept. 6, 1960, 74 Stat. 793, which was repealed and reenacted as sections 5922 to 5925 of Title 5, Government Organization and Employees, by Pub. L. 89-554, Sept. 6, 1966, 80 Stat. 378. Sections l(e) and (f) and 22 of the Administrative Expenses Act of 1946, referred to in par. (1)(D). were § 912 Page 592
TITLE 26-INTERNAL REVENUE CODE repealed and the provisions thereof reenacted as sec- tions 5726(b), 5727(b) to (e), and 5913 of Title 5, Gov- ernment Organization and Employees, by Pub, L. 89- 554, Sept. 6, 1966, 80 Stat. 378. The Peace Corps Act, referred to in par. (3), is Pub. L. 87-293, Sept. 22, 1961, 75 Stat. 612, which is classi- fied principally to chapter 34 (§ 2501 et seq.) of Title 22, Foreign Relations and Intercourse. Sections 5 and 6 of that act are classified to sections 2504 and 2505 of Title 22. For complete classification of this act to the Code, see Short Title note set out under section 2501 of Title 22 and Tables volume. AMENDMENTS 1961-Par. (3). Pub. L. 87-293 added par. (3). 1960-Pub. L. 86-707 exempted foreign areas allowances received under section 4 of the Central In- telligence Agency Act of 1949, title II of the Overseas Differentials and Allowances Act, subsection (e) or (f) of the first section of the Administrative Expenses Act of 1946, or section 22 of such Act, provided that amounts received as post differentials shall not be exempt and in the provisions relating to cost-of-living allowances excluded Alaska from the term "continen- tal United States" and amounts received under title II of the Overseas Differentials and Allowances Act. EFFECTIVE DATE OF 1961 AMENDMENTS Section 201(d) of Pub. L. 87-293 provided that: "The amendments made by subsections (a) and (b) of this section (to this section and section 1303 of this title] shall apply with respect to taxable years ending after March 1, 1961. The amendment made by subsection (c) (to section 3401 of this title] .hall apply with respect to remuneration paid after the date of the enactment of this Act [Sept. 22, 1961)." Section 201(d) of Pub. L. 87-293 repealed by Pub. L. 89-572, § 5(a), Sept. 13, 1966, 80 Stat. 765. Such repeal not deemed to affect amendments contained in such provisions, see sections 5(b) of Pub. L. 89-572, set out as a note under former section 2515 of Title 22, For- eign Relations and Intercourse. EFFECTIVE DATE OF 1960 AMENDMENT Section 523(b) of Pub. L. 86-707 provided that: "Paragraphs (1) and (2) of section 912 of the Internal Revenue Code of 1954, as amended by subsection (a) of this section [pars. (1) and (2) of this section], shall apply only with respect to amounts received on or after the date of the enactment of this Act [Sept. 6, 1960] in taxable years ending on or after such date." REPEALS; AMENDMENTS AND APPLICATION OF AMENDMENTS UNAFFECTED Section 201(a) of Pub. L. 87-293 repealed by Pub. L. 89-572, § 5(a), Sept. 13, 1966, 80 Stat. 765. Such repeal not deemed to affect amendments to this section con- tained in such provisions, and continuation in full force and effect until modified by appropriate author- ity of all determinations, authorization, regulations, orders, contracts, agreements, and other actions issued undertaken, or entered into under authority of the re- pealed provisions, see section 5(b) of Pub. L. 89-572, set out as a note under former section 2515 of Title 22, Foreign Relations and Intercourse. DELEGATION OF FUNCTIONS Functions of the President under subsec. (3)(D) of this section, to determine the portion of living allowances constituting basic compensation, delegated to the Director of ACTION to be performed in consul- tation with the Secretary of the Treasury, see section 102(b) of Ex, Ord. No. 11603, June 30, 1971, 36 P.R. 12675, set out as a note under section 2501 of Title 22, Foreign Relations and Intercourse. DELEGATION OF AUTHORITY Authority of the President under par. (2) of this sec- tion delegated to the Secretary of Defense with re- spect to the military departments, and the Secretary of the Treasury with respect to the Coast Guard, con- cerning civilian employees of nonappropriated fund in- strumentalities of the armed forces, see section 201 of Ex. Ord. No. 11137, Jan. 7, 1964, set out as a note under section 5921 of Title 5, Government Organiza. tion and Employees. SUBPART C-WESTERN HEMISPHERE TRADE CORPORATIONS Sec. 921. Definition of Western Hemisphere trade corpora- tions. 922. Special deduction. REPEALS Subpart C and sections 921 and 922 of this title were repealed by Pub. L. 94-455, title X, § 1052(b), Oct. 4, 1976, 90 Stat. 1648, appli- cable with respect to taxable years begin- ning after Dec. 31, 1979. § 921. Definition of Western Hemisphere trade corpo- rations For purposes of this subtitle, the term "West- ern Hemisphere trade corporation" means a do- mestic corporation all of whose business (other than incidental purchases) is done in any coun- try or countries in North, Central, or South America, or in the West Indies, and which satis- fies the following conditions: (1) if 95 percent or more of the gross income of such domestic corporation for the 3-year period immediately preceding the close of the taxable year (or for such part of such period during which the corporation was in existence) was derived from sources without the United States; and (2) if 90 percent or more of its gross income for such period or such part thereof was de- rived from the active conduct of a trade or business. (Aug. 16, 1954, ch. 736, 68A Stat. 290; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(a)(116), 90 Stat. 1784.) REPEAL OF SECTION Section repealed by Pub. L. 94-455, title X, § 1052(b), Oct. 4, 1976, 90 Stat. 1648, appli- cable with respect to taxable years begin- ning after Dec. 31, 1979. AMENDMENTS 1976-Pub. L. 94-455, § 1901(a)(116), struck out pro- vision relating to taxable years prior to Jan. 1, 1954. EFFECTIVE DATE OF 1976 AMENDMENT Amendment by Pub. L. 94-455 applicable with re- spect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 2 of this title. APPLICATION OF WESTERN HEMISPHERE TRADE CORPORA- TION PROVISION UNDER THE VIRGIN ISLANDS TAX LAws Pub. L. 92-178, title III, § 307, Dec. 10, 1971, 85 Stat. 524, provided that for purposes of applying the income tax laws of United States with respect to the Virgin Is- lands under section 1397 of Title 48, Territories and Insular Possessions, this subpart shall be treated as having been repealed effective with respect to taxable years beginning after Dec. 10, 1971. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 1503 of this title. Page 593 § 921
TITLE 26-INTERNAL REVENUE CODE § 922. Special deduction (a) General rule In the case of a Western Hemisphere trade corporation there shall be allowed as a deduc- tion in computing taxable income an amount computed as follows- (1) First determine the taxable income of such corporation computed without regard to this section. (2) Then multiply the amount determined under paragraph (1) by the fraction- (A) the numerator of which is 14 percent, and (B) the denominator of which is that per- centage which equals the sum of the normal tax rate and the surtax rate for the taxable year prescribed by section 11. No deduction shall be allowed under this sec- tion to a corporation for a taxable year for which it is a DISC or in which it owns at any time stock in a DISC or former DISC (as de- fined in section 992(a)). (b) Phaseout of deduction In the case of a taxable year beginning after December 31, 1975, and before January 1, 1980, the percent specified in subsection (a)(2)(A) shall be (in lieu of 14 percent) the percent specified in the following table: For a taxable year The percentage beginning in- shall be- 1976 ..................................................................... 11 1977 .................................................................... . 8 1978 .................................................................... . 5 1979 .................................................................... . 2 (Aug. 16, 1954, ch. 736, 68A Stat. 291; Dec. 10, 1971, Pub. L. 92-178, title V, §502(c), 85 Stat. 550; Oct. 4, 1976, Pub. L. 94-455, title X, § 1052(a), (c)(1), 90 Stat. 1647, 1648.) REPEAL OF SECTION Section repealed by Pub. L. 94-455, title X, §1052(b), Oct. 4, 1976, 90 Stat. 1648, appli- cable with respect to taxable years begin- ning after Dec. 31, 1979. AMENDMENTS 1976-Subset. (a). Pub. L. 94-455, § 1052(c)(1), substi- tuted "(a) General rule-In the case of" for "In the case of" following "Special deduction". Subsec. (b). Pub. L. 94-455, § 1052(a), added subsec. (b). 1971-Pub. L. 92-178 disallowed a deduction to a cor- poration for a taxable year for which it is a DISC or in which it owns at any time stock in a DISC or former DISC. EFFEcTIvE DATE OF 1976 AMENDMENT Section 1052(d) of Pub. L. 94-455 provided that: "The amendments made by subsection (a) [enacting subsec. (b) of this section] and paragraph (1) of sub- section (c) [amending subsec. (a) this section] shall apply with respect to taxable years beginning after December 31, 1975. The amendments made by subsec. tion (b) [repealing this section and section 921 of this title] and by subsection (c) (other than paragraph (1)) [amending sections 170(b)(2), 172(d)(5), (6), 907(g), 1503, 6091(b)(2)(B) of this title] shall apply with re- spect to taxable years beginning after December 31, 1979." EFFECTIVE DATE OF 1971 AMENDMENT Amendment by Pub. L. 92-178 appli'nable with re- spect to taxable years ending after Dec. 31, 1971, except that a corporation may not be a DISC for any taxable year beginning before Jan. 1, 1972, see section 507 of Pub. L. 92-178, set out as an Effective Date of 1971 Amendment note under section 991 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 172, 6091 of this title. SUBPART D-PossESSIONS OF THE UNITED STATES Sec. 931. Income from sources within possessions of the United States. 932. Citizens of possessions of the United States. 933. Income from sources within Puerto Rico. 934. Limitation on reduction in income tax liability in- curred to the Virgin Islands. 935. Coordination of United States and Guam individ- ual income taxes. 936. Puerto Rico and possession tax credit. AMENDMENTS 1972-Pub. L. 92-606, § 1(f)(5), Oct. 31, 1972, 86 Stat. 1497, added item 935. 1960-Pub. L. 86-779. § 4(a)(2), Sept. 14, 1960, 74 Stat. 999, added item 934. SUBPART REFERRED TO IN OTHER SECTIONS This subpart is referred to in section 1304 of this title. § 931. Income from sources within possessions of the United States (a) General rule In the case of individual citizens of the United States, gross income means only gross income from sources within the United States if the conditions of both paragraph (1) and para- graph (2) are satisfied: (1) 3-year period If 80 percent or more of the gross income of such citizen (computed without the benefit of this section) for the 3-year period immediate- ly preceding the close of the taxable year (or for such part of such period immediately pre- ceding the close of such taxable year as may be applicable) was derived from sources within a possession of the United States; and (2) Trade or business If 50 percent or more of his gross income (computed without the benefit of this sec- tion) for such period or such part thereof was derived from the active conduct of a trade or business within a possession of the United States either on his own account or as an em- ployee or agent of another. (b) Amounts received in United States Notwithstanding subsection (a), there shall be included in gross income all amounts re- ceived by such citizens or corporations within the United States, whether derived from sources within or without the United States. (c) Definition For purposes of this section, the term "pos- session of the United States" does not include the Commonwealth of Puerto Rico, the Virgin Islands of the United States, or Guam. 'Item 936 has been editorially inserted. Pub. L. 94- 455 added section 936 without amending analysis to add item 936. § 922 Page 594
TITLE 26-INTERNAL REVENUE CODE (d) Deductions (1) General rule Except as otherwise provided in this subsec- tion and subsection (e), in the case of a citizen of the United States entitled to the benefits of this section the deductions shall be allowed only if and to the extent that they are con- nected with income from sources within the United States; and the proper apportionment and allocation of the deductions with respect to sources of income within and without the United States shall be determined as provided in part I, under regulations prescribed by the Secretary. (2) Exceptions The following deductions shall be allowed whether or not they are connected with income from sources within the United States: (A) The deduction, for losses not connect- ed with the trade or business if incurred in transactions entered into for profit, allowed by section 165(c)(2), but only if the profit, if such transaction had resulted in a profit, would be taxable under this subtitle. (B) The deduction, for losses of property not connected with the trade or business if arising from certain casualties or theft, al- lowed by section 165(c)(3), but only if the loss is of property within the United States. (C) The deduction for charitable contribu- tions and gifts allowed by section 170. (3) Deduction disallowed For disallowance of standard deduction, see section 142(b)(2). (e) Deduction for personal exemption A citizen of the United States entitled to the benefits of this section shall be allowed a de- duction for only one exemption under section 151. (f) Allowance of deductions and credits A citizen of the United States entitled to the benefits of this section shall receive the benefit of the deductions and credits allowed to them in this subtitle only by filing or causing to be filed with the Secretary a true and accurate return of their total income received from all sources in the United States, in the manner prescribed in subtitle F, including therein all the Information which the Secretary may deem necessary for the calculation of such deduc- tions and credits. (g) Foreign tax credit Persons entitled to the benefits of this section shall not be allowed the credits against the tax for taxes of foreign countries and possessions of the United States allowed by section 901. (h) Employees of the United States For purposes of this section, amounts paid for services performed by a citizen of the United States as an employee of the United States or any agency thereof shall be deemed to be de- rived from sources within the United States. (Aug. 16, 1954, ch. 736, 68A Stat. 291; Nov. 13, 1966, Pub. L. 89-809, title I. § 107(a), 80 Stat. 1571; Dec. 10, 1971, Pub. L. 92-178, title V, § 502(d), 85 Stat. 550; Oct. 31, 1972, Pub. L. 92- 606, § l(f)(1), 86 Stat. 1497; Oct. 4, 1976, Pub. L. 94-455, title X, § 1051(c), title XIX, §§1901(a)(117), 1906(b)(13)(A), 90 Stat. 1645, 1784, 1834.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, § 1O51(c)(1), struck out all references to domestic corporations and made subsection applicable only to individual citizens. Subsec. (c). Pub. L. 94-455, § 1051(c)(2), substituted "Commonwealth of Puerto Rico, the Virgin Islands of the United States, or Guam" for "Virgin Islands of the United States, and such term when used with respect to citizens of the United States does not include Puerto Rico or Guam" following "does not include the". Subsec. (d)(1). Pub. L. 94-455, §§ 1051(c)(3), 1906(b)(13)(A), substitued "a citizen of the United States" for "persons" following "in the case of" and struck out "or his delegate" following "Secretary". Subsec. (f). Pub. L. 94-455, §§ 1051(c)(3), 1906(b)(13)(A), substituted "A citizen of the United States" for "Persons" following "Allowance of deduc- tions and credits" and struck out in two places "or his delegate" following "Secretary". Subsec. (h. Pub. L. 94-455, § 1901(a)(117), struck out subsec. (h) relating to the status of a citizen of the United States who has been interned by the enemy. Former subsec. (I) redesignated subsee. (h). Subsec. (I). Pub. L. 94-455, § 1901(a)(117), redesignat- ed former subsec. (i) as (h). 1972-Subsec. (c). Pub. L. 92-606 substituted "Puerto Rico or Guam" for "Puerto Rico". 1971-Subsec. (a). Pub. L. 92-178 provided for non- application of section in the case of a corporation for a taxable year for which it is a DISC or in which it owns at any time stock in a DISC or former DISC. 1966-Subsec d). Pub. L. 89-809 made applicable to United States citizens and domestic corporations en- gaged in trade or business in possessions, who qualify for the special tax treatment of income qualifying for the exclusion relating to income from United States possessions, provisions which allow deductions to non- resident aliens or foreign corporations engaged in trade or business in the United States by allowing de- ductions only where they are allocable to income ef- fectively connected with the trade or business in the United States and by spelling out the exceptions al- lowing deductions whether or not connected with income from sources within the United States in the case of losses not connected with the trade or business but incurred in transactions entered into for profit, ca- sualty losses, and charitable contributions. EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsecs. (a), (c), (d)(1), by section 1051(c) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1975, with cer- tain exceptions, see section 1051(i) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 33 of this title. Amendment of subsecs. (h), (i) by section 1901(a)(117) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see sec- tion 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE OF 1972 AMENDMENT Amendment by Pub. L. 92-606 applicable with re- spect to taxable years beginning after Dec. 31, 1972, see section 2 of Pub. L. 92-606, set out in part as an Ef- fective Date note under section 935 of this title. EFFECTIVE DATE OF 1971 AMEMDMENT Amendment of subsec. (a) by Pub. L. 92-178 applica- ble with respect to taxable years ending after Dec. 31, 1971, except that a corporation may not be a DISC for any taxable year beginning before Jan. 1. 1972, see sec- tion 507 of Pub. L. 92-178, set out as an Effective Date note under section 991 of this title. Page 595
TITLE 26-INTERNAL REVENUE CODE EFFECTIVE DATE OF 1966 AMENDMENT Section 107(b) of Pub. L. 89-809 provided that: "The amendment made by this section [amending subsec. (d) of this section] shall apply with respect to taxable years beginning after December 31, 1966." CROSS REFERENCES Consolidated returns, definition of "includible corpo- ration" as not meaning corporation entitled to the benefits of this section, see section 1504 of this title. Income from sources within the United States, see section 861 of this title. Standard deduction, citizen entitled to benefits of this section ineligible, see section 142 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 43, 48, 142, 153, 901, 957, 1302, 1402, 1504, 6091 of this title; title 42 sec- tion 411; title 48 section 14211. § 932. Citizens of possessions of the United States (a) General rule Any individual who is a citizen of any posses- sion of the United States (but not otherwise a citizen of the United States) and who is not a resident of the United States shall be subject to taxation under this subtitle in the same manner and subject to the same conditions as in the case of a nonresident alien individual. This section shall have no application in the case of a citizen of Puerto Rico or Guam. (b) Virgin Islands Nothing in this section shall be construed to alter or amend the Act entitled "An Act making appropriations for the naval service for the fiscal year ending June 30, 1922, and for other purposes", approved July 12, 1921 (48 U.S.C. 1397), relating to the imposition of income taxes in the Virgin Islands of the United States. (c) Guam For provisions relating to the Individual income tax In the case of Guam, see section 935 and 7654; see also sec- tions 30 and 31 of the Act of August 1, 1950 (48 U.S.C., sees. 1421h and 1421i). (Aug. 16, 1954, ch. 736, 68A Stat. 292; Nov. 13, 1966, Pub. L. 89-809, title I, § 103(m), 80 Stat. 1554; Oct. 31, 1972, Pub. L. 92-606, § 1(f)(2), (3), 86 Stat. 1497.) AMENDMENTS 1972-Subsec. (a). Pub. L. 92-606, § l(f)(2), substitut- ed "Puerto Rico or Guam" for "Puerto Rico". Subsec. (c). Pub. L. 92-606, § l(f)(3), added reference to sections 935 and 7654 of this title. 1966-Subsec. (a). Pub. L. 89-809 substituted "in the same manner and subject to the same conditions as in the case of a nonresident alien individual" for "only as to income derived from sources within the United States, and in such case the tax shall be computed and paid in the same manner and subject to the same con- ditions as in the case of other persons who are taxable only as to income derived from such sources" follow- ing "this subtitle". EFFECTIVE DATE OF 1972 AMENDMENT Amendment by Pub. L. 92-606 applicable with re- spect to taxable years beginning after Dec. 31, 1972, see section 2 of Pub. L. 92-606, set out in part as an Ef- fective Date of 1972 Amendment note under section 935 of this title. EFFECTIVE DATE OF 1966 AMENDMENT mendment by Pub. L. 89-809 applicable with re- spect to taxable years beginning after Dec. 31, 1966, see section 103(n)(1) of Pub. L. 89-809, set out as an Effective Date of 1966 Amendment note under section 871 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 48, 1402 of this title; title 42 section 411. § 933. Income from sources within Puerto Rico The following items shall not be included in gross income and shall be exempt from tax- ation under this subtitle: (1) Resident of Puerto Rico for entire taxable year In the case of an individual who is a bona fide resident of Puerto Rico during the entire taxable year, income derived from sources within Puerto Rico (except amounts received for services performed as an employee of the United States or any agency thereof); but such individual shall not be allowed as a de- duction from his gross income any deductions (other than the deduction under section 151, relating to personal exemptions) properly al- locable to or chargeable against amounts ex- cluded from gross income under this para- graph. (2) Taxable year of change of residence from Puerto Rico In the case of an individual citizen of the United States who has been a bona fide resi- dent of Puerto Rico for a period of at least 2 years before the date on which he changes his residence from Puerto Rico, income de- rived from sources therein (except amounts received for services performed as an employ- ee of the United States or any agency there- of) which is attributable to that part of such period of Puerto Rican residence before such date; but such individual shall not be allowed as a deduction from his gross income any de- ductions (other than the deduction for per- sonal exemptions under section 151) properly allocable to or chargeable against amounts excluded from gross income under this para- graph. (Aug. 16, 1954, ch. 736, 68A Stat. 293.) CROSS REFERENCES Self-employment income, resident of Puerto Rico to compute his net earnings without regard to this sec- tion, see section 1402 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 48, 957, 1402, 6091, 7655 of this title; title 42 section 411. § 934. Limitation on reduction in income tax liability incurred to the Virgin Islands (a) General rule Tax liability incurred to the Virgin Islands pursuant to this subtitle, as made applicable in the Virgin Islands by the Act entitled "An Act making appropriations for the naval service for the fiscal year ending June 30, 1922, and for other purposes", approved July 12, 1921 (48 U.S.C. 1397), or pursuant to section 28(a) of the Revised Organic Act of the Virgin Islands, ap- proved July 22, 1954 (48 U.S.C. 1642), shall not be reduced or remitted in any way, directly or indirectly, whether by grant, subsidy, or other similar payment, by any law enacted in the § 932 Page 596
TITLE 26-INTERNAL REVENUE CODE Virgin Islands, except to the extent provided in subsection (b) or (c). (M) Exception for certain domestic and Virgin Islands corporations In the case of a domestic corporation or a Virgin Islands corporation, subsection (a) shall not apply (if the information required by sub- section (d) is supplied) to the extent such cor- poration derived its income from sources with- out the United States if the conditions of both paragraph (1) and paragraph (2) are satisfied: (1) Three-year period If 80 percent or more of the gross income of such corporation for the 3-year period imme- diately preceding the close of the taxable year (or for such part of such period immedi. ately preceding the close of such taxable year as may be applicable) was derived from sources within the Virgin Islands; and (2) Trade or business If 50 percent or more of the gross income of such corporation for such period or such part thereof was derived from the active conduct of a trade or business within the Virgin Is- lands. For purposes of the preceding sentence, the gross income of a Virgin Islands corporation, and the sources from which the income of such corporation is derived, shall be determined as if such corporation were a domestic corporation. (c) Exception for certain residents of the Virgin Is- lands Subsection (a) shall not apply in the case of an individual citizen of the United States who is a bona fide resident of the Virgin Islands during the entire taxable year (if the informa- tion required by subsection (d) is supplied), to the extent his income is derived from sources within the Virgin Islands (except that subsec- tion (a) shall apply in the case of amounts re- ceived for services performed as an employee of the United States or any agency thereof). For purposes of the preceding sentence, gain or loss from the sale or exchange of any security (as defined in section 165(g)(2)) shall not be treat- ed as derived from sources within the Virgin Is- lands. (d) Requirement to supply information Subsections (b) and (c) shall apply only in the case of persons who supply (at such time and in such manner as the Secretary may by regula- tions prescribe) such information as the Secre- tary may by regulations prescribe for purposes of determining the applicability of such subsec- tions. (Added Pub. L. 86-779, §4(a)(1), Sept. 14, 1960, 74 Stat. 998, and amended ub. L. 94-455, title XIX, §§ 1901(a)(118), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1784, 1834.) AMENDMENTS 1976-Subsec. (b). Pub. L. 94-455, § 1901(a)(118), struck out "For the purposes of this subsection, all amounts received by such corporation within the United States, whether derived from sources within or without the United States, shall be considered as being derived from sources within the United States" following "were a domestic corporation". Subsec. d. Pub. L. 94-455, § 1906(b)(13)(A). struck out "or his delegate" following "Secretary" in two places. EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (b) by section 1901(a)(118) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EFFECTxVE DATE Section 4(e)(1) of Pub. L. 86-779 provided that: "The amendments made by subsection (a) (adding this sec- tion] shall apply to tax liability incurred with respect to taxable years beginning on or after January 1, 1960." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 48 of this title. § 935. Coordination of United States and Guam Indi- vidual income taxes (a) Application of section This section shall apply to any individual for the taxable year who- (1) is a resident of Guam, (2) is a citizen of Guam but not otherwise a citizen of the United States, (3) has income derived from Guam for the taxable year and is a citizen or resident of the United States or (4) files a Joint return for the taxable year with an individual who satisfies paragraph (1), (2), or (3) for the taxable year. (b) Filing requirement (1) In general Each individual to whom this section ap- plies for the taxable year shall file his income tax return for the taxable year- (A) with the United States, if he is a resi- dent of the United States, (B) with Guam, if he is a resident of Guam, and (C) if neither subparagraph (A) nor sub- paragraph (B) applies- (I) with Guam, if he is a citizen of Guam but not otherwise a citizen of the United States, or (ii) with the United States, if clause (I) does not apply. (2) Determination date For purposes of this section, determinations of residence and citizenship for the taxable year shall be made as of the close of the tax- able year. (3) Special rule for joint returns In the case of a Joint return, this subsection shall be applied on the basis of the residence and citizenship of the spouse who has the greater adjusted gross income (determined without regard to community property laws) for the taxable year. (cW Extent of income tax liability In the case of any individual to whom this section applies for the taxable year- (1) for purposes of so much of this title (other than this section and section 7654) as relates to the taxes imposed by this chapter, the United States shall be treated as includ- ing Guam, 71-999 0 - 78 - 40 (Vol. 7) Page 597 § 935
TITLE 26-INTERNAL REVENUE CODE (2) for purposes of the Guam territorial income tax, Guam shall be treated as Includ- ing the United States, and (3) such individual is hereby relieved of li- ability for income tax for such year to the Ju- risdiction (the United States or Guam) other than the Jurisdiction with which he is re- quired to file under subsection (b). (d) Special rules for estimated income tax If there is reason to believe that this section will apply to an individual for the taxable year, then- (1) he shall file any declaration of estimat- ed income tax (and all amendments thereto) with the Jurisdiction with which he would be required to file a return for such year under subsection (b) if his taxable year closed on the date he is required to file such declara- tion, (2) he is hereby relieved of any liability to file a declaration of estimated income tax (and amendments thereto) for such taxable year to the other jurisdiction, and (3) his liability for underpayments of esti- mated income tax shall be to the Jurisdiction with which he is required to file his return for the taxable year (determined under sub- section (b)). (Added Pub. L. 92-606, § l(a), Oct. 31, 1972, 86 Stat. 1494.) EFFEcTrIvE DATE Section 2 of Pub. L. 92-606 provided in part that: "The amendments made by section 1 [enacting this section and section 6687 of this title, amending sec- tions 931, 932, 7654 and 7701 of this title, section 1421i of Title 48, Territories and Insular Possessions, and enacting provisions set out as notes under sections 881 and 1442 of this title] (other than section I(e)) [amending sections 881 and 1442 of this title] shall apply with respect to taxable years beginning after December 31, 1972." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 932, 7654 of this title. § 936. Puerto Rico and possession tax credit (a) Allowance of credit (1) In general Except as provided in paragraph (2), in the case of a domestic corporation which elects the application of this section, there shall be allowed as a credit against the tax imposed by this chapter an amount equal to the portion of the tax which is attributable to taxable income, from sources without the United States, from the active conduct of a trade or business within a possession of the United States, and from qualified possession source investment income, if the conditions of both subparagraph (A) and subparagraph (B) are satisfied: (A) 3-year period If 80 percent or more of the gross income of such domestic corporation for the 3-year period immediately preceding the close of the taxable year (or for such part of such period immediately preceding the close of such taxable year as may be applicable) was derived from sources within a possession of the United States (determined without regard to section 904(f)); and (B) Trade or business If 50 percent or more of the gross income of such domestic corporation for such period or such part thereof was derived from the active conduct of a trade or busi- ness within a possession of the United States. (2) Credit not allowed against certain taxes The credit provided by paragraph (1) shall not be allowed against the tax imposed by- (A) section 56 (relating to minimum tax), (B) section 531 (relating to the tax on ac- cumulated earnings), (C) section 541 (relating to personal hold- ing company taxi, or [(D) Repealed. Pub. L. 94-455, title XIX, § 1901(b)(37)(B), Oct. 4, 1976, 90 Stat. 1803.] (E) section 1351 (relating to recoveries of foreign expropriation losses). (b) Amounts received in United States In determining taxable income for purposes of subsection (a), there shall not be taken into account as income from sources without the United States any gross income which was re- ceived by such domestic corporation within the United States, whether derived from sources within or without the United States. (c) Treatment of certain foreign taxes For purposes of this title, any tax of a foreign country or a possession of the United States which is paid or accrued with respect to taxable income which is taken into account in comput- ing the credit under subsection (a) shall not be treated as income, war profits, or excess profits taxes paid or accrued to a foreign country or possession of the United States, and no deduc- tion shall be allowed under this title with re- spect to any amounts so paid or accrued. (d) Definitions For purposes of this section- (1) Possession The term "possession of the United States" includes the Commonwealth of Puerto Rico, but does not include the Virgin Islands of the United States. (2) Qualified possession source investment income The term "qualified possession source in- vestment income" means gross income which- (A) is from sources within a possession of the United States in which a trade or busi- ness is actively conducted, and (B) the taxpayer establishes to the satis- faction of the Secretary is attributable to the investment in such possession (for use therein) of funds derived from the active conduct of a trade or business in such pos- session, or from such investment, less the deductions properly apportioned or allocated thereto. (e) Election (1) Period of election The election provided in subsection (a) shall be made at such time and in such manner as the Secretary may by regulations prescribe. Any such election shall apply to the first tax- § 936 Page 598
TITLE 26-INTERNAL REVENUE CODE able year for which such election was made and for which the domestic corporation satis- fied the conditions of subparagraphs (A) and (B) of subsection (a)(1) and for each taxable year thereafter until such election is revoked by the domestic corporation under paragraph (2). If any such election is revoked by the do- mestic corporation under paragraph (2), such domestic corporation may make a subsequent election under subsection (a) for any taxable year thereafter for which such domestic cor- poration satisfies the conditions of subpara- graphs (A) and (B) of subsection (a)(1) and any such subsequent election shall remain in effect until revoked by such domestic corpo- ration under paragraph (2). (2) Revocation An election under subsection (a)- (A) may be revoked for any taxable year beginning before the expiration of the 9th taxable year following the taxable year for which such election first applies only with the consent of the Secretary; and (B) may be revoked for any taxable year beginning after the expiration of such 9th taxable year without the consent of the Secretary. f) DISC or former DISC corporation ineligible for credit No credit shall be allowed under this section to a corporation for a taxable year for which it is a DISC or former DISC (as defined in section 992(a)) or in which it owns at any time stock in a DISC or former DISC. (g) Exception to accumulated earnings tax (1) For purposes of section 535, the term "accumulated taxable income" shall not in- clude taxable income entitled to the credit under subsection (a). (2) For purposes of section 537, the term "reasonable needs of the business" includes assets which produce income eligible for the credit under subsection (a). (Added Pub. L. 94-455, title X, § 1051(b), Oct. 4, 1976, 90 Stat. 1643, and amended Pub. L. 94- 455, title XIX, § 1901(b)(37)(B), Oct. 4, 1976, 90 Stat. 1803.) AMENDMENTS 1976-Subsee. (a)(2). Pub. L. 94-455, § 1901(b)(37)(B), struck out subpar. (D), relating to war loss recoveries. EFPEECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (a)(2) by section 1901(b)(37)(B) of Pub. L. 94-455 applicable with re- spect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 2 of this title. EFFECTIVE DATE Section applicable to taxable years beginning after Dec. 31, 1975, except that qualified possession source investment income as defined in subsec. (d)(2) of this section shall include income from any source outside the United States if the taxpayer establishes to the satisfaction of the Secretary of the Treasury or his delegate that the income from such sources was earned before Oct. 1, 1976, see section 1051(i) of Pub. L. 94-455, set out as an Effective Date of 1976 Amend- ment note under section 33 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 33, 48, 243, 901, 904, 1504 of this title. SUBPART E-CHINA TRADE ACT CORPORATIONS Sec. 941. Special deduction for China Trade Act corpora- tions. 942. Disallowance of foreign tax credit. 943. Exclusion of dividends to residents of Formosa or Hong Kong. REPEALS Subpart E and sections 941 to 943 of this title were repealed by Pub. L. 94-445, title X, § 1053(c), Oct. 4, 1976, 90 Stat. 1649, applica- ble with respect to taxable years beginning after Dec. 31, 1977. § 941. Special deduction for China Trade Act corpora. tions (a) Allowance of deduction For purposes only of the taxes imposed by section 11, there shall be allowed, in the case of a corporation organized under the China Trade Act, 1922 (15 U.S.C. ch. 4, sec. 141 and follow- ing), in addition to the deductions from taxable income otherwise allowed such corporation, a special deduction, in computing the taxable income, of an amount equal to the proportion of the taxable income derived from sources within Formosa and Hong Kong (determined without regard to this section and determined in a similar manner to that provided in part I) which the par value of the shares of stock of the corporation owned on the last day of the taxable year by- (1) persons resident in Formosa, Hong Kong, the United States, or possessions of the United States, and (2) individual citizens of the United States wherever resident, bears to the par value of the whole number of shares of stock of the curporation outstanding on such date. In no case shall the diminution, by reason of such special deduction, of the taxes imposed by section 11 (computed without regard to this section) exceed the amount of the special dividend certified under subsection (b) of this section. (b Special dividend The special deduction provided in subsection (a) shall not be allowed unless the Secretary of Commerce has certified to the Secretary of the Treasury (1) the amount which, during the year ending on the date fixed by law for filing the return, the corporation has distributed as a special dividend to or for the benefit of such persons as on the last day of the taxable year were resident in Formosa, Hong Kong, the United States, or possessions of the United States, or were individual citizens of the United States, and owned shares of stock of the corporation; (2) that such special dividend was in addi- tion to all other amounts, payable or to be payable to such persons or for their benefit, by reason of their interest in the corporation; and (3) that such distribution has been made to or for the benefit of such persons ,'n propor- Page 599
TITLE 26-INTERNAL REVENUE CODE tion to the par value of the shares of stock of the corporation owned by each; except that if the corporation has more than one class of stock, the certificates shall contain a state- ment that the articles of incorporation pro- vide a method for the apportionment of such special dividend among such persons, and that the amount certified has been distribut- ed in accordance with the method so pro- vided. () Ownership of stock For purposes of this section, shares of stock of a corporation shall be considered to be owned by the person in whom the equitable right to the income from such shares is in good faith vested. (d) Phaseout of deduction In the case of a taxable year beginning after December 31, 1975, and before January 1, 1978, the amount of the special deduction under sub- section (a) (determined without regard to this subsection) shall be reduced by the percentage reduction specified in the following table: The percentage For a taxable year reduction beginning in- shall be- 1976 ................................................................. 333 1977 ..................................................................... 66% . (Aug. 16, 1954, ch. 736, 68A Stat. 293; Oct. 4, 1976, Pub. L. 94-455, title X, § 1053(a), title XIX, § 1906(b)(1)(A), 90 Stat. 1648, 1834.) REPEAL OF SECTION Section repealed by Pub. L. 94-455, title X, § 1053(c),.Oct 4, 1976, 90 Stat. 1648, applica- ble with respect to taxable years beginning after Dec. 31, 1977. REFERENCES IN TEXT The China Trade Act of 1922, referred to in section catchline and subsec. (a), is act Sept. 19. 1922, ch. 346, 42 Stat. 849, as amended, which is classified generally to chapter 4 (§ 141 et seq.) of Title 15, Commerce and Trade. For complete classification of this Act to the Code, see section 141 of Title 15 and see Tables volume. AMENDMENTs 1976-Subsec. (b). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (d). Pub. L. 94-455, § 1053(a), added subsec. (d). EmcTIvE DATE o 1976 AMENDMENT Section 1053(e) of Pub. L. 94-455 provided that: "The amendments made by subsections (a) and (b) [enacting subsec. (c) of this section and amending sec- tion 943 of this title] shall apply with respect to tax- able years beginning after December 31, 1975. The amendments made by subsections (c) and (d) (amend- ing sections 116(b), 1504(b)(5), 6072(e) and 6091(b)(2), (B) of this title, and repealing sections 941-943 of this title] shall apply with respect to taxable years begin- ning after Decmber 31, 1977.'" CROSS REFxu mNCES Partial exclusion of dividends received by individ- uals, not applicable to dividend from corporation orga- nized under China Trade Act, see section 116 of this title. Taxes of foreign countries and of possessions of United States, corporations treated as foreign, see sec- tion 901 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 116, 992, 6091 of this title. § 942. Disallowance of foreign tax credit A corporation organized under the China Trade Act, 1922, shall not be allowed the credits against the tax for taxes of foreign countries and possessions of the United States allowed by section 901. (Aug. 16, 1954, ch. 736, 68A Stat. 294.) REPEAL OF SECTION Section repealed by Pub. L. 94-455, title X, § 1053(c), Oct. 4, 1976, 90 Stat. 1648, applica- ble with respect to taxable years beginning after Dec, 31, 1977. REFERENCES IN TEXT The China Trade Act, 1922, referred to in text, is act Sept. 19, 1922, ch. 346, 42 Stat. 849, as amended, which is classified generally to chapter 4 (§ 141 et seq.) of Title 15, Commerce and Trade. For complete classifi- cation of this Act to the Code, see section 141 of Title 15 and Tables volume. § 943. Exclusion of dividends to residents of Formosa or Hong Kong Amounts distributed as dividends to or for the benefit of any person by a corporation or- ganized under the China Trade Act, 1922, shall not be included in gross income and shall be exempt from taxation under this subtitle if, at the time of such distribution, such person is a resident of Formosa or Hong Kong, and the equitable right to the income of the shares of stock of the corporation is in good faith vested in him. In the case of a taxable year beginning after December 31, 1975, and before January 1, 1978, the amount of the distributions which are excludable from gross income under this sec- tion (determined without regard to this sen- tence) shall be reduced by the percentage re- duction specified in the following table: The percentage For a taxable year reduction beginning in- shall be- 1976 .......................................... 33V3 1977 .................................. 66%. (Aug. 16, 1954, ch. 736, 68A Stat. 294; Oct. 4, 1976, Pub. L. 94-455, title X, § 1053(b), 90 Stat. 1648.) REPEAL OF SECTION Section repealed by Pub. L. 94-455, title X, § 1053(c), Oct. 4, 1976, 90 Stat. 1648, applica- ble with respect to taxable years beginning after Dec. 31, 1977. REFERENCES IN TEXT The China Trade Act, 1922, referred to in text, is act Sept. 19, 1922, ch. 346, 42 Stat. 849, as amended, which is classified generally to chapter 4 (§ 141 et seq.) of Title 15, Commerce and Trade. For complete classifi. cation of this Act to the Code, see section 141 of Title 15 and Tables volume. § 942 Page 600
TITLE 26-INTERNAL REVENUE CODE 1976-Pub. L, 94-455, § 1053(b), added provision re- lating to exclusion of dividend distributions to resi- dents of Formosa or Hong Kong for taxable years 1976 and 1977 and simplified table of percentage reduc- tions. EmrcvE. DATE or 1976 AMENDMENT Amendment by Pub. L. 94-455 applicable with re- spect to taxable years beginning after Dec. 31, 1975, see section 1053(e) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 941 of this title. SUBPART F-CONTROLLED FOREIGN CORPORATIONS Sec. 951. Amounts included in gross income of United States shareholders. 952. Subpart F income defined. 953. Income from insurance of United States risks. 954. Foreign base company income. 955. Withdrawal of previously excluded subpart F income from qualified Investment. 956. Investment of earnings In United States proper- ty. 957. Controlled foreign corporations; United States persons. 958. Rules for determining stock ownership. 959. Exclusion from gross income of previously taxed earnings and profits. 960. Special rules for foreign tax credit. 961. Adjustments to basis of stock in controlled for- eign corporations and of other property. 962. Election by individuals to be subject to tax at corporate rates. [963. Repealed.] 964. Miscellaneous provisions. AumDmENTs 1975-Pub. L. 94-12, title VI, § 602(a)(3)(A), (c)(7), (d)(3)(B), Mar. 29, 1975, 89 Stat. 58, 60, 64 struck out existing item 955 and replaced it with an identical item 955 and struck out item 963 "Receipt of minimum distributions by domestic corporations". 1962-Pub. L. 87-834, § 12(a), Oct. 16, 1962, 76 Stat. 1006, added the heading of Subpart F, and items 951- 964. SusPART REImUM TO IN OTHER SECTIONS This subpart is referred to in sections 970, 999 of this title. § 951. Amounts included in gross income of United States shareholders (a) Amounts included (1) In general If a foreign corporation is a controlled for- eign corporation for an uninterrupted period of 30 days or more during any taxable year, every person who is a United States share- holder (as defined in subsection (b)) of such corporation and who owns (within the mean- ing of section 958(a)) stock in such corpora- tion on the last day, in such year, on which such corporation is a controlled foreign cor- poration shall include in his gross income, for his taxable year tn which or with which such taxable year of the corporation ends- (A) the sum of- (i) his pro rata share (determined under paragraph (2)) of the corporation's sub- part P income for such year, (it) his pro rata share (determined under section 955(a)(3) as in effect before the enactment of the Tax Reduction Act of 1975) of the corporation's previously excluded subpart F income withdrawn from investment in less developed coun- tries for such year, and (iii) his pro rata share (determined under section 955(a)(3)) of the corpora- tion's previously excluded subpart F income withdrawn from foreign base com- pany shipping operations for such year; and, (B) his pro rata share (determined under section 956(a)(2)) of the corporation's in- crease in earnings invested in United States property for such year (but only to the extent not excluded from gross income under section 959(a)(2)). (2) Pro rata share of subpart F income (The pro rata share referred to in para- graph (1)(A)(i) in the case of any United States shareholder is the amount- (A) which would have been distributed with respect to the stock which such share- holder owns (within the meaning of section 958(a)) in such corporation if on the last day, in its taxable year, on which the corpo- ration is a controlled foreign corporation it had distributed pro rata to its shareholders an amount (I) which bears the same ratio to its subpart F income for the taxable year, as (ii) the part of such year during which the corporation is a controlled foreign cor- poration bears to the entire year, reduced by (B) the amount of distributions received by any other person during such year as a dividend with respect to such stock, but only to the extent of the dividend which would have been received if the distribution by the corporation had been the amount (I) which bears the same ratio to the subpart F income of such corporation for the taxable year, as (ii) the part of such year during which such shareholder did not own (within the meaning of section 958(a)) such stock bears to the entire year. (3) Limitation on pro rata share of previously ex- cluded subpart F income withdriwn from in. vestment For purposes of paragraph (1)(A)(iii), the pro rata share of any United States share- holder of the previously excluded subpart P income of a controlled foreign corporation withdrawn from investment in foreign base company shipping operations shall not exceed an amount- (A) which bears the same ratio to his pro rata share of such income withdrawn (as de- termined under section 955(a)(3)) for the taxable year, as (B) the part of such year during which the corporation is a controlled foreign cor- poration bears to the entire year. (4) Limitation on pro rata share of investment in United States property For purposes of paragraph (1)(B), the pro rata share of any United States shareholder in the increase of the earnings of a controlled foreign corporation invested in United States property shall not exceed an amount (A) which bears the same ratio to his pro rata share of such increase (as determined under section 956(a)(2)) for the taxable year, as (B) Page 601
TITLE 26-INTERNAL REVENUE CODE the part of such year during which the corpo- ration is a controlled foreign corporation bears to the entire year. (b) United States shareholder defined For purposes of this subpart, the term "United States shareholder" means, with re- spect to any foreign corporation, a United States person (as defined in section 957(d)) who owns (within the meaning of section 958(a)), or is considered as owning by applying the rules of ownership of section 958(b), 10 percent or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation. (c) Coordination with election of a foreign invest- ment company to distribute income A United States shareholder who, for his tax- able year, is a qualified shareholder (within the meaning of section 1247(c)) of a foreign invest- ment company with respect to which an elec- tion under section 1247 is in effect shall not be required to include in gross income, for such taxable year, any amount under subsection (a) with respect to such company. (d) Coordination with foreign personal holding com- pany provisions A United States shareholder who, for his tax- able year, is subject to tax under section 551(b) (relating to foreign personal holding company income included in gross income of United States shareholders) on income of a controlled foreign corporation shall not be required to in- clude in gross income, for such taxable year, any amount under subsection (a) with respect to such company. (Added Pub. L. 87-834, § 12(a), Oct. 16, 1962, 76 Stat. 1006, and amended Pub. L. 94-12, title VI, § 602(a)(3)(B), (c)(3), (4), (d)(2), Mar. 29, 1975, 89 Stat. 58, 62; Pub. L. 94-455, title XIX, § 1901(a)(119), Oct. 4, 1976, 90 Stat. 1784.) REFERENCES IN TEXT The Tax Reduction Act of 1975, referred to in subsec. (a)(1)(A)(ii), is Pub. L. 94-12, Mar. 29, 1975, 89 Stat. 26, which was enacted Mar. 29, 1975. For com- plete classification of this Act to the Code, see Short Title of 1975 Amendment note set out under section 1 of this title and Tables volume. AMENDMENTS 1976-Subsec. (a)(1). Pub. L. 94-455 struck out "be- ginning after December 31, 1962" following "during any taxable year". 1975-Subsec. (a)(1)(A)(i). Pub. L. 94-12, § 602(a)(3)(B), struck out "except as provided in sec. tion 963," preceding "his pro rata share". Subsec. (a)(1)(A)(ii). Pub. L. 94-12. § 602(c)(3), substi- tuted "(determined under section 955(a)(3) as in effect before the enactment of the Tax Reduction Act of 1975)" for "(determined under section 955(a)(3))". Subsec. (a)(1)(A)(ill). Pub. L. 94-12, § 602(d)(2)(A), added cl. (iii). Subsec. (a)(3). Pub. L. 94-12, § 602(c)(4), (d)(2)(B), substituted "paragraph (i)(A)(iii)" for "paragraph (1)(A)(ii)" and "foreign base company shipping oper- ations" for "less developed countries". EFFECTIVE DATE OF 1975 AMENDMENT Amendment by Pub. L. 94-12 applicable to taxable years of foreign corporations beginning after Dec. 31, 1975, and to taxable years of United States sharehold- ers (within the meaning of subsec. (b) of this section) within which or with which such taxable years of such foreign corporations end, see section 602(f) of Pub. L. 94-12, set out as an Effective Date of 1975 Amendment note under section 955 of this title. EFFECTIVE DATE Section 12(c) of Pub. L. 87-834 provided that: "The amendments made by this section [adding sections 951 to 964 and 970 to 972 of this title, and amending sec- tions 901, 904 and 1016 of this title] shall apply with respect to taxable years of foreign corporations begin- ning after December 31, 1962, and to taxable year of United States shareholders within which or with which such taxable years of such foreign corporations end." ECONOMICALLY LESS DEvELOPED CouNTRIEs Designation of certain foreign countries as economi- cally less developed countries, see Ex. Ord. No. 11071, Dec. 27, 1962, 27 P.R. 12875, set out as a note under section 955 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 679, 851. 952, 955. 956. 958, 959, 960, 961, 962, 970, 993, 999, 1246, 1248 of this title. § 952. Subpart F income defined (a) In general For purposes of this subpart, the term "sub- part F income" means, in the case of any con- trolled foreign corporation, the sum of- (1) the income derived from the insurance of United States risks (as determined under section 953), and (2) the foreign base company income (as de- termined under section 954). (3) an amount equal to the product of- (A) the income of such corporation other than income which- (i) is attributable to earnngs and profits of the foreign corporation included in the gross income of a United States person under section 951 (other than by reason of this paragraph), or (ii) is described in subsection (b), multi- plied by (B) the international boycott factor (as determined under section 999), and (4) the sum of the amounts of any illegal bribes, kickbacks, or other payments (within the meaning of section 162(c)) paid by or on behalf of the corporation during the taxable year ef the corporation directly or indirectly to an official, employee, or agent in fact of a government. (b) Exclusion of United States income In the case of a controlled foreign corpora- tion, subpart F income does not include any item of income from sources within the United States which is effectively connected with the conduct by such corporaiton of a trade or busi- ness within the United States unless such item is exempt from taxation (or is subject to a re- duced rate of tax) pursuant to a treaty obliga- tion of the United States. (c) Limitation For purposes of subsection (a), the subpart F income of any controlled foreign corporation for any taxable year shall not exceed the earn- ings and profits of such corporation for such year reduced by the amount (if any) by which- (1) an amount equal to- Page 602 § 952
TITLE 26-INTERNAL REVENUE CODE (A) the sum of the deficits in earnings and profits for prior taxable years beginning after December 31, 1962, plus (B) the sum of the deficits in earpings and profits for taxable years beginning after Le- cember 31, 1959, and before January 1, 1963 (reduced by the sum of the earnings and profits for such taxable years); exceeds (2) an amount equal to the sum of the earn- ings and profits for prior taxable years begin- ning after December 31, 1962, allocated to other earnings and profits under section 959(c)(3). For purposes of the preceding sentence, any deficit in earnings and profits for any prior tax- able year shall be taken into account under paragraph (1) for any taxable year only to. the extent it has not been taken into account under such paragaph for any preceding taxable year to reduce earnings and profits of such preced- ing year. (d) Special rule in case of Indirect ownership For purposes of subsection (c), if- (1) a United States shareholder owns (within the meaning of section 958(a)) stock of a foreign corporation, and by reason of such ownership owns (within the meaning of such section) stock of any other foreign cor- poration, and (2) any of such foreign corporations has a deficit in earnings and profits for the taxable year, then the earnings and profits for the taxable year of each such foreign corporation which is a controlled foreign corporation shall, with re- spect to such United States shareholder, be properly reduced to take into account any defi- cit described in paragraph (2) in such manner as the Secretary shall prescribe by regulations. (Added Pub. L. 87-834, § 12(a), Oct. 16, 1962, 76 Stat. 1008, and amended Pub. L. 89-809, title I, § 104(j), Nov. 13, 1966, 80 Stat. 1562; Pub. L. 94- 455, title X, §§ 1062(a), 1065(a)(1), title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1650, 1653, 1834.) AMENDMENTS 1976--Subsec. (a)(3). Pub. L. 94-455, § 1062(a), added par. (3). Subsec. (a)(4). Pub. L. 94-455, § 1065(a)(1), added par. (4). Subsec. d). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". 1966-Subsec. (b). Pub. L. 89-809 substituted "In the case of a controlled foreign corporation, subpart F income does not include any item of income from sources within the United States which is effectively connected with the conduct by such corporation of a trade or business within the United States unless such item is exempt from taxation (or is subject to a re- duced rate of tax) pursuant to a treaty obligation of the United States" for "Subpart F income does not in- clude any item includible in gross Income under this chapter (other than this supbart) as income derived from sources within the United States of a foreign cor- poration engaged in trade or business in the United States". EFFECTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (a)(3) by section 1062 of Pub. L. 94-455 applicable to participation in or cooperation with an international boycott more than 30 days after Oct. 4, 1976, see section 1066(a) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 908 of this title. Section 1066(b) of Pub. L. 94-455 provided that: "The amendments made by section 1065 [amending subsecs. (a)(2) to (4) of this section and sections 995(b)()(D)(Iii) and 964(a) of this title] apply to pay- ments described in section 162(c) of the Internal Rev- enue Code of 1954 made more than 30 days after the date of enactment of this Act [Oct. 4, 1976]." EFFECTiVE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-809 applicable with re- spect to taxable years beginning after Dec. 31, 1966, see section 104(n) of Pub. L. 89-809, set out as an Ef- fective Date of 1966 Amendnent note under section 11 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 864, 953, 954, 956, 964, 999 of this title. § 953. Income from insurance of United States risks (a) General rule For purposes of section 952(a)(1), the term "income derived from the insurance of United States risks" means that income which- (1) is attributable to the reinsurance or the issuing of any insurance or annuity contract- (A) in connection with property in, or li- ability arising out of activity in, or in con- nection with the lives or health of residents of, the United States, or (B) in connection with risks not included in subparagraph (A) as the result of any ar- rangement whereby another corporation re- ceives a substantially equal amount of pre- miums or other consideration in respect to any reinsurance or the issuing of any insur- ance or annuity contract in connection with property in, or liability arising out of activ- Ity in, or in connection with the lives or health of residents of, the United States, and (2) would (subject to the modifications pro- vided by paragraphs (1), (2), and (3) of subsec- tion (b)) be taxed under subchapter L of this chapter if such income were the income of a domestic insurance corporation. This section shall apply only in the case of a controlled foreign corporation which receives, during any taxable year, premiums or other consideration in respect of the reinsurance, and the issuing, of insurance and annuity contracts described in paragraph (1) in excess of 5 per- cent of the total of premiums and other consid- eration received during such taxable year in re- spect of all reinsurance and issuing of insurance and annuity contracts. (b) Special rules For purposes of subsection (a)- (1) In the application of part I of sub- chapter L, life insurance company taxable income is the gain from operations as defined in section 809(b). (2) A corporation which would, if it were a domestic insurance corporation, be taxable under part II of subchapter L shall apply sub- section (a) as if it were taxable under part III of subchapter L. (3) The following provisions of subchapter L shall not apply: Page 603 § 953
TITLE 26-INTERNAL REVENUE CODE (A) Section 809(d)(4) (operations loss de- duction). (B) Section 809(d)(5) (certain nonpartici- pating contracts). (C) Section 809(d)(6) (group life, accident, and health insurance). (D) Section 809(d)(10) (small business de- duction). (E) Section 817(b) (gain on property held on December 31, 1958, and certain substitut- ed property acquired after 1958). (F) Section 832(c)(5) (certain capital losses). (4) The items referred to in- (A) section 809(c)(1) (relating to gross amount of premiums and other consider- ations), (B) section 809(c)(2) (relating to net de- crease in reserves), (C) section 809(d)(2) (relating to net in- crease in reserves), and (D) section 832(b)(4) (relating to premi- ums earned on insurance contracts) shall be taken into account only to the extent they are in respect of any reinsurance or the issuing of any insurance or annuity contract described in subsection (a)(1). (5) All items of income, expenses, losses, and deductions (other than those taken into account under paragraph (4)) shall be proper- ly allocated or apportioned under regulations prescribed by the Secretary. (Added Pub. L. 87-834, 12(a), Oct. 16, 1962, 76 Stat. 1008, and amended Pub. L. 89-809, title I, § 104(m)(2), Nov. 13, 1966, 80 Stat. 1563; Pub. L. 94-455, title XIX, § 1906(b)(13(A), Oct. 4, 1976, 90 Stat. 1834.) AMENDMENTS 1976-Subsec. (b)(5). Pub. L. 94-455 struck out "or his delegate" following "Secretary". 1966-Subsec. (b)(3)(F). Pub. L. 89-809 substituted "832(c)(5)" for "832(b)(5)". EFrcTivE DATE OF 1966 AMENDMENT Amendment by Pub. L. 89-809 applicable with re- spect to taxable years beginning after Dec. 31, 1966, see section 104(n) of Pub. L. 89-809, set out as an Ef- fective Date of 1966 Amendment note under section 11 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 952, 956, 957, of this title. § 954. Foreign base company income (a) Foreign base company income For purposes of section 952(a)(2), the term "foreign base company income" means for any taxable year the sum of- (1) the foreign personal holding company income for the taxable year (determined under subsection (c) and reduced as provided in subsection (b)(5)), (2) the foreign base company sales income for the taxable year (determined under sub- section (d) and reduced as provided in subsec- tion (b)(5)), (3) the foreign base company services income for the taxable year (determined under subsection (e) and reduced as provided in subsection (b)(5)), and (4) the foreign base company shipping income for the taxable year (determined under subsection (f) and reduced as provided in subsection (b)(5)). (b) Exclusion and special rules [(1) Repealed. Pub. L. 94-12, title VI, § 602(c)(1), Mar. 29, 1975, 89 Stat. 58] (2) Exclusion for reinvested shipping income For purposes of subsection (a), foreign base company income does not include foreign base company shipping income to the extent that the amount of such income does not exceed the increase for the taxable year in qualified investments in foreign base compa- ny shipping operations of the controlled for- eign corporation (as determined under subsec- tion (g)). (3) Special rule where foreign base company income is less than 10 percent or more than 70 percent of gross income For purposes of subsection (a)- (A) If the foreign base company income (determined without regard to paragraphs (2) and (5)) is less than 10 percent of gross income, no part of the gross income of the taxable year shall be treated as foreign base company income. (B) If the foreign base company income (determined without regard to paragraphs (2) and (5)) exceeds 70 percent of gross income, the entire gross income of the tax- able year shall, subject to the provisions of paragraphs (2). (4), and (5), be treated as foreign base company income. (4) Exception for foreign corporations not availed of to reduce taxes For purposes of subsection (a), foreign base company income does not include any item of income received by a controlled foreign corpo- ration if it is established to the satisfaction of the Secretary that neither- (A) the creation or organization of such controlled foreign corporation under the laws of the foreign country in which it is in- corporated (or, in the case of a controlled foreign corporation which is an acquired corporation, the acquisition of such corpo- ration created or organized under the laws of the foreign country in which it is incor- porated), nor (B) the effecting of the transaction giving rise to such income through the controlled foreign corporation, has as one of its significant purposes a sub- stantial reduction of income, war profits, or excess profits or similar taxes. (5) Deductions to be taken into account For purposes of subsection (a), the foreign personal holding company income, the for- eign base company sales income, the foreign base company services income, and the for- eign base company shipping income shall be reduced, under regulations prescribed by the Secretary so as to take into account deduc- tions (including taxes) properly allocable to such income. (6) Special rules for foreign base company shipping income Income of a corporation which is a foreign base company shipping income under para- § 954 Page 604
TITLE 26-INTERNAL REVENUE CODE graph (4) of subsection (a) (determined with- out regard to the exclusion under paragraph (2) of this subsection)- (A) shall not be considered foreign base company income of such corporation under any other paragraph of subsection (a) and (B) if distributed through a chain of own- ership described under section 958(a), shall not be included in foreign base company income of another controlled foreign corpo- ration in such chain. (7) Special exclusion for foreign base company shipping income Income of a corporation which is foreign base company shipping income under para- graph (4) of subsection (a) (determined with- out regard to the exclusion under paragraph (2) of this subsection) shall be excluded from foreign base company income if derived by a controlled foreign corporation from, or in connection with, the use (or hiring or leasing for use) of an aircraft or vessel in foreign commerce between two points within the for- eign country in which such corporation is cre- ated or organized and such aircraft or vessel is registered. (c) Foreign personal holding company income (1) In general For purposes of subsection (a)(1), the term "foreign personal holding company income" means the foreign personal holding company income (as defined in section 553), modified and adjusted as provided in paragraphs (2), (3), and (4). (2) Rents included without regard to 50 percent limitation For purposes of paragraph (1), all rents shall be included in foreign personal holding company income without regard to whether or not such rents constitute 50 percent or more of gross income. (3) Certain income derived in active conduct of trade or business For purposes of paragraph (1), foreign per- sonal holding company income does not in- clude- (A) rents and royalties which are derived in the active conduct of a trade or business and which are received from a person other than a related person (within the meaning of subsection (d)(3)), (B) dividends, interest, and gains from the sale or exchange of stock or securities de- rived in the conduct of a banking, financing, or similar business, or derived from the in- vestments made by an insurance company of its unearned premiums or reserves ordi- nary and necessary for the proper conduct of its insurance business, and which are re- ceived from a person other than a related person (within the meaning of subsection (d)(3)), or (C) dividends, interest, and gains from the sale or exchange of stock or securities re- ceived from a person other than a related person (within the meaning of subsection (d)(3)) derived from investments made by an insurance company of an amount of its assets equal to one-third of its premiums earned on insurance contracts (other than life insurance and annuity contracts) during the taxable year (as defined in section 832(b)(4)) which are not directly or indirect- ly attributable to the insurance or reinsur- ance of risks of persons who are related per- sons (within the meaning of subsection (d)(3)). (4) Certain income received from related persons For purposes of paragraph (1), foreign per- sonal holding company income does not in- clude- (A) dividends and interest received from a related person which (I) is created or orga- nized under the laws of the same foreign country under the laws of which the con- trolled foreign corporation is created or or- ganized, and (ii) has a substantial part of its assets used in its trade or business located in such same foreign country; (B) interest received in the conduct of a banking, financing, or similar business from a related person engaged in the conduct of a banking, financing, or similar business if the businesses of the recipient and the payor are predominantly with persons other than related persons; and (C) rents, royalties, and similar amounts received from a related person for the use of, or the privilege of using, property within the country under the laws of which the controlled foreign corporation is created or organized. (d) Foreign base company sales income (1) In general For purposes of subsection (a)(2), the term "foreign base company sales income" means income (whether in the form of profits, com- missions, fees, or otherwise) derived in con- nection with the purchase of personal proper- ty from a related person and its sale to any person, the sale of personal property to any person on behalf of a related person, the pur- chase of personal property from any person and its sale to a related person, or the pur- chase of personal property from any person on behalf of a related person where- (A) the property which is purchased (or in the case of property sold on behalf of a re- lated person, the property which is sold) is manufactured, produced, grown, or extract- ed outside the country under the laws of which the controlled foreign corporation is created or organized, and (B) the property is sold for use, consump- tion, or disposition outside such foreign country, or, in the case of property pur- chased on behalf of a related person, is pur- chased for use, consumption, or disposition outside such foreign country. For purposes of this subsection, personal property does not include agricultural com- modities which are not grown in the United States in commercially marketable quantities. (2) Certain branch income For purposes of determining foreign base company sales income in situations in which the carrying on of activities by a controlled foreign corporation through a branch or simi- lar establishment outside the country of in- corporation of the controlled foreign corpora- tion has substantially the same effect as if Page 605 § 954
TITLE 26-INTERNAL REVENUE CODEP such branch or similar establishment were a wholly owned subsidiary corporation deriving such income, under regulations prescribed by the Secretary the income attributable to the carrying on of such activities of such branch or similar establishment shall be treated as income derived by a wholly owned subsidiary of the controlled foreign corporation and shall constitute foreign base company sales income of the controlled foreign corporation. (3) Related person defined For purposes of this section, a person is a related person with respect to a controlled foreign corporation, if- (A) such person is an individual, partner- ship, trust, or estate which controls the con- trolled foreign corporation; (B) such person is a corporation which controls, or is controlled by, the controlled foreign corporation; or (C) such person is a corporation which is controlled by the same person or persons which control the controlled foreign corpo- ration. For purposes of the preceding sentence, con- trol means the ownership, directly or indirect- ly, of stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote. For purposes of this paragraph, the rules for determining ownership of stock prescribed by section 958 shall apply. (e) Foreign base company services income For purposes of subsection (a)(3), the term "foreign base company services income" means income (whether in the form of compensation, commissions, fees, or otherwise) derived in con- nection with the performance of technical, managerial, engineering, architectural, scientif- ic, skilled, industrial; commercial, or like ser- vices which- (1) are performed for or on behalf of any related person (within the meaning of subsec- tion (d)(3)), and (2) are performed outside the country under the laws of which the controlled for- eign corporation is created or organized. The preceding sentence shall not apply to income derived in connection with the perfor- mance of services which are directly related to the sale or exchange by the controlled foreign corporation of property manufactured, pro- duced, grown, or extracted by it and which are performed prior to the time of the sale or ex- change, or of services directly related to an offer or effort to sell or exchange such proper- ty. (f) Foreign base company shipping income For purposes of subsection (a)(4), the term "foreign base company shipping income" means income derived from, or in connection with, the use (or hiring or leasing for use) of any aircraft or vessel in foreign commerce, or from, or in connection with the performance of services di- rectly related to the use of any such aircraft, or vessel, or from the sale, exchange, or other dis- position of any such aircraft or vessel. Such term includes, but is not limited to- (1) dividends and interest received from a foreign corporation in respect of which taxes are deemed paid under section 902, and gain from the sale, exchange, or other disposition of stock or obligations of such a foreign cor- poration to the extent that such dividends, interest, and gains are attributable to foreign base company shipping income, and (2) that portion of the distributive share of the income of a partnership attributable to foreign base company shipping income. (g) Increase in qualified investments in foreign base company shipping operations For purposes of subsection (b)(2), the in- crease for any taxable year in qualified invest- ments in foreign base company shipping oper- ations of any controlled foreign corporation is the amount by which- (1) the qualified investments in foreign base company shipping operations (as defined in section 955(b)) of the controlled foreign cor- poration at the close of the taxable year, exceed (2) the qualified investments in foreign base company shipping operations (as defined) of the controlled foreign corporation at the close of the preceding taxable year. (Added Pub. L. 87-834, § 12(a), Oct. 16, 1962, 76 Stat. 1009, and amended Pub. L. 91-172, title IX, § 909(a), Dec. 30, 1969, 83 Stat. 718; Pub. L. 94-12, title VI, § 602,b), (c)(1). (2), (d)(1), (e), Mar. 29, 1975, 89 Stat. 58, 60, 64; Pub. L. 94-455, title X, §§ 1023(a), 1024(a), title XIX, §1906(b)(13)(A). Oct. 4, 1976, 90 Stat. 1620, 1834.) AMENDMENTS 1976-Subsecs. (b)(4), (5). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (b)(7). Pub. L. 94-455, § 1024(a), added par. (7). Subsec. (c)(3). Pub. L. 94-455, § 1023(a), added subpar. (C). 1975-Subsec. (a)(4). Pub. L. 94-12, § 602(d)(1)(A), added par. (4). Subsec. (b)(1). Pub. L. 94-12, § 602(c)(1), struck out subsec. (b)(l) which related to the exclusion of certain dividends, interest, and gains from qualified invest- ments in less developed countries. Subsec. (b)(2). Pub. L. 94-12. §602(d)(1)(B), substi- tuted "foreign base company shipping income to the extent that the amount of such income does not exceed the increase for the taxable year in qualified investments in foreign base company shipping oper- ations of the controlled foreign corporation (as deter- mined under subsection (g))" for "income derived from, or in connection with, the use (or hiring or leas- ing for use) of any aircraft or vessel in foreign com- merce, or the performance of services directly related to the use of any such aircraft or vessel" in text and "Exclusion for reinvested shipping income" for "Ex- clusion of certain shipping income" in the par. catch- line. Subsec. (b)(3). Pub, L. 94-12, § 602(d)(1)(C), (D), (e), substituted "10 percent" for "30 percent" in the catch- line, substituted "paragraphs (2) and (5)" for "para- graphs (1) and (5)" and "10 percent" for "30 percent" in subpar. (A), and substituted "paragraphs (2) and (5)" for "paragraphs (1) and (5)" and "paragraphs (2), (4), and (5)" for "paragraphs (1), (2), (4), and (5)" in subpar. (B). Subsec. (b)(5). Pub. L. 94-12, § 602(d)(l)(E), substi- tuted "the foreign base company services income, and the foreign base company shipping income" for "and the foreign base company services income". Subsec. (b)(6). Pub. L. 94-12, § 602(d)(1)(P), added subsec. (b)(6). Page 606
TITLE 26-INTERNAL REVENUE CODE Subsec. (d)(1). Pub. L. 94-12, § 602(b). provided that for purposes of subsec. (d) personal property does not include agricultural commodities which are not grown in the United States in commercially marketable quantities. Subsecs. (M), (g). Pub. L. 94-12, § 602(c)(2), (d)(1)(0), added subsecs. () and (g). 1969-Subsec. (b)(4). Pub. L. 91-172 inserted refer- ence to a foreign corporation which is an acquired cor- poration, and made the effecting of a transaction giving rise to foreign base income through the con- trolled foreign corporation subject to the Secretary's power to disallow inclusion of any item of such income where such Inclusion will have one of the effects pre- scribed by this section. EFFECTIVE DATE OF 1976 AMENDMENT Section 1023(b) of Pub. L. 94-455 provided that: "The amendment made by this section [enacting subsec. (b)(7) of this section) shall apply to taxable years of foreign corporations beginning after Decem- ber 31, 1975. and to taxable years of United States shareholders (within the meaning of section 951(b) of the Internal Revenue Code of 1954 [section 951(b) of this title]) within which or with which such taxable years of such foreign corporations end." Section 1024(b) of Pub. L. 94-455 provided that: "The amendment made by this section [amending subsec. (c)(3) of this section] shall apply to taxable years of foreign corporations beginning after Decem- ber 31, 1975, and to taxable years of United States shareholders (within the meaning of section 951(b) of the Internal Revenue Code of 1954 [section 951(b) of this title]) within which or with which such taxable years of such foreign corporations end." EFFECTiVE DATE OF 1975 AMmDMENT Amendment by Pub. L. 94-12 applicable to taxable years of foreign corporations begining after Dec. 31, 1975, and to taxable years of United States sharehold- ers (within the meaning of section 951(b) of this title) within which or with which such taxable years of such foreign corporations end, see section 602(f) of Pub. L. 94-12, set out as an Effective Date of 1975 Amendment note under section 955 of this title. EFFECrIV E DATE OF 1969 AMENDMENT Section 909(b) of Pub. L. 91-172 provided that: "The amendment made by subsection (a) [amending subsec. (b)(4) of this section] shall apply to taxable years ending after October 9, 1969." SECTION REFERE TO IN OTMM SECToNS This section is referred to in sections 952, 955, 958, 970, 971 of this title. § 955. Withdrawal of previously excluded subpart F income from qualified investment (a) General rules (1) Amount withdrawn For purposes of this subpart, the amount of previously excluded subpart F Income of any controlled foreign corporation withdrawn from investment in foreign base company shipping operations for any taxable year is an amount equal to the decrease in the amount of qualified investments in foreign base com- pany shipping operations of the controlled foreign corporation for such year, but only to the extent that the amount of such decrease does not exceed an amount equal to- (A) the sum of the amounts excluded under section 954(b)(2) from the foreign base company income of such corporation for all prior taxable years, reduced by (B) the sum of the amounts of previously excluded subpart F income withdrawn from investment in foreign base company ship- ping operations of such corporation deter- mined under this subsection for all prior taxable years. (2) Decrease in qualified investments For purposes of paragraph (1), the amount of the decrease in qualified investments in foreign base company shipping operations of any controlled foreign corporation for any taxable year is the amount by which- (A) the amount of qualified investments in foreign base company shipping oper- ations of the controlled foreign corporation at the close of the preceding taxable year, exceeds (B) the amount of qualified investments In foreign base company shipping oper- ations of the controlled foreign corporation at the close of the taxable year, to the extent that the amount of such de- crease does not exceed the sum of the earn- ings and profits for the taxable year and the earnings and profits accumulated fr'r prior taxable years beginning after December 31, 1975, and the amount of previously excluded subpart F income invested in less developed country corporations described in section 955(c)(2) (as In effect before the enactment of the Tax Reduction Act of 1975) to the extent attributable to earnings and profits accumu- lated for taxable years beginning after De- cember 31, 1962. For purposes of this para- graph, if qualified investments in foreign base company shipping operations are disposed of by the controlled foreign corporation during the taxable year, the amount of the decrease in qualified investments in foreign base com- pany shipping operations of such controlled foreign corporations for such year shall be re- duced by an amount equal to the amount (if any) by which the losses on such dispositions during such year exceed the gains on such dispositions during such year. (3) Pro rata share of amount withdrawn In the case of any United States share- holder, the pro rata share of the amount of previously excluded subpart F income of any controlled foreign corporation withdrawn from investment in foreign base company shipping operations for any taxable year is his pro rata share of the amount determined under paragraph (1). (b) Qualified Investments in foreign base company shipping operations (1) In general For purposes of this subpart, the term "qualified investments in foreign base compa- ny shipping operations" means investments in- (A) any aircraft or vessel used in foreign commerce, and (B) other assets which are used in connec- tion with the performance of services di. rectly related to the use of any such air- craft or vessel. Such term includes, but is not limited to, in- vestments by a controlled foreign corporation in stock or obligations of another controlled foreign corporation which is a related person (within the meaning of section 954(d)(3)) and Page 607 § 955
TITLE 26-INTERNAL REVENUE CODE which holds assets described in the preceding sentence, but only to the extent that such assets are so used. (2) Qualified investments by related persons For purposes of determining the amount of qualified investments in foreign based compa- ny shipping operations, an investment (or a decrease in investment) in such operations by one or more controlled foreign corporations may, under regulations prescribed by the Sec- retary, be treated as an investment (or a de- crease in investment) by another corporation which is a controlled foreign corporation and is a related person (as defined in section 954(d)(3) with respect to the corporation ac- tually making or withdrawing the investment. (3) Special rule For purposes of this subpart, a United States shareholder of a controlled foreign corporation may, under regulations pre- scribed by the Secretary, elect to make the determinations under subsection (a)(2) of this section. and under subsection (g) of section 954 as of the close of the years following the years referred to in such subsections, or as of the close of such longer period of time as such regulations may permit, in lieu of on the last day of such years. Any election under this paragraph made with respect to any tax- able year shall apply to such year and to all succeeding taxable years unless the Secretary consents to the revocation of such election. (4) Amount attributable to property The amount taken into account under this subpart with respect to any property de- scribed in paragraph (1) shall be its adjusted basis, reduced by any liability to which such property is subject. (5) Income excluded under prior law Amounts invested in less developed country corporations described in section 955(c)(2) (as in effect before the enactment of the Tax Re- duction Act of 1975) shall be treated as quali- fied investments in foreign base company shipping operations and shall not be treated as investments in less developed countries for purposes of section 951(a)(1)(A)(ii). (Added Pub. L. 94-12, title V1, § 602(d)(3)(A), Mar. 29, 1975, 89 Stat. 62, and amended Pub. L. 94-455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) REFERENCES IN TEXT Section 955(c)(2) (as in effect before the enactment of the Tax Reduction Act of 1975), referred to in sub- secs. (a)(2) and (b)(5), refers to section 955(c)(2) as added by Pub. L. 87-834, § 12(a), Oct. 16, 1962, 76 Stat. 1013 and as in effect from 1962 until the repeal of that section and the enactment of this section by Pub. L. 94-12. The Tax Reduction Act of 1975, referred to In sub- secs. (a)(2) and (b)(5), is Pub. L. 94-12, Mar. 29, 1975, 89 Stat. 26, which was enacted Mar. 29, 1975. For com- plete classification of this Act to the Code, see Short Title of 1975 Amendment note set out under section 1 of this title and Tables volume. PRIOR PROVISIONS A prior section 955, added Pub. L. 87-834, § 12(a), Oct. 16, 1962, 76 Stat. 1013, covering investments in less developed countries and dealing with less devel- oped country corporations, was repealed by Pub. L. 94- 12, title VI, § 602(c)(5), Mar. 29, 1975, 89 Stat. 59. AMEN MENTrS 1976-Subsec. (b). Pub. L. 94-455 struck out "or his delegate" following "Secretary" once in par. (2), and twice in par. (3). EFFECTIVE DATE Section 602(f) of Pub. L. 94-12 provided that: "The amendments made by this section [enacting this sec- tion, amending sections 851, 902, 951, and 954 of this title, and repealing section 963 and former section 955 of this title] shall apply to taxable years of foreign corporations beginning after December 31, 1975, and to taxable years of United States shareholders (within the meaning of 951(b) of the Internal Revenue Code of 1954 [section 951(b) of this title]) within which or with which such taxable years of such foreign corpo. rations end." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 902, 951, 954, 956, 958, 964, 970 of this title. § 956. Investment of earnings in United States prop- erty (a) General rules For purposes of this subpart- (1) Amount of investment The amount of earnings of a controlled for- eign corporation invested in United States property at the close of any taxable year is the aggregate amount of such property held, directly or indirectly, by the controlled for- eign corporation at the close of the taxable year, to the extent such amount would have constituted a dividend (determined after the application of section 955(a)) if it had been distributed. (2) Pro rata share of increase for year In the case of any United States share- holder, the pro rata share of the increase for any taxable year in the earnings of a con- trolled foreign corporation invested in United States property is the amount determined by subtracting his pro rata share of- (A) the amount determined under para- graph (1) for the close of the preceding tax- able year, reduced by amounts paid during such preceding taxable year to which sec- tion 959(c)(1) applies, from (B) the amount determined under para- graph (1) for the close of the taxable year. The determinations under subparagraphs (A) and (B) shall be made on the basis of stock owned (within the meaning of section 958(a)) by such Udited States shareholder on the last day during the taxable year on which the for- eign corporation is a controlled foreign corpo- ration. (3) Amount attributable to property The amount taken into account under para- graph (1) or (2) with respect to any property shall be its adjusted basis, reduced by any li- ability to which the property is subject. (b) United States property defined (1) In general For purposes of subsection (a), the term "United States property" means any property acquired after December 31, 1962, which is- § 95C Page 608
TITLE 26-INTERNAL REVENUE CODE (A) tangible property located in the United States; (B) stock of a domestic corporation; (C) an obligation of a United States person; or (D) any right to the use in the United States of- (i) a patent or copyright, (ii) an invention, model, or design (whether or not patented), (iii) a secret formula or process, or (iv) any other similar right, which is acquired or developed by the con- trolled foreign corporation for use in the United States. (2) Exceptions For purposes of subsection (a), the term "United States property" does not include- (A) obligations of the United States, money, or deposits with persons carrying on the banking business; (B) property located in the United States which is purchased in the United States for export to, or use in, foreign countries; (C) any obligation of a United States person arising in connection with the sale or processing of property if the amount of such obligation outstanding at no time during the taxable year exceeds the amount which would be ordinary and necessary to carry on the trade or business of both the other party to the sale or processing trans- action and the United States person had the sale or processing transaction been made between unrelated persons; (D) any aircraft, railroad rolling stock, vessel, motor vehicle, or container used in the transportation of persons or property in foreign commerce and used predominantly outside the United States; (E) an amount of assets of an insurance company equivalent to the unearned premi- ums or reserves ordinary and necessary for the proper conduct of its insurance business attributable to contracts which are not con- tracts described in section 953(a)(1); (F) the stock or obligations of a domestic corporation 'vhich is neither a United States shareholder (as defined in section 951(b)) of the controlled foreign corpora- tion, nor a domestic corporation, 25 percent or more of the total combined voting power of which, immediately after the acquisition of any stock in such domestic corporation by the controlled foreign corporation, is owned, or is considered as being owned, by such United States shareholders in the ag- gregate; (0) any movable property (other than a vessel or aircraft) which is used for the pur- pose of exploring for, developing, removing, or transporting resources from ocean waters or under such waters when used on the Continental Shelf of the United States; and (H) an amount of assets of the controlled foreign corporation equal to the earnings and profits accumulated after December 31, 1962, and excluded from subpart F income under section 952(b). (c) Pledges and guarantees For purposes of subsection (a), a controlled foreign corporation shall, under regulations prescribed by the Secretary, be considered as holding an obligation of a United States person if such controlled foreign corporation is a pled- gor or guarantor of such obligations. (Added Pub. L. 87-834, § 12(a), Oct. 16, 1962, 76 Stat. 1015, and amended Pub. L. 94-455, title X, § 1021(a), title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1618, 1834.) AMENDMENTS 1976-Subsec. (b)(2)(F). Pub. L. 94-i'5, §1021(a), added subpar. (F). Former subpar. (F) was redesignat- ed (H). Subsec. (b)(2)(G). Pub. L. 94-455, § 1021(a), added subpar. (0). Subsec. (b)(2)(H). Pub. L. 94-455, § 1021(a), redesig- nated former subpar. (F) as (H). Subsec. (c). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". EFFECTIVE DATE OF 1976 AMENDMENT Section 1021(c) of Pub. L. 94-455 provided that: "The amendments made by this section [amending subsec. (b)(2)(E) to (H) of this section and section 958(b) of this title] shall apply to taxable years of for- eign corporations beginning after December 31, 1975, and to taxable years of United States shareholders (within the meaning of section 951(b) of the Internal Revenue Code of 1954 [section 951(b) of this title]) within which or with which such taxable years of such foreign corporations end. In determining for purposes of any taxable year referred to in the preceding sen- tence the amount referred to In section 956(a)(2)(A) of the Internal Revenue Code of 1954 [subsec. (a)(2)(A) of this section] for the last taxable year of a corpora- tion beginning before January 1, 1976, the amend- ments made by this section shall be deemed also to apply to such last ta cable year." SECTION REFRseiM TO IN OTHER SECTIONS This section is referred to in sections 902, 951, 955, 958, 964, 4916 of this title. § 957. Controlled foreign corporations; United States persons (a) General rule For purposes of this subpart, the term "con- trolled foreign corporation" means any foreign corporation of which more than 50 percent of the total combined voting power of all classes of stock entitled to vote is owned (within the meaning of section 958(a)), or is considered as owned by applying the rules of ownership of section 958(b), by United States shareholders on any day during the taxable year of such for- eign corporation. (b) Special rule for insurance For purposes only of taking into account income described in section 953(a) (relating to income derived from insurance of United States risks), the term "controlled foreign corpora- tion" includes not only a foreign corporation as defined by subsection (a) but also one of which more than 25 percent of the total combined voting power of all classes of stock is owned (within the meaning of section 958(a)), or is considered as owned by applying the rules of ownership of section 958(b), by United States shareholders on any day during the taxable year of such corporation, if the gross amount of premiums or other consideration in respect of Page 609
TITLE 26-INTERNAL REVENUE CODE the reinsurance or the issuing of insurance or annuity contracts described in section 953(a)(1) exceeds 75 percent of the gross amount of all premiums or other consideration in respect of all risks. (c) Corporations organized in United States posses- sions For purposes of this subpart, the term "con- trolled foreign corporation" does not include any corporation created or organized in the Commonwealth of Puerto Rico or a possession of the United States or under the laws of the Commonwealth of Puerto Rico or a possession of the United States if- (1) 80 percent or more of the gross income of such corporation for the 3-year period im- mediately preceding the close of the taxable year (or for such part of such period immedi- ately preceding the close of such taxable year as may be applicable) was derived from sources within the Commonwealth of Puerto Rico or a possession of the United States; and (2) 50 percent or more of the gross income of such corporation for such period, or for such part thereof, was derived from the active conduct within the Commonwealth of Puerto Rico or a possession of the United States of any trades or businesses constituting the manufacture or processing of goods, wares, merchandise, or other tangible personal prop- erty; the processing of agricultural or horti- cultural products or commodities (including but not limited to livestock, poultry, or fur- bearing animals); the catching or taking of any kind of fish or the mining or extraction of natural resources, or any manufacturing or processing of any products or commodities ob- tained from such activities; or the ownership or operation of hotels. For purposes of paragraphs (1) and (2), the de- termination as to whether income was derived from sources within the Commonwealth of Puerto Rico or a possession of the United States and was derived from the active conduct of a described trade or business within the Commonwealth of Puerto Rico or a possession of the United States shall be made under regu. lations prescribed by the Secretary. (d) United Statis person For purposes of this subpart, the term "United States person" has the meaning as- signed to it by section 7701(a)(30) except that- (1) with respect to a corporation organized under the laws of the Commonwealth of Puerto Rico, such term does not include an individual who is a bona fide resident of Puerto Rico, if a dividend received by such in- dividual during the taxable year from such corporation would, for purposes of section 933(1), be treated as income derived from sources within Puerto Rico, (2) with respect to a corporation organized under the laws of the Virgin Islands, such term does not include an individual who is a bona fide resident of the Virgin Islands and whose income tax obligation under this subti- tle for the taxable year is satisfied pursuant to section 28(a) of the Revised Organic Act of the Virgin Islands, approved July 22, 1954 (48 U.S.C. 1642), by paying tax on income derived from all sources both within and outside the Virgin Islands into the treasury of the Virgin Islands, and (3) with respect to a corporation organized under the laws of any other possession of the United States, such term does not include an individual who is a bona fide resident of any such other possession and whose income de- rived from sources within possessions of the United States is not, by reason of section 931(a), includible in gross income under this subtitle for the taxable year, (Added Pub. L. 87-834, § 12(a), Oct. 16, 1962, 76 Stat. 1017, and amended Pub. L. 94-455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) AMENnMmErN 1976-Subsec. (c) Pub. L. 94-455 struck out "or his delegate" following "Secretary". SECTION REnER TO IN OTHER SECTIONS This section is referred to in sections 951, 958, 970, 971, 1248 of this title. § 958. Rules for determining stock ownership (a) Direct and indirect ownership (1) General rule For purposes of this subpart (other than sections 955(b)(1)(A) and (B), 955(c)(2)(A)(ii), and 960(a)(1)), stock owned means- (A) stock owned directly, and (B) stock owned with the application of paragraph (2). (2) Stock ownership through foreign entities For purposes of subparagraph (B) of para- graph (1), stock owned, directly or indirectly, by or for a foreign corporation, foreign part- nership, or foreign trust or foreign estate (within the meaning of section 7701(a)(31)) shall be considered as being owned propor- tionately by its shareholders, partners, or beneficiaries. Stock considered to be owned by a person by reason of the application of the preceding sentence shall, for purposes of applying such sentence, be treated as actually owned by such person. (3) Special rule for mutual insurance companies For purposes of applying paragraph (1) in the case of a foreign mutual insurance compa- ny, the term "stock" shall include any certifi- cate entitling the holder to voting power in the corporation. (b) Constructive ownership For purposes of sections 951(b), 954(d)(3), 956(b)(2), and 957, section 318(a) (relating to constructive ownership of stock) shall apply to the extent that the effect is to treat any United States person as a United States shareholder within the meaning of section 951(b), to treat a person as a related person within the meaning of section 954(d)(3), to treat the stock of a do- mestic corporation as owned by a United States shareholder of the controlled foreign corpora- tion for purposes of section 956(b)(2), or to treat a foreign corporation as a controlled for- eign corporation under section 957, except that- (1) In applying paragraph (1)(A) of section 318(a), stock owned by a nonresident alien in- dividual (other than a foreign trust or foreign § 958 Page 610
TITLE 26-INTERNAL REVENUE CODE estate) shall not be considered as owned by a citizen or by a resident alien individual. (2) In applying subparagraphs (A), (B), and (C) of section 318(a)(2), if a partnership, estate, trust, or corporation owns, directly or indirectly, more than 50 percent of the total combined voting power of all classes of stock entitled to vote of a corporation, it shall be considered as owning all the stock entitled to vote. (3) In applying subparagraph (C) of section 318(a)(2), the phrase "10 percent" shall be substituted for the phrase "50 percent" used in subparagraph (C). (4) Subparagraph (A), (B), and (C) of sec- tion 318(a)(3) shall not be applied so as to consider a United States person as owning stock which is owried by a person who is not a United States person. Paragraphs (1) and (4) shall not apply for pur- poses of section 956(b)(2) to treat stock of a do- mestic corporation as not owned by a United States shareholder. (Added Pub. L. 87-834, § 12(a), Oct. 16, 1962, 76 Stat. 1018, and amended Pub. L. 88-554, § 4(b)(5), Aug. 31, 1964, 78 Stat. 763; Pub. L. 94- 455, title X, § 1021(b), Oct. 4, 1976, 90 Stat. 1619.) REFERENCES IN TEXT Section 955(c)(2)(A)(ii), referred to in subsec. (a)(1), was section 955(c)(2)(A)(ii) of this title as added by Pub. L. 87-834, § 12(a), Oct. 16, 1962, 72 Stat. 1013 and was repealed by Pub. L. 94-12, title VI, § 602(c)(5), Mar. 29, 1975, 89 Stat. 59. See prior provisions note set out under section 955 of this title. AMENDMENTS 1976-Subsec. (b). Pub. L. 94-455 inserted "956(b)(2)" following "purposes of sections 951(b), 954(d)(3),", "to treat the stock of a domestic corpora- tion as owned by a United States shareholder of the controlled foreign corporation for purposes of section 956(b)(2)" following "meaning of section 954(d)(3)" and "Paragraphs (1) and (4) shall not apply for pur- poses of section 556(b)(2) to treat stock of a domestic corporation as not owned by a United States share- holder" following subpar. (4). 1964-Subsec. (b). Pub. L. 88-554 redesignated pars. (4) and (5) as (3) and (4), respectively, eliminated former par. (3) which related to ownership of stock by a partnership, estate, trust, or corporation for pur- poses of applying the first sentence of subpars. (A) and (B), and subpar. (C(i) of section 318(a)(2) of this title, and made amendments throughout subsec. (b) to conform to the changes made in section 318 of this title by Pub. L. 88-554. EFFECTIVE DATE OF 1976 AMENDMENT Amendment by Pub. L. 94-455 applicable to taxable years of foreign corporations beginning after Dec. 31, 1975, and Lo taxable years of United States sharehold- ers within which or with which such taxable years of such corporations end, see section 1021(c) of Pub. L. 94-455, set out as an Effective Date of 1976 Amend- ment note under section 956 of this title. EFFECTIVE DATE OF 1964 AMENDMENT Amendment by section 4 of Pub. L. 88-554 effective Aug. 31, 1964, except that for purposes of sections 302 and 304 of this title, such amendments shall not apply to distributions in payment for stock acquisitions or redemptions, if such acquisitions or redemptions oc. curred before Aug. 31, 1964, see section 4(c) of Pub. L. 88-554 set out as an Effective Date of 1964 Amend- ment note under section 318 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 318, 545, 679, 864, 951, 952, 954, 956, 957, 959, 961, 964, 1246, 1248, 1249, 2107 of this title. § 959. Exclusion from gross income of previously taxed earnings and profits (a) Exclusion from gross income of United States persons For purposes of this chapter, the earnings and profits for a taxable year of a foreign cor- poration attributable to amounts which are, or have been, included in the gross income of a United States shareholder under section 951(a) shall not, when- (1) such amounts are distributed to, or (2) such amounts would, but for this subsec- tion, be included under section 951(a)(1)(B) in the gross income of, such shareholder (or any other United States person who acquires from any person any por- tion of the interest of such United States share- holder in such foreign corporation, but only to the extent of such portion, and subject to such proof of the identity of such interest as the Secretary may by regulations prescribe) direct- ly or indirectly through a chain of ownership described under section 958(a), be again includ- ed in the gross income of such United States shareholder (or of such other United States person). (b) Exclusion from gross income of certain foreign subsidiaries For purposes of section 951(a), the earnings and profits for a taxable year of a controlled foreign corporation attributable to amounts which are, or have been, included in the gross income of a United States shareholder under section 951(a), shall not, when distributed through a chain of ownership described under section 958(a), be also included in the gross income of another controlled foreign corpora- tion in such chain for purposes of the applica- tion of section 951(a) to such other controlled foreign corporation with respect to such United States shareholder (or to any other United States shareholder who acquires from any person any portion of the interest of such United States shareholder in the controlled for- eign corporation, but only to the extent of such portion, and subject to such proof of identity of such interest as the Secretary may prescribe by regulations). (c) Allocation of distributions For purposes of subsections (a) and (b), sec- tion 316(a) shall be applied by applying para- graph (2) thereof, and then paragraph (1) thereof- (1) first to earnings and profits attributable to amounts included in gross income under section 951(a)(1)(B) (or which would have been included except for subsection (a)(2) of this section), (2) then to earnings and profits attributable to amounts included in gross income under section 951(a)(1)(A) (but reduced by amounts not included under section 951(a)(1)(B) be- cause of the exclusion in subsection (a)(2) of this section), and (3) then to other earnings and profits. Page 611 § 959
TITLE 26-INTERNAL REVENUE CODE (d) Distributions excluded from gross income not to be treated as dividends Except as provided in section 960(a)(3), any distribution excluded from gross income under subsection (a) shall be treated, for purposes of this chapter, as a distribution which is not a dividend. (Added Pub. L. 87-834, § 12(a), Oct. 16, 1962, 76 Stat. 1019, and amended Pub. L. 94-455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) AMENDMENTS 1976-Subsecs. (a). (b). Pub. L. 94-455 struck out "or his delegate" following "Secretary". SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 951, 952, 956, 960, 961, 962, 1246, 1248 of this title. § 960. Special rules for foreign tax credit (a) Taxes paid by a foreign corporation (1) General rule For purposes of subpart A of this part, if there is included, under section 951(a), in the gross income of a domestic corporation any amount attributable to earnings and profits- (A) of a foreign corporation (hereafter in this subsection referred to as the "first for- eign corporation") at least 10 percent of the voting stock of which is owned by such do- mestic corporation, or (B) of a second foreign corporation (her- einafter in this subsection referred to as the "second foreign corporation") at least 10 percent of the voting stock of which is owned by the first foreign corporation, or (C) of a third foreign corporation (herein- after in this subsection referred to as the "third foreign corporation") at least 10 per- cent of the voting stock of which is ownta by the second foreign corporation, then, under regulations prescribed by the Secretary, such domestic corporation shall be deemed to have paid the same proportion of the total income, war profits, and excess prof- its taxes paid (or deemed paid) by such for- eign corporation to a foreign country or pos- session of the United States for the taxable year on or with respect to the earnings and profits of such foreign corporation which the amount of earnings and profits of such for- eign corporation so included in gross income of the domestic corporation bears to the entire amount of the earnings and profits of such corporation for such taxable year. This paragraph shall not apply with respect to any amount included in the gross income of such domestic corporation attributable to earnings and profits of the second foreign corporation or of the third foreign corporation unless, in the case of the second foreign corporation, the percentage-of-voting-stock requirement of section 902(b)(3)(A) is satisfied, and in the case of the third foreign corporation, the per- centage-of-voting-stock requirement of sec- tion 902(b)(3)(B) is satisfied. (2) Taxes previously deemed paid by domestic cor- poration If a domestic corporation receives a distri- bution from a foreign corporation, any por- tion of which is excluded from gross income under section 959, the income, war profits, and excess profits taxes paid or deemed paid by such foreign corporation to any foreign country or to any possession of the United States in connection with the earnings and profits of such foreign corporation from which such distribution is made shall not be taken into account for purposes of section 902, to the extent such taxes were deemed paid by a domestic corporation under para- graph (1) for any prior taxable year. (3) Taxes paid by foreign corporation and not pre- viously deemed paid by domestic corporation Any portion of a distribution from . foreign corporation received by a domestic corpora- tion which is excluded from gross income under section 959(a) shall be treated by the domestic corporation as a dividend, solely for purposes of taking into account under section 902 any income, war profits, or excess profits taxes paid to any foreign country or to any possession of the United States, on or with re- spect to the accumulated profits of such for- eign corporation from which such distribu- tion is made, which were not deemed paid by the domestic corporation under paragraph (1) for any prior taxable year., (b) Special rules for foreign tax credit In year of re- ceipt of previously taxed earnings and profits (1) Increase in section 904 limitation In the case of any taxpayer who- (A) either (i) chose to have the benefits of subpart A of this part for a taxable year in which he was required under section 951(a) to include in his gross income an amount in respect of a controlled foreign corporation, or (ii) did not pay or accrue for such taxable year any income, war profits, or excess prof- its taxes to any foreign country or to any possession of the United States, and (B) chooses to have the benefits of sub- part A of this part for the taxable year in which he receives a distribution or amount which is excluded from gross income under section 959(a) and which is attributable to earnings and profits of the controlled for- eign corporation which was included in his gross income for the taxable year referred to in subparagraph (A), and (C) for the taxable year in which such dis- tribution or amount Is received, pays, or Is deemed to have paid, or accrues income, war profits, or excess profits taxes to a for- eign country or to any possession of the United States with respect to such distribu- tion or amount, the limitation under section 904 for the tax- able year in which such distribution or amount is received shall be increased as pro- vided in paragraph (2), but such increase shall not exceed the amount of such taxes paid, or deemed paid, or accrued with respect to such distribution or amount. (2) Amount of increase The amount of increase of the limitation under section 904(a) for the taxable year in which the distribution or amount referred to in paragraph (1)(B) is received shall be an amount equal to- § 960 Page 612
TITLE 26-INTERNAL REVENUE CODE (A) the amount by which the limitation under section 904(a) for the taxable year re- ferred to in paragraph (1)(A) was increased by reason of the inclusion in gross income under section 951(a) of the amount in re- spect of the controlled foreign corporation, reduced by (B) the amount of any income, war prof- its, and excess profits taxes paid, or deemed paid, or accrued to any foreign country or possession of the United States which were allowable as a credit under section 901 for the taxable year referred to in paragraph (1)(A) and which would not have been al- lowable but for the inclusion in gross incorme of the amount described in subpara- graph (A). (3) Cases In which taxes not to be allowed as de- duction In the case of any taxpayer who- (A) chose to have the benefits of subpart A of this part for a taxable year in which he was required under section 951(a) to include in his gross income an amount in respect of a controlled foreign corporation, and (B) does not choose to have the benefits of subpart A of this part for the taxable year in which he receives a distribution or amount which is excluded from gross income under section 959(a) and which is attributable to earnings and profits of the controlled foreign corporation which was included in his gross income for the taxable year referred to in subparagraph (A), no deduction shall be allowed under section 164 for the taxable year in which such distri- bution or amount is received for any income, war profits, or excess profits taxes paid or ac- crued to any foreign country or to any posses- sion of the United States on or with respect to such distribution or amount. (4) Insufficient taxable income If an increase in the limitation under this subsection exceedi, the tax imposed by this chapter for such year, the amount of such excess shall be deemed an overpayment of tax for such year. (Added Pub. L. 87-834, § 12(a), Oct. 16, 1962, 76 Stat. 1020, and amended Pub. L. 94-455, title X, §§ 1031(b)(1), 1033(b)(2), 1037(a), Oct. 4, 1976, 90 Stat. 1622, 1628, 1633.) AMENDMENTS 1976-Subsec. (a)(1). Pub. L. 94-455, §§ 1033(b)(2), 1037(a), substituted "bears to the entire amount of the earnings and profits of such foreign corporation for such taxable year" for "bears to-" following "gross income of the domestic corporation", struck out sub- pars. (C) and (D) relating to corporations which are and are not less developed country corporations, added in subpar. (A) "(hereafter in this subsection referred to as the 'first foreign corporation')" following "for- eign corporation", substituted in subpar. (B) "of a second foreign corporation (hereinafter in this subsec- tion referred to as the 'second foreign corporation') at least 10 percent of the voting stock of which is owned by the first foreign corporation, or" for "of a foreign corporation at least 50 percent of the voting stock of which is owned by a foreign corporation at least 10 percent of the voting stock of which in turn owned by such domestic corporation" following "(B)", added subpar. (C), and added "This paragraph shall not apply with respect to any amount included in the gross income of such domestic corporation attribut- able to earning and profits of the second foreign cor- poration or of the third foreign corporation unless, in the case of the second foreign corporation, the per- centage-of-voting-stock requirement of section 902(b)(3)(A) Is satisfied, and in the case of the third foreign corporation, the percentage-of-voting-stock re- quirement of section 902(b)(3)(B) is satisfied" follow- ing "such taxable year". Subsec. (b). Pub. L. 94-455, § 1031(b)(1), struck out "applicable" in par. (1) following "amount, the", in par. (2) following "increase of the", and in subpar. (A) of par. (2) following "by which the". ErncTivz DATE OF 1976 AmENDMMErr Amendment of subsec. (b) by section 1031(b)(l) of Pub. L. 94-455 applicable to taxable years beginning after Dec. 31, 1975, see section 1031(c) of Pub. L. 94- 455, set out as an Effective Date of 1976 Amendment note under section 904 of this title. Amendment of subsec. (a) by section 1033(b)(2) of Pub. L. 94-455 applicable in respect of any distribution received by a domestic corporation after Dec. 31, 1977, and in respect of any distribution received by a domes- tic corporation before Jan. 1, 1978, in a taxable year ox such corporation beginning after Dec. 31, 1975, but only to the extent that such distribution is made out of the accumulated profits of a foreign corporation for a taxable year beginning after Dec. 31, 1975, see sec- tion 1033(c) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 902 of this title. Section 1037(b) of Pub. L. 94-455 provided that: "The amendment made by this section [to subsec. (a)(1) of this section] shall apply with respect to earn- ings and profits of a foreign corporation, included, under section 951(a) of the Internal Revenue Code of 1954 [section 951(a) of this title], in the gross income of a domestic corporation in taxable years beginning after December 31, 1976." SECTION REFERRED TO IN OTHER SECTIONS This section is refcrred to in sections 78, 535, 545, 901, 902, 904, 907, 908, 958, 959, 962, 6038 of this title. § 961. Adjustments to basis of stock In controlled for- eign corporations and of other property (a) Increase in basis Under regulations prescribed by the Secre- tary, the basis of a United States shareholder's stock in a controlled foreign corporation, and the basis of property of a United States hare- holder by reason of which he is conidered under section 958(a)(2) as owning stock of a controlled foreign corporation, shall be in- creased by the amount required to be included in his gross income under section 951(a) with respect to such stock or with respect to such property, as the case may be, but only to the extent to which such amount was included in the gross income of such United States share- holder. In the case of a United States share- holder who has made an election under section 962 for the taxable year, the increase in basis provided by this subsection shall not exceed an amount equal to the amount of tax paid under this chapter with respect to the amounts re- quired to be included in his gross income under section 951(a). (b) Reduction in basis (1) In general Under regulations prescribed by the Secre- tary, the adjusted basis of stock.: or other property with respect to which a United States shareholder or a United States person receives an amount which is excluded from 71-999 0 - '78 - 41 (Vol. 7) Page 613
TITLE 26-INTERNAL REVENUE CODE gross income under section 959(a) shall be re- duced by the amount so excluded. In the case of a United States shareholder who has made an election under section 962 for any prior taxable year, the reduction in basis provided by this paragraph shall not exceed an amount equal to the amount received which is ex- cluded from gross income under section 959(a) after the application of section 962(d). (2) Amount in excess of basis To the extent that an amount excluded from gross income under section 959(a) ex- ceeds the adjusted basis of the stock or other property with respect to which It is received, the amount shall be treated as gain from the sale or exchange of property. (Added Pub. L. 87-834, § 12(a), Oct. 16, 1962, 76 Stat. 1022, and amended Pub. L. 94-455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) AMENDMENTS 1976-Subsecs. (a), (b)(1). Pub. L. 94-455 struck out "or his delegate" following "Secretary". SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 1016 of this title. § 962. Election by individuals to be subject to tax at corporate rates (a) General rule Under regulations prescribed by the Secre- tary, in the case of a United States shareholder who is an individual and who elects to have the provisions of this section apply for the taxable year- (1) the tax imposed under this chapter on amounts which are included in his gross income under section 951(a) shall (in lieu of the tax determined under section 1) be an amount equal to the tax which would be im- posed under section 11 if such amounts were received by a domestic corporation, and (2) for purposes of applying the provisions of section 960 (relating to foreign tax credit) such amounts shall be treated as if they were received by a domestic corporation. (b) Election An election to have the provisions of this sec- tion apply for any taxable year shall be made by a United States shareholder at such time and in such manner as the Secretary shall pre- scribe by regulations. An election made for any taxable year may not be revoked except with the consent of the Secretary. (c) Surtax exemption For purposes of applying subsection (a)(1), the surtax exemption provided by section 11(c) shall not exceed, in the case of any United States shareholder, an amount which bears the same ratio to the surtax exemption as the amounts included in his gross income under section 951(a) for the taxable year bears to his pro rata share of the earnings and profits for the taxable year of all controlled foreign corpo- rations with respect to which such United States shareholder includes any amount in gross income under section 951(a). (d) Special rule for actual distributions The earnings and profits of a foreign corpora- tion attributable to amounts which were includ- ed in the gross income of a United States share- holder under section 951(a) and with respect to which an election under this sectioi applied shall, when such earnings and profits are dis- tributed, notwithstanding the provisions of sec- tion 959(a)(1), be included in gross income to the extent that such earnings and profits so distributed exceed the amount of tax paid under this chapter on the amounts to which such election applied. (Added Pub. L. 87-834, § 12(a), Oct. 16, 1962, 76 Stat. 1023, and amended Pub. L. 94-12, title III, § 303(c)(3), Mar. 29, 1975, 89 Stat. 45; Pub. L. 94-164, §4(d)(1), Dec. 23, 1975, 89 Stat. 975; Pub. L. 94-455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) AMENDMENTS 176-Subsecs. (a), (b). Pub, L. 94-455 struck out "or his delegate" following "Secretary" wherever appear- ing. 1975-Subsec. (c). Pub. L. 94-164 substituted "same ratio to the surtax exemption" for "same ratio to $25,000" in subsec. c) as such subsec. (c) is in effect for taxable years ending after Dec. 31, 1975. Pub. L. 94-12 substituted "$50,000" for "$25,000". EFFECTIVE AND TERMINATION DATES OF 1975 AMENDMENTS Amendment by Pub. L. 94-164 applicable to taxable years beginning after Dec. 31, 1975, see section 4(e) of Pub. L. 94-164, set out as an Effective and Termina- tion Dates of 1975 Amendments note under section 11 of this title. Amendment by Pub. L. 94-12 applicable to taxable years ending after Dec. 31, 1974, but to cease to apply for taxable years ending after Dec. 31, 1975, see sec- tion 305(b)(1) of Pub. L. 94-12, set out as an Effective and Termination Dates of 1975 Amendments note under section 11 of this title. SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in section 961 of this title. [§ 963. Repealed. Pub. L. 94-12, title VI, § 602(a)(1), Mar. 29, 1975, 89 Stat. 581 Section, added Pub. L. 87-834, § 12(a), Oct. 16, 1962, 76 Stat. 1023, and amended Pub. L. 88-272, title I, § 123(b), Feb. 26, 1964, 78 Stat. 29; Pub. L. 90-364, title I, § 102(b), June 28, 1968. 82 Stat. 255; Pub. L. 91-53, § 5(b), Aug. 7, 1969. 83 Stat. 95; Pub. L. 91-172, title VII, § 701(b), Dec. 30, 1969, 83 Stat. 659, dealt with the receipt of minimum distributions by domestic corpora. tions. EFFECTIVE DATE OF REPEAL Repeal effective with respect to taxable years for foreign corporations beginning after Dec. 31, 1975, and to taxable years of United States shareholders (within the meaning of section 951(b) of this title) within which or with which such taxable years of such for- eign corporations end, see section 602(f) of Pub. L. 94- 12, set out as an Effective Date note under section 955 of this title. § 964. Miscellaneous provisions (a) Earnings and profits Except as provided in section 312(k)(3), for purposes of this subpart, the earnings and prof- its of any foreign corporation, and the deficit in earnings and profits of any foreign corporation, for any taxable year shall be determined ac- § 962 Page 614
TITLE 26-INTERNAL REVENUE CODE cording to rules substantially similar to those applicable to domestic corporations, under reg- ulations prescribed by the Secretary. In deter- mining such earnings and profits, or the deficit in such earnings and profits, the amount of any illegal bribe, kickback, or other payment (within the meaning of section 162(c)) shall not be taken into account to decrease such earnings and profits or to increase such deficit. (b) Blocked foreign income Under regulations prescribed by the Secre- tary, no part of the earnings and profits of a controlled foreign corporation for any taxable year shall be included in earnings and profits for purposes of sections 952, 955, and 956, if it is established to the satisfaction of the Secretary that such part could not have been distributed by the controlled foreign corporation to United States shareholders who own (within the mean- ing of section 958(a)) stock of such controlled foreign corporation because of currency or other restrictions or limitations imposed under the laws of any foreign country. (c) Records and accounts of United States sharehold- erg (1) Records and accounts to be maintained The Secretary may by regulations require each person who is, or has been, a United States shareholder of a controlled foreign corporation to maintain such records and ac- counts as may be prescribed by such regula- tions as necessary to carry out the provisions of this subpart and subpart 0. (2) Two or more persons required to maintain or furnish the same records and accounts with re- spect to the same foreign corporation Where, but for this paragraph, two or more United States persons would be required to maintain or furnish the same records and ac- counts as may by regulations be required under paragraph (1) with respect to the same controlled foreign corporation for the same period, the Secretary may by regulations pro- vide that the maintenance or furnishing of such records and accounts by only one such person shall satisfy the requirements of para- graph (1) for such other persons. (Added Pub. L. 87-834, § 12(a), Oct. 16, 1962, 76 Stat. 1027, and amended Pub. L. 91-172, title IV, § 442(b)(1), Dec. 30, 1969, 83 Stat. 628; Pub. L. 94-455, title X, § 1065(b), title XIX, §§ 1901(b)(32)(B)(iii), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1654, 1800, 1834.) AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, §§ 1065(b), 1901(b)(32)(B)(ii), 1906(b)(13)(A), struck out "or his delegate" following "Secretary" added "In determin- ing such earnings and profits, the amount of any il- legal bribe, kickback, or other payment (within the meaning of section 162(c)) shall not be taken into ac- count to decrease such earnings and profits or to in- crease such deficit" following "Secretary" and substi- tuted "312(k)(3)" for "312(m)(3)" following "provided in section". Subsecs. (b), (c)(1), (2). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" whenever appearing. 1969-Subsec. (a). Pub. L. 91-172 added reference to the exception provided for in section 312(m)(3). EmcTIvE DATE OF 1976 AMENDMENT Amendment of subsec. (a) by section 1065(b) of Pub. L. 94-455 applicable to payments described in section 162(c) of this title made more than 30 days after Oct. 4. 1976, see section 1066(b) of Pub. L. 94-455, set (ut as an Effective Date of 1976 Amendment note under sec- tion 952 of this title. SUBPART G-EXPORT TRADE CORPORATIONS Sec. 970. Reduction of su opart F income of export trade corporations. 971. Definitions. [972. Repealed.] ,%MENDMENTS 1976-Pub. L. 94-4t,5, title XIX, § 1901(b)(27)(B), Oct. 4, 1976, 90 Stat. 1799, struck out item 972. 1962-Pub. L. 87-834, § 12(a), Oct. 16, 1962, 76 Stat. 1027, added the heading of subpart G, and items 970 to 972. SUBPART REFERRED TO IN OTHER SECTIONS This subpart is referred to in section 964 of this title. § 970. Reduction of subpart F income of export trade corporations (a) Export trade income constituting foreign base company income (I) In general In the case of a controlled foreign corpora- tion (as defined in section 957) which for the taxable year is an export trade corporation, the subpart F income (determined without regard to this subpart) of such corporation for such year shall be reduced by an amount equal to so much of the export trade income (as defined in section 971(b)) of such corpora- tion for such year as constitutes foreign base company income (as defined in section 954), but only to the extent that such amount does not exceed whichever of the following amounts is the lesser: (A) an amount equal to IV2 times so much of the export promotion expenses (as de- fined in section 971(d)) of such corporation for such year as is probably allocable to the export trade income which constitutes for- eign base company income of such corpora- tion for such year, or (B) an amount equal to 10 percent of so much of the gross receipts for such year (or, in the case of gross receipts arising from commissions, fees, or other compensation for its services, so much of the gross amount upon the basis of which such com- missions, fees, or other compensation is computed) accruing to such export trade corporation from the sale, installation, op- eration, maintenance, or use of property in respect of which such corporation derives export trade income as is properly allocable to the export trade income which consti- tutes foreign base company income of such corporation for such year. The allocations with respect to export trade income which constitutes foreign base compa- ny income under subparagraphs (A) and (B) shall be made under regulations prescribed by the Secretary. Page 615 § 970
TITLE 26-INTERNAL REVENUE CODE (2) Overall limitation The reduction under paragraph (1) for any taxable years shall not exceed an amount which bears the same ratio to the increase in the Investments in export trade assets (as de- fined in section 971(c)) of such corporation for such year as the export trade income which constitutes foreign base company income of such corporation for such year bears to the entire export trade income of such corporation for such year. (b) Inclusion of certain previously excluded amounts Each United States shareholder of a con- trolled foreign corporation which for any prior taxable year was an export trade corporation shall include in his gross Income under section 951(a)(1)(A)(ii), as an amount to which section 955 (relating to withdrawal of previously ex- cluded subpart F income from qualified invest- ment) applies, his pro rata share of the amount of decrease in the investments in export trade assets of such corporation for such year, but only to the extent that his pro rata share of such amount does not exceed an amount equal to- (1) his pro rata share of the sum of (A) the amounts by which the subpart F income of such corporation was reduced for all prior taxable years under subsection (a), and (B) the amounts not included in subpart F income (determined without regard to this subpart) for all prior taxable years by reason of the treatment (under section 972 as in effect before the date of the enactment of the Tax Reform Act of 1976) of two or more con- trolled foreign corporations which are export trade corporations as a single controlled for- eign corporation, reduced by (2) the sum of the amounts which were in- cluded in his gross income under section 951(a)(1)(A)(ii) under the provisions of this subsection for all prior taxable years. (c) Investments in export trade assets (1) Amount of Investments For purposes of this section, the amount taken into account with respect to any export trade asset shall be its adjusted basis, reduced by any liability to which the asset is subject. (2) Increase in investments in export trade assets. For purposes of subsection (a), the amount of increase in investments in export trade assets of any controlled foreign corporation for any taxable year is the amount by which- (A) the amount of such investments at the close of the taxable year, exceeds (B) the amount of such investments at the close of the preceding taxable year. (3) Decrease In investments in export trade assets. For purposes of subsection (b), the amount of decrease in investments in export trade assets of any controlled foreign corporation for any taxable year is the amount by which- (A) the amount of such investments at the close of the preceding taxable year (re- duced by an amount equal to the amount of net loss sustained during the taxable year with respect to export trade assets), exceeds (B) the amount of such investments at the close of the taxable year. (4) Special rule A United States shareholder of an export trade corporation may, under regulations pre- scribed by the Secretary, make the determi- nations under paragraphs (2) and (3) as of the close of the 75th day after the close of the years referred to in such paragraphs in lieu of on the last day of such years. A United States shareholder of an export trade corporation may, under regulations prescribed by the Sec- retary, make the determinations under para- graphs (2) and (3) with respect to export trade assets described in section 971(c)(2) as of the close of the years following the years referred to in such paragraphs, or as of the close of such longer period of time as such regulations may permit, in lieu of on the last day of such years and in lieu of on the day prescribed in the preceding sentence. Any election under this paragraph made with re- spect to any taxable year shall apply to such year and to all succeeding taxable years unless the Secretary consents to the revoca- tion of such election. (Added Pub. L. 87-834, § 12(a), Oct. 16, 1972, 76 Stat. 1027, and amended Pub. L. 94-455, title XIX, §§ 1901(b)(27)(A), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1799, 1834.) REs'mxNcEs IN TEXT The Tax Reform Act of 1976, referred to in subsec. (b)(1), is Pub. L. 94-455, Oct. 4, 1976, 90 Stat. 1250, which was enacted Oct. 4, 1976. Section 972 of this title was repealed by Pub. L. 94-455, title XIX, § 1901(a)(120), Oct. 4, 1976, 90 Stat. 1784. For complete classification of this Act to the Code, see Tables volume. AMENDMENTS 1976-Subsec. (a)(1). Pub. L. 94-455, § 1906(b)(13)(A). struck out "or his delegate" following "Secretary". Subsec. (b)(1). Pub. L. 94-455, § 1901(b)(27)(A), sub- stituted "treatment (under section 972 as in effect before the date of enactment of the Tax Reform Act of 1976) of two or more controlled foreign corpora- tions which are export trade corporations as a single controlled corporation" for "application of section 972" following "reason of the". Subsec. (c)(4). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" in three places. EFCTIVE DATE OF 1976 AMENDMENT Amendment of subsec. (b)(1) by section 1901(b)(27)(A) of Pub. L. 94-455 applicable with re- spect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Ef- fective Date of 1976 Amendment note under section 2 of this title. EXPORT TRADE CORPORATIONS Section 505(a) and (b) of Pub. L. 92-178, title V, Dec. 10, 1971, 85 Stat. 551, provided as follows: "(a) Use of terms.-Except as otherwise expressly provided, whenever in this section a reference is made to a section, chapter, or other provision, the reference shall be considered to be made to a section, chapter, or other provision of the Internal Revenue Code of 1954 [this title], and terms used in this section shall have the same meaning as when used in such Code. "(b) Transfer to a DISC of assets of export trade corporation. "(1) In general.-If a corporation (hereinafter in this section called 'parent') owns all of the outstand- Page 616 § 970
TITLE 26-INTERNAL REVENUE CODE Ing stock of an export trade corporation (as defined in section 971), and the export trade corporation, during a taxable year beginning before January 1, 1976, transfers property, without receiving consider- ation, to a DISC (as defined in section 992(a)) all of whose outstanding stock is owned by the parent, and if the amount transferred by the export trade corpo- ration is not less than the amount of its untaxed subpart F income (as defined In paragraph (2) of this subsection) at the time of such transfer, then- "(A) notwithstanding section 367 or any other provision of chapter 1, no gain or loss to the export trade corporation, the parent, or the DISC shall be recognized by reason of such transfer; "(B) the earnings and profits of the DISC shall be increased by the amount transferred to it by the export trade corporation and such amount shall be Included in the accumulated DISC income, and for purposes of section 861(a)(2)(D) shall be considered to be qualified export receipts; "(C) the adjusted basis of the assets transferred to the DISC shall be the same in the hands of the DISC as in the hands of the export trade corpora- tion; "(D) the earnings and profits of the export trade corporation shall be reduced by the amount trans- ferred to the DISC, to the extent thereof, with the reduction being applied first to the untaxed sub- part F income and then to the other earnings and profits in the order in which they were most re- cently accumulated; "(E the basis of the parent's stock in the export trade corporation shall be decreased by the amount obtained by multiplying its basis in such stock by a fraction the numerator of which is the amount transferred to the DISC and the denomi- nator of which is the aggregate adjusted basis of all the assets of the export trade corporation im- mediately before such transfer; "(F) the basis of the parent's stock in the DISC shall be increased by the amount of the reduction under subparagraph (E) of its basis in the stock of the export trade corporation; "(0) the property transferred to the DISC shall not be considered to reduce the Investments of the export trade corporation in export trade assets for purposes of applying section 970(b); and "(H) any foreign Income taxes which would have been deemed under section 902 to have been paid by the parent if the transfer had been made to the parent shall be treated as foreign income taxes paid by the DISC. For purposes of this section, the amount transferred by trhe export trade corporation to the DISC shall be the aggregate of the adjusted basis of the properties transferred, with proper adjustment for any indebt- edness secured by such property or assumed by the DISC in connection with the transfer. For purposes of this section, a foreign corporation which qualified as an export trade corporation for any 3 taxable years beginning before November 1, 1971, shall be treated as an export trade corporation. "(2) Definition of untaxed subpart F income.-For purposes of this section, the term 'untaxed subpart F income' means with respect to an export trade cor- poration the amount by which- "(A) the sum of the amount by which the sub- part F income of such corporation was reduced for the taxable year and all prior taxable years under section 970(a) and the amounts not included in subpart P Income (determined without regard to subpart 0 of subchapter N of chapter 1) for all prior taxable years by reason of the application of section 972, exceeds "(B) the sum of the amounts which were includ- ed In the gross income of the shareholders of such corporation under section 951(a)(1)(A)(Il) and under the provision of section 970(b) for all prior taxable years, determined without regard to the transfer of property described in paragraph (1) of this subsection. "(3) Special cases.-If the provisions of paragraph (1) of this subsection are not applicable solely be- cause the export trade corporation or the DISC, or both, are not owned in the manner prescribed in such paragraph, the provisions shall nevertheless be applicable in such cases to the extent, and In accor- dance with such rules, as iray be prescribed by the Secretary or his delegate. "(4) Treatment of export trade assets.-If the pro- visions of this subsection are applicable, accounts re- ceivable held by an export trade corporation and transferred to a DISC, to the extent such receivables were export trade assets in the hands of the export trade corporation, shall be treated as qualified export assets for purposes of section 993(b)." § 971. Definitions (a) Export trade corporations For purposes of this subpart, the term "export trade corporation" means- (1) In general A controlled foreign corporation (as defined in section 957) which satisfies the following conditions: (A) 90 percent or more of the gross Income of such corporation for the 3-year period immediately preceding the close of the taxable year (or such part of such period subsequent to the effective date of this subpart during which the corporation was in existence) was derived from sources without the United States, and (B) 75 percent or more of the gross income of such corporation for such period constituted gross income in respect of which such corporation derived export trade income. (2) Special rule If 50 percent or more of the gross income of a controlled foreign corporation in the period specified in subsection (a)(1)(A) Is gross income in respect of which such corporation derived export trade income in respect of ag- ricultural products grown in the United States, it may qualify as an export trade cor- poration although It does not meet the re- quirements of subsection (a)(1)(B). (3) Limitation No controlled foreign corporation may qualify as an export trade corporation for any taxable year beginning after October 31, 1971, unless it qualified as an export trade corpora- tion for any taxable year beginning before such date, If a corporation fails to qualify as an export trade corporation for a period of any 3 consecutive taxable years beginning after such date, it may not qualify as an export trade corporation for any taxable year beginning after such period. (b) Export trade income For the purposes of this subpart, the term "export trade income" means net income from- (1) the sale to an unrelated person for use, consumption, or disposition outside the United States of export property (as defined in subsection (e)), or from commissions, fees, compensation, or other income from the per- formance of commercial, Industrial, financial, technical, scientific, managerial, engineering, architectural, skilled, or other services in re- spect to such sales or in respect of the Instal- Page 617
TITLE 26-INTERNAL REVENUE CODE lation or maintenance of such export proper- ty; (2) commissions, fees, compensation, oi other income from commercial, industrial, fi- nancial, technical, scientific, managerial, engi- neering, architectural, skilled, or other ser- vices performed in connection with the use by an unrelated person outside the United States of patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property acquired or developed and owned by the manufacturer, producer, grower, or extractor of export prop- erty in respect of which the export trade cor- poration earns export trade income under paragraph (1); (3) commissions, fees, rentals, or other com- pensation or income attributable to the use of export property by an unrelated person or at- tributable to the use of export property in the rendition of technical, scientific, or engi- neering services to an unrelated person; and (4) interest from export trade assets de- scribed in subsection (c)(4). For purposes of paragraph (3), if a controlled foreign corporation receives income from an unrelated person attributable to the use of export property in the rendition of services to such unrelated person together with income at- tributable to the rendition of other services to such unrelated person, including personal ser- vices, the amount of such aggregate income which shall be considered to be attributable to the use of the export property shall (if such amount cannot be established by reference to transactions between unrelated persons) be that part of such aggregate income which the cost of the export property consumed in the rendition of such services (including a reason- able allowance for depreciation) bears to the total cost and expenses attributable to such ag- gregate income. (c) Export trade assets For purposes of this subpart, the term "export trade assets" means- (1) working capital reasonably necessary for the production of export trade income, (2) inventory of export property held for use, consumption, or disposition outside the United States, (3) facilities located outside the United States for the storage, handling, transporta- tion, packaging, or servicing of export proper- ty, and (4) evidences of indebtedness executed by persons, other than related persons, in con- nection with payment for purchases of export property for use, consumption, or disposition outside the United States, or in comection with the payment for services described in subsections (b)(2) and (3). (d) Export promotion expenses For purposes of this subpart, the term "export promotion expenses" means the follow- ing expenses paid or incurred in the receipt or production of export trade income- (1) a reasonable allowance for salaries or other compensation, for personal services ac- tually rendered for such purpose, (2) rentals or other payments for the use of property actually used for such purpose, (3) a reasonable allowance for the exhaus- tion, wear and tear, or obsolescence of proper- ty actually used for such purpose, and (4) any other ordinary and necessary ex- penses of the corporation to the extent rea- sonably allocable to the receipt or production of export trade income. No expense incurred within the United States shall be treated as an export promotion ex- pense within the meaning of the preceding sen- tence, unless at least 90 percent of each catego- ry of expenses described in such sentence is in- curred outside the United States. (e) Export property For purposes of this subpart, the term "export property" means any property or any interest in property manufactured, produced, grown, or extracted in the United States. (f) Unrelated person For purposes of this subpart, the term "unre- lated person" means a person other than a re- lated person as defined in section 954(d)(3). (Added Pub. L. 87-834, § 12(a), Oct. 16, 1962, 76 Stat. 1029, and amended Pub. L. 92-178, title V, § 505(c), Dec. 10, 1971, 85 Stat. 553.) AMENDMENTS 1971-Subsec. (a)(3). Pub. L. 92-178 added par. (3). SECTION REniu Da TO IN OTHER SECTIONS This section is referred to in section 970 of this title. [§972. Repealed. Pub. L. 94-455, title XiX, § 1901(a)(120), Oct. 4, 1976, 90 Stat. 17841 Section, Pub. L. 87-834, § 12(a), Oct. 16, 1962, 76 Stat. 1031, related to the consolidation of a group of export trade corporations for treatment as a single controlled foreign corporation for tax purposes. [§ 981. Repealed. Pub. L. 94-455, title X, § 1012(b)(2), Oct. 4, 1976, 90 Stat. 1614] Section, Pub. L. 89-809, title I, § 105(e)(1), Nov. 13, 1966, 80 Stat. 1565, related to the income of certain nonresident United States citizens subject to foreign community property laws. PART IV-DOMESTIC INTERNATIONAL SALES CORPORATIONS Subpart Sec. A. Treatment of qualifying corporations.... 991 B. Treatment of distributions to share- holders ............................................................. 995 AMENDMENTs 1971-Pub. L. 92-178, title V, § 501, Dec. 10, 1971, 85 Stat. 535, added Part IV to Subchapter N of Chapter 1. SUBPART A-TAsmEwrr OF QUALIFYING CORPORATIONS Sec. 991. Taxation of a domestic international sales corpo. ration. 992. Requirements of a domestic international sales corporation. 993. Definitions and special rules.' 994. Inter-company pricing rules. *Sections editorially added for convenience of reader. 'So in original. Section catchline does not conform to analysis. § 972 Page 618
TITLE 26-INTERNAL REVENUE CODE §991. Taxation of a Domestic International Sales Corporation For purposes of the taxes imposed by this subtitle upon a DISC (as defined in section 992(a)), a DISC shall not be subject to the taxes imposed by this subtitle except for the tax imposed by chapter 5. (Added Pub. L. 92-178, title V, § 501, Dec. 10, 1971, 85 Stat. 535.) EIMCTIVE DATE Section 507 of Pub. L. 92-178 provided that: "Except as provided in section 505 of this title [amending sec- tion 971(a)(3) of this title and enacting provisions set out as a note under section 970 of this title), the amendments made by sections 501 through 504 of this title (enacting sections 991 to 994, 995 to 997, 6686, 246(d), 861(a)(2)(D), 901(d), 904(f)(5), 1014(d), 1504(b)(7), 6011(e), and 6501(g)(3) of this title and amending sections 904(f), (f)(1), (3), 922, 931(a), and 6072(b) of this title] shall apply with respect to tax- able years ending after December 31, 1971, except that a corporation may not be a DISC (as defined in section 992(a) of the Internal Revenue Code of 1954, added by section 501 of this title) for any taxable year begin- ning before January 1, 1972." SUBMISSION OF ANNUAL REPORTS TO CONaREss Section 506 of Pub. L. 92-178 provided that: "The Secretary of the Treasury shall, commencing for the calendar year 1972, submit an annual report to the Congress within 15 months following the close of each calendar year setting forth an analysis of the op- eration and effect of the provisions of this title [enact- ing sections 991 to 994, 995 to 997, 6686, and 246(d), 861(a)(2)(D), 904(f)(5), 971(a)(3). 1014(d), 1504(b)(7), and 6011(e) of this title; amending sections 901(d), 904(f). (f)(1), (3). 922, 931(a), and 6501(g)(3) of this title: and enacting provisions set out as notes under this section and section 970 of this title]." § 992. Requirements of a Domestic International Sales Corporation. (a) Definition of "DISC" and "former DISC" (1) DISC For purposes of this title, the term "DISC" means, with respect to any taxable year, a corporation which is incorporated under the laws of any State and satisfies the following conditions for the taxable year: (A) 95 percent or more of the gross re- ceipts (as defined in section 993(f)) of such corporation consist of qualified export re- ceipts (as defined in section 993(a)). (B) the adjusted basis of the qualified export assets (as defined in section 993(b)) of the corporation at the close of the tax- able year equals or exceeds 95 percent of the sum of the adjusted basis of all assets of the corporation at the close of the taxable year, (C) such corporation does not have more than one class of stock and the par or stated value of its outstanding stock is at least $2,500 on each day of the taxable year, and (D) the corporation has made an election pursuant to subsection (b) to be treated as a DISC and such election is in effect for the taxable year. (2) Status as DISC after having filed a return as a DISC The Secretary shall prescribe regulations setting forth the conditions under and the extent to which a corporation which has filed a return as a DISC for a taxable year shall be treated as a DISC for such taxable year for all purposes of this title, notwithstanding the fact that the corporation has failed to satisfy the conditions of paragraph (1). (3) "Former DISC" For purposes of this title, the term "former DISC" means, with respect to any taxable year, a corporation which is not a DISC for such year but was a DISC in a preceding tax- able year and at the beginning of the taxable year has undistributed previously taxed income or accumulated DISC income. (b) Election (1) Election (A) An election by a corporation to be treated as a DISC shall be made by such corporation for a taxable year at any time during the 90-day period immediately pre- ceding the beginning of the taxable year, except that the Secretary may give his con- sent to the making of an election at such other times as he may designate. (B) Such election shall be made in such manwir as the Secretary shall prescribe and shall be valid only if all persons who are shareholders in such corporation on the first day of the first taxable year for which such election is effective consent to such election. (2) Effect of election If a corporation makes an election under paragraph (1), then the provisions of this part shall apply to such corporation for the taxable year of the corporation for which made and for all succeeding taxable years and shall apply to each person who at any time is a shareholder of such corporation for all peri- ods on or after the first day of the first tax- able year of the corporation for which the election is effective. (3) Termination of election (A) Revocation An election under this subsection made by any corporation may be terminated by revo- cation of such election for any taxable year of the corporation after the first taxable year of the corporation for which the elec- tion is effective. A termination under this paragraph shall be effective with respect to such election- (i) for the taxable year in which made, if made at any time during the first 90 days of such taxable year, or (ii) for the taxable year following the taxable year in which made, if made after the close of such 90 days, and for all succeeding taxab, years of the corporation. Such termination shall be made in such manner as the Secretary shall prescribe by regulations. (B) Continued failure to be DISC If a corporation is not a DISC for each of any 5 consecutive taxable years of the cor- § 992 Page 619
TITLE 26-INTERNAL REVENUE CODEP poration for which an election under this subsection is effective, the election shall be terminated and not be in effect for any tax- able year of the corporation after such 5th year. (c) Distributions to meet qualification requirements (1) In general Subject to the conditions provided by para- graph (2), a corporation which for a taxable year does not satisfy a condition specified in paragraph (1)(A) (relating to gross receipts) or (1)(B) (relating to assets) of subsection (a) shall nevertheless be deemed to satisfy such condition for such year if it makes a pro rata distribution of property after the close of the taxable year to its shareholders (designated at the time of such distribution as a distribu- tion to meet qualification requirements) with respect to their stock in an amount which is equal to- (A) if the condition of subsection (a)(1)(A) is not satisfied, the portion of such corpora- tion's taxable income attributable to its gross receipts which are not qualified export receipts for such year, (B) if the condition of subsection (a)(1)(B) is not satisfied, the fair market value of those assets which are not qualified export assets on the last day of such taxable year, or (C) if neither of such conditions is satis- fied, the sum of the amounts required by subparagraphs (A) and (B). (2) Reasonable cause for failure The conditions under paragraph (1) shall be deemed satisfied in the case of a distribution made under such paragraph- (A) if the failure to meet the require- ments of subsection (a)(1)(A) or (B), and the failure to make such distribution prior to the date on which made, are due to rea- sonable cause; and (B) the corporation pays, within the 30- day period beginning with the day on which such distribution is made, to the Secretary, if such corporation makes such distribution after the 15th day of the 9th months after the close of the taxable year, an amount de- termined by multiplying (I) the amount equal to 4 percent of such distribution, by (ii) the number of its taxable years which begin after the taxable year with respect to which such distribution is made and before such distribution is made. For purposes of this title, any payment made pursuant to this paragraph shall be treated as interest. (3) Certain distributions made within 8V months after close of taxable year deemed for reason- able cause A distribution made on or before the 15th day of the 9th month after the close of the taxable year shall be deemed for reasonable cause for purposes of paragraph (2)(A) if- (A) at least 70 percent of the gross re- ceipts of such corporation for such taxable year consist of qualified export receipts, and (B) the adjusted basis of the qualified export assets held by the corporation on the last day of each month of the taxable year equals or exceeds 70 percent of the sum of the adjusted basis of all assets held by the corporation on such day. (d) Ineligible corporations The following corporations shall not be eligi- ble to be treated as a DISC- (1) a corporation exempt from tax by reason of section 501, (2) a personal holding company (as defined in section 542), (3) a financial institution to which section 581 or 593 applies, (4) an Insurance company subject to the tax imposed by subchapter L, (5) a regulated investment company (as de- fined in section 851(a)), (6) a China Trade Act corporation receiving the special deduction provided in section 941(a), or (7) an electing small business corporation (as defined in section 1371(b)). (e) Coordination with personal holding company pro- visions in case of certain produced film rents If- (1) a corporation (hereinafter in this sub- section referred to as "subsidiary") was estab- lished to take advantage of the provisions of this part, and (2) a second corporation (hereinafter in this subsection referred to as "parent") through- out the taxable year owns directly at least 80 percent of the stock of the subsidiary, then, for purposes of applying subsection (d)(2) and section 541 (relating to personal holding company tax) to the subsidiary for the taxable year, there shall be taken into account under section 543(a)(5) (relating to produced film rents) any interest in a film acquired by the parent and transferred to the subsidiary as if such interest were acquired by the subsidiary at the time it was acquired by the parent. (Added Pub. L. 92-178, title V, § 501, Dec. 10, 1971, 85 Stat. 535, and amended Pub. L. 94-455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) REFERENCES iN TEXT The China Trade Act, referred to in subsec. (d)(6), is act Sept. 19, 1922, ch. 346, 42 Stat. 849, as amended, which is classified generally to chapter 4 § 141 et seq.) of Title 15, Commerce and Trade. For complete classi- fication of this Act to the Code, see section 141 of Title 15 and Tables volume. AMENDMENTS 1976-Subsecs. (a)(2), (b)(1),(3), (c)(2)(B). Pub. L. 94- 455 struck out "or his delegate" following "Secretary" wherever appearing. SECTION RaUtM TO IN OnuM SECTIONS This section is referred to in sections 246, 751, 861, 901, 904, 922, 936, 991, 995, 996, 1504, 6501 of this title. § 993. Definitions (a) Qualified export receipts (1) General rule For purposes of this part, except as pro- vided by regulations under paragraph (2), the qualified export receipts of a corporation are- (A) gross receipts from the sale, exchange, or other disposition of export property, § 993 Page 620
TITLE 26-INTERNAL REVENUE CODE (B) gross receipts from the lease or rental of export property, which is used by the lessee of such property outside the United States, (C) gross receipts for services which are related and subsidiary to any qualified sale, exchange, lease, rental, or other disposition of export property by such corporation, (D) gross receipts from the sale, ex- change, or other disposition of qualified export assets (other than export property), (E) dividends (or amounts includible in gross income under section 951) with re- spect to stock of a related foreign export corporation (as defined in subsection (e)), (F) interest on any obligation which is a qualified export asset, (G) gross receipts for engineering or ar- chitectural services for construction pro- jects located (or proposed for location) out- side the United States, and (H) gross receipts for the performance of managerial services in furtherance of the production of other qualified export re- ceipts of a DISC. (2) Excluded receipts The Secretary may under regulations desig- nate receipts from the sale, exchange, lease, rental, or other disposition of export proper- ty, and from services, as not being receipts de- scribed in paragraph (1) if he determines that such sale, exchange, lease, rental, or other disposition, or furnishing of services- (A) is for ultimate use in the United States; (B) is accomplished by a subsidy granted by the United States or any instrumentality thereof; (C) is for use by the United States or any instrumentality thereof where the use of such export property or services is required by law or regulation. For purposes of this part, the term "qualified export receipts" does not include receipts from a corporation which is a DISC for its taxable year in which the receipts arise and which is a member of a controlled group (as defined in paragraph (3)) which includes the recipient corporation. (3) Definition of controlled group For purposes of this part, the term "con- trolled group" has the meaning assigned to such term by section 1563(a), except that the phrase "more than 50 percent" shall be sub- stituted for the phrase "at least 80 percent" each place it appears therein, and section 1563(b) shall not apply. (b) Qualified export assets For purposes of this part, the *qualified export assets of a corporation are- (1) export property (as defined in subsec- tion (c)); (2) assets used primarily in connection with the sale, lease, rental, storage, handling, transportation, packaging, assembly, or ser- vicing of export property, or the performance of engineering or architectural services de- scribed in subparagraph (G) of subsection (a)(1) or managerial services in furtherance of the production of qualified export receipts de- scribed in subparagraphs (A), (B), (C), and (0) of subsection (a)(1); (3) accounts receivable and evidences of in- debtedness which arise by reason of transac- tions of such corporation or of another corpo- ration which is a DISC and which is a member of a controlled group which includes such corporation described in subparagraph (A), (B), (C), (D), (0), or (H), of subsection (a)(1); (4) money, bank deposits, and other similar temporary investments, which are reasonably necessary to meet the working capital re- quirements of such corporation; (5) obligations arising in connection with a producer's loan (as defined in subsection (d)); (6) stock or securities of a related foreign export corporation (as defined in subsection (e)); (7) obligations issued, guaranteed, or in- sured, in whole or in part, by the Export- Import Bank of the United States or the For- eign Credit Insurance Association in those cases where such obligations are acquired from such Bank or Association or from the seller or purchaser of the goods or services with respect to which such obligations arose; (8) obligations issued by a domestic corpora- tion organized solely for the purpose of fi- nancing sales of export property pursuant to an agreement with the Export-Import Bank of the United States under which such corpo- ration makes export loans guaranteed by such bank; and (9) amounts (other than reasonable working capital) on deposit in the United States that are utilized during the period provided for in, and otherwise in accordance with, regulations prescribed by the Secretary to acquire other qualified export assets. (c) Export property (1) In general For purposes of this part, the term "export property" means property- (A) manufactured, produced, grown, or extracted in the United States by a person other than a DISC, (B) held primarily for sale, lease, or rental, in the ordinary course of trade or business, by, or to, a DISC, for direct use, consumption, or disposition outside the United States, and (C) not more than 50 percent of the fair market value of which is attributable to ar- ticles imported into the United States. In applying subparagraph (C), the fair market value of any article imported into the United States shall be its appraised value as determined by the Secretary under section 402 or 402a of the Tariff Act of 1930 (19 U.S.C., sec. 1401a or 1402) in connection with its importation. (2) Excluded property For purposes of this part, the term "export property" does not include- (A) property leased or rented by a DISC for use by any member of a controlled group (as defined in subsection (a)(3)) which includes the DISC, (B) patents, inventions, models, designs, formulas, or processes, whether or not pat- Page 621 § 993
TITLE 26-INTERNAL REVENUE CODE ented, copyrights (other than films, tapes, records, or similar reproductions, for com- mercial or home use), goodwill, trademarks, trade brands, franchises, or other like prop- erty, (C) products of a character with respect to which a deduction for depletion is al- lowable (including oil, gas, coal, or uranium products) under section 613 or 613A, or (D) products the export of which is pro- hibited or curtailed under section 4(b) of the Export Administration Act of 1969 (50 U.S.C. App. 2403(b)) to effectuate the policy set forth in paragraph (2)(A) of section 3 of such Act (relating to the protection of the domestic economy). Subparagraph (C) shall not apply to any com- modity or product at least 50 percent of the fair market value of which is attributable to manufacturing or processing, except that sub- paragraph (C) shall apply to any primary product from oil, gas, coal, or uranium. For purposes of the preceding sentence, the term "processing" does not include extracting or handling, packing, packaging, grading, stor- ing, or transporting. (3) Property in short supply If the President determines that the supply of any property described in paragraph (1) is insufficient to meet the requirements of the domestic economy, he may by Executive order designate the property as in short supply. Any property so designated shall be treated as property not described in para- graph (1) during the period beginning with the date specified in the Executive order and ending with the date specified in an Execu- tive order setting forth the President's deter- mination that the property is no longer in short supply. (d) Producer's loans (1) In general An obligation, subject to the rules provided in paragraphs (2) and (3), shall be treated as arising out of a producer's loan if- (A) the loan, when added to the unpaid balance of all other producer's loans made by the DISC, does not exceed the accumu- lated DISC income at the beginning of the month in which the loan is made; (B) the obligation is evidenced by a note (or other evidence of indebtedness) with a stated maturity date not more than 5 years from the date of the loan; (C) the loan is made to a person engaged in the United States in the manufacturing, production, growing, or extraction of export property determined without regard to sub- paragraph (C) or (D) of subsection (c)(2), (referred to hereinafter as the "borrower"); and (D) at the time of such loan it is designat- ed as a producer's loan. (2) Limitation An obligation shall be treated as arising out of a producer's loan only to the extent that such loan, when added to the unpaid balance of all other producer's loans to the borrower outstanding at the time such loan is made, does not exceed an amount determined by multiplying the sum of- (A) the amount of the borrower's adjusted basis determined at the beginning of the borrower's taxable year in which the loan is made, in plant, machinery, and equipment, and supporting production facilities in the United States; (B) the amount of the borrower's proper- ty held primarily for sale, lease, or rental, to customers in the ordinary course of trade or business, at the beginning of such tax- able year; and (C) the aggregate amount of the borrow- er's research and experimental expendi- tures (within the meaning of section 174) In the United States during all preceding tax- able years beginning after December 31, 1971, by the percentage which the borrower's re- ceipts, during the 3 taxable years immediate- ly preceding the taxable year (but not includ- ing any taxable year commencing prior to 1972) in which the loan is made, from the sale, lease, or rental outside the United States of property which would be export property (determined without regard to subparagraph (C) or (D) of subsection (c)(2)) if held by a DISC is of the gross receipts during such 3 taxable years from the sale, lease, or rental of property held by such borrower primarily for sale, lease, or rental to customers in the ordi- nary course of the trade or business of such borrower. (3) Increased investment requirement An obligation shall be treated as arising out of a producer's loan in a taxable year only to the extent that such loan, when added to the unpaid balance of all other producer's loans to the borrower made during such taxable year, does not exceed an amount equal to- (A) the amount by which the sum of the adjusted basis of assets described in para- graph (2)(A) and (B) on the last day of the taxable year in which the loan is made ex- ceeds the sum of the adjusted basis of such assets on the first day of such taxable year; plus (B) the aggregate amount of the borrow- er's research and experimental expendi- tures (within the meaning of section 174) in the United States during such taxable year. (4) Special limitation in the case of domestic film maker (A) In general In the case of a borrower who is a domes- tic film maker and who incurs an obligation to a DISC for the making of a film, and such DISC Is engaged in the trade or busi- ness of selling, leasing, or renting films which are export property, the limitation described in paragraph (2) may be deter- mined (to the extent provided under regula- tions prescribed by the Secretary) on the basis of- (i) the sum of the amounts described in subparagraphs (A). (B), and (C) thereof plus reasonable estimates of all such amounts to be incurred at any time by the borrower with respect to films which are Page 622
TITLE 26-INTERNAL REVENUE CODE commenced within the taxable year in which the loan is made, and (ii) the percentage which, based on the experience of producers of similar films, the annual receipts of such producers from the sale, lease, or rental of such films outside the United States is of the annual gross receipts of such producers from the sale, lease, or rental of such films. (B) Domestic film maker For purposes of this paragraph, a borrow- er is a domestic film maker with respect to a film if- (i) such borrower is a United States person within the meaning of section 7701(a)(30), except that with respect to a partnership, all of the partners must be United States persons, and with respect to a corporation, all of its officers and at least a majority of its directors must be United States persons; (ii) such borrower is engaged in the trade or business of making the film with respect to which the loan is made; (fii) the studio, if any, used or to be used for the taking of photographs and the re- cording of sound incorporated into such film is located in the United States; (iv) the aggregate playing time of por- tions of such film photographed outside the United States does not or will not exceed 20 percent of the playing time of such film; and (v) not less than 80 percent of the total amount paid or to be paid for services per- formed in the making of such film is paid or to be paid to persons who are United States persons at the time such services are -performed or consists of amounts which are fully taxable by the United States. (C) Special rules for application of subparagraph (B)(v) For purposes of clause (v) of subpara- graph (B)- (1) there shall not be taken into account any amount which is contingent upon re- ceipts or profits of the film and which is fully taxable by the United States (within the meaning of clause (ii)); and (1i) any amount paid or to be paid to a United States person, to a non-resident alien individual, or to a corporation which furnishes the services of an officer or em- ployee to the borrower with respect to the making of a film, shall be treated as fully taxable by the United States only if the total amount received by such person, in- dividual, officer, or employee for services performed in the making of such film is fully included in gross income for pur- poses of this chapter. (e) Related foreign export corporation In determining whether a corporation (here- inafter in this subsection referred to as "the do- mestic corporation") is a DISC- (1) Foreign international sales corporation A foreign corporation is a related foreign export corporation if- (A) stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote is owned di- rectly by the domestic corporation, (B) 95 percent or more of such foreign corporation's gross receipts for its taxable year ending with or within the taxable year of the domestic corporation consists of qualified export receipts described in sub- paragraphs (A), (B), (C), and (D) of subsec- tion (a)(1) and interest on any obligation described in paragraphs (3) and (4) of sub- section (b), and (C) the adjusted basis of the qualified export assets (described in paragraphs (1), (2), (3), and (4) of subsection (b)) held by such foreign corporation at the close of such taxable year equals or exceeds 95 per- cent of the sum of the adjusted basis of all assets held by it at the close of such taxable year. (2) Real property holding company A foreign corporation is a related foreign export corporation If- (A) stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote is owned di- rectly by the domestic corporation, and (B) its exclusive function is to hold real property for the exclusive use (under a lease or otherwise) of the domestic corpora- tion. (3) Associated foreign corporation A foreign corporation is a related foreign export corporation if- (A) less than 10 percent of the total com- bined voting power of all classes of stock en- titled to vote of such foreign corporation is owned (within the meaning of section 1563 (d) and (e)) by the domestic corporation or by a controlled group of corporations (within the meaning of section 1563) of which the domestic corporation is a member, and (B) the ownership of stock or securities in such foreign corporation by the domestic corporation is determined (under regula- tions prescribed by the Secretary) to be rea- sonably in furtherance of a transaction or transactions giving rise to qualified export receipts of the domestic corporation. (f) Gross receipts For purposes of this part, the term "gross re- ceipts" means the total receipts from the sale, lease, or rental of property held primarily for sale, lease, or rental in the ordinary course of trade or business, and gross income from .all other sources. In the case of commissions on the sale, lease, or rental of property, the amount taken into account for purposes of this part as gross receipts shall be the gross receipts on the sale, lease, or rental of the property on which such commissions arose. (g) United States defined For purposes of this part, the term "United States" includes the Commonwealth of Puerto Rico and the possessions of the United States. (Added Pub. L. 92-178, title V, § 501, Dec. 10, 1971, 85 Stat. 538, and amended Pub. L. 93-482, § 3(a), Oct. 26, 1974, 88 Stat. 1456; Pub. L. 94-12, Page 623
TITLE 26-INTERNAL REVENUE CODE title VI, § 803(a), Mar. 29, 1975, 89 Stat. 64; Pub. L. 94-455, title XI, § 1101(b), (c), title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1658, 1834.) REFERENCES IN TEXT Section 3 of the Export Administration Act, referred to in subsec. (c)(2)(D), is classified to section 2402 of Title 50 App., War and National Defense. AMENDMENTS 1976-Subsecs. (a)(2), (b)(9). Pub. L. 94-455. § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (c). Pub. L. 94-455, §§ 1101(b), 1906(b)(13)(A). in par. (I) in provisions following subpar. (C), struck out "or his delegate" following "Secretary", in par. (2)(B) "or" following "like property" and, in par. (2)(C), substituted "under section 613 or 613A" for "under section 611" following "uranium products)". Subsec. (d)(1)(C). Pub. L. 94-455, § ll01(c)(1), added "determined without regard to subparagraph (C) or (D) of subsection (c)(2)" following "export property". Subsec. (d)(2). Pub. L. 94-455, § 1101(c)(2), added "(determined without regard to subparagraph (C) or (D) of subsection (c)(2))" following "would be export property". Subsec. (d)(4)(A). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. (e)(3)(B). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". 1975-Subsec. (c)(2). Pub. L. 94-12 added subpars. (C) and (D) and provisions following subpar. (D). 1974-Subsec. (b)(3). Pub. L. 93-482 added "or of an- other corporation which is a DISC and which is a member of a controlled group which includes such cor- poration" following "such corporation". EFFECTIVE DATE OF 1976 AMENDMENT Section 1101(g)(2) of Pub. L. 94-455 provided that: "The amendments made by subsection (b) [amending subsec. (c)(2) of this section] shall apply to sales, ex- changes, and other dispositions made after March 18, 1975, in taxable years ending after such date." Section 1101(g)(3) of Pub. L. 94-455 provided that: "The amendments made by subsections (c) and () (amending subsecs. (d)(1)(C), (2) of this section] shall apply to taxable years ending after March 18, 1975." Er'EcTivE DATE OF 1975 Ammpugwr Section 603(b) of Pub. L. 94-12 as amended by sec- tion 1101(f) of Pub. L. 94-455, provided that: "(1) IN OGENEAL.-Except as provided in paragraph (2), the amendments made by subsection (a) [amend- ing this section] shall apply to sales, exchanges, and other dispositions made after March 18, 1975, in tax- able years ending after such date. "(2) BINDING coNTRAcT.-The amendments made by subsection (a) [amending this section] shall not apply to sales, exchanges, and other dispositions made after March 18, 1975, but before March 19, 1980, If such sales, exchanges, and other dispositions are made pur- suant to a fixed contract. The term 'fixed contract' means a contract which was, on March 18, 1975, and is at &Il times thereafter binding on the DISC or a tax- payer which was a member of the same controlled group (within the meaning of section 993(a)(3) of the Internal Revenue Code of 1954 [subsec. (a)(3) of this section]) as the DISC, which was entered into after the date on which the DISC qualified as a DISC and the DISC and the taxpayer became members of the same controlled group, and under which the price and quantity of the products sold, exchanged, or otherwise disposed of cannot be increased." ErrEcrivE DATE OF 1974 AmDMmNT Section 3(b) of Pub. L. 93-482 provided that: "The amendment made by subsection (a) [amending subsec. (b)(3) of this section] applies to taxable years begin- ning after December 31, 1973. The aihendment shall, at the election of the taxpayer made within 90 days after the date of enactment of this Act (Oct. 26, 1974], also apply to any taxable year beginning after Decem- ber 31, 1971, and before January 1. 1974." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 861, 908, 992, 995, 999 of this title. § 994. Inter-company pricing rules (a) In general In the case of a sale of export property to a DISC by a person described in section 482, the taxable income of such DISC and such person shall be based upon a transfer price which would allow such DISC to derive taxable income attributable to such sale (regardless of the sales price actually charged) in an amount which does not exceed the greatest of- (1) 4 percent of the qualified export receipts on the sale of such property by the DISC plus 10 percent of the export promotion expenses of such DISC attributable to such receipts, (2) 50 percent of the combined taxable income of such DISC and such person which is attributable to the qualified export receipts on such property derived as the result of a sale by the DISC plus 10 percent of the export promotion expenses of such DISC at- tributable to such receipts, or (3) taxable income based upon the sale price actually charged (but subject to the rules provided in section 482). (b) Rules for commissions, rentals, and marginal costing The Secretary shall prescribe regulations set- ting forth- (1) rules which are consistent with the rules set forth in subsection (a) for the application of this section in the case of commissions, rentals, and other income, and (2) rules for the allocation of expenditures in computing combined taxable income under subsection (a)(2) in those cases where a DISC is seeking to establish or maintain a market for export property. (c) Export promotion expenses For purposes of this section, the term "export promotion expenses" means those expenses in- curred to advance the distribution or sale of export property for use, consumption, or distri- bution outside of the United States, but does not include income taxes. Such expenses shall also include freight expenses to the extent of 50 percent of the cost of shipping export prop- erty aboard airplanes owned and operated by United States persons or ships documented under the laws of the United States in those cases where law or regulations does not require that such property be shipped aboard such air- planes or ships. (Added Pub. L. 92-178, title V, § 501, Dec. 10, 1971, 85 Stat. 543, and amended Pub. L. 94-455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834.) AMENDMENTs 1976-Subsec. (b). Pub. L. 94-455 struck out "or his delegate" following "Secretary". § 994 Page 624
TITLE 26-INTERNAL REVENUE CODE SUBPART B-TREATMENT OF DISTRIBUTIONS TO SHAREHOLDERS Sec. 995. Taxation of DISC income to shareholders. 996. Rules for allocation in the case of distributions and losses. 997. Special subchapter C rules. § 995. Taxation of DISC income to shareholders (a) General rule A shareholder of a DISC or former DISC shall be subject to taxation on the earnings and profits of a DISC as provided in this chapter, but subject to the modifications of this subpart. (b) Deemed distributions (1) Distributions in qualified years A shareholder of a DISC shall be treated as having received a distribution taxable as a dividend with respect to his stock in an amount which is equal to his pro rata share of the sum (or, if smaller, the earnings and profits for the taxable year) of- (A) the gross interest derived during the taxable year from producer's loans, (B) the gain recognized by the DISC during the taxable year on the sale or ex- change of property, other than property which in the hands of the DISC is a quali- fied export asset, previously transferred to it in a transaction in which gain was not recognized in whole or in part, but only to the extent that the transferor's gain on the previous transfer was not recognized, (C) the gain (other than the gain de- scribed in subparagraph (B)) recognized by the DISC during the taxable year on the sale or exchange of property (other than property which in the hands of the DISC is stock in trade or other property described in section 1221(1)) previously transferred to it in a transaction in which gain was not recognized in whole or in part, but only to the extent that the transferor's gain on the previous transfer was not recognized and would have been treated as ordinary income if the property has been sold or exchanged rather than transferred to the DISC, (D) 50 percent of the taxable income of the DISC for the taxable year attributable to military property, (E) the taxable income for the taxable year attributable to base period export gross receipts (as defined in subsection (e)), (F) the sum of- (i) one-half of the excess of the taxable income of the DISC for the taxable year, before reduction for any distributions during the year, over the sum of the amounts deemed distributed for the tax- able year under subparagraphs (A), (B), (C), (D), and (E), (1i) an amount equal to the amount de- termined under clause (I) multiplied by the international boycott factor deter- mined under section 999, and (iii) any illegal bribe, kickback, or other payment (within the meaning of section 162(c)) paid by or on behalf of the DISC directly or indirectly to an official, em- ployee, or agent in fact of a government, and (0) the amount of foreign investment at. tributable to producer's loans (as defined in subsection d)) of a DISC for the taxable year. Distributions described in this paragraph shall be deemed to be received on the last day of the taxable year of the DISC in which the gross income (taxable income in the case of subparagraph (D)) was derived. In the case of a distribution described in subparagraph (E), earnings and profits for the taxable year shall include accumulated earnings and prof. its. (2) Distributions upon disqualification (A) A shareholder of a corporation which revoked its election to be treated as a DISC or failed to satisfy the conditions of section 992(a)(1) for a taxable year shall be deemed to have received (at the time specified in subparagraph (B)) a distribution taxable as a dividend equal to his pro rata share of the DISC income of such corporation accumu- lated during the immediately preceding con- secutive taxable years for which the corpo- ration was a DISC. (B) Distributions described in subpara- graph (A) shall be deemed to be received in equal installments on the last day of each of the 10 taxable years of the corporation following the year of the termination or dis- qualification described in subparagraph (A) (but in no case over more than twice the number immediately preceding consecutive taxable years during which the corporation was a DISC). (3) Taxable income attributable to military prop- erty (A) In general For purposes of paragraph (1)(D), taxable income of a DISC for the taxable year at- tributable to military property shall be de- termined by only taking into account- (I) the gross income of the DISC for the taxable year which is attributable to mili- tary property, and ii) the deductions which are properly apportioned or allocated to such income. (B) Military property For purposes of subparagraph (A), the term "military property" means any proper- ty which is an arm, ammunition, or imple- ment of war designated in the munitions list published pursuant to the Military Se- curity Act of 1954 (22 U.S.C. 1934). (c) Gain on disposition of stock in a DISC (1) In general If- (A) a shareholder disposes of stock in a DISC or former DISC any gain recognized on such disposition shall be included in gross income as a dividend to the extent provided in paragraph (2), (B) stock of a DISC or former DISC is dis- posed of in a transaction in which the sepa- rate corporate existence of the DISC or former DISC is terminated other than by a mere change in place of organization, how- ever effected, any gain realized on the dis- position of such stock in the transaction shall be recognized notwithstanding any Page 625 § 995
TITLE 26-INTERNAL REVENUE CODE other provision of this title to the extent provided in paragraph (2) and to the extent so recognized shall be included in gross income as a dividend, or (C) a shareholder distributes, sells, or ex- changes stock in a DISC or former DISC in a transaction to which section 311, 336, or 337 applies, then an amount equal to the excess of the fair market value of such stock over its adjusted basis in the hands of the shareholder shall, notwithstanding any provision of this title, be included in gross income of the shareholder as a dividend to the extent provided in paragraph (2). (2) Amount included The amounts described in paragraph (1) shall be included in gross income as a divi- dend to the extent of the accumulated DISC income of the DISC or former DISC which is attributable to the stock disposed of and which was accumulated in taxable years of such corporation during the period or periodG the stock disposed of was held by the share- holder which disposed of such stock. (d) Foreign investment attributable to DISC earnings For the purposes of this part- (1) In general The amount of foreign investment attribut- able to producer's loans of a DISC for a tax- able year shall be the smallest of- (A) the net increase in foreign assets by members of the controlled group (as de- fined in section 993(a)(3)) which includes the DISC, (B) the actual foreign investment by do- mestic members of such group, or (C) the amount of outstanding producer's loans by such DISC to members of such controlled group. (2) Net increase in foreign assets The term "net increase in foreign assets" of a controlled group means the excess of- (A) the amount incurred by such group to acquire assets (described in section 1231(b)) located outside the United States over, (B) the sum of- (i) the depreciation with respect to assets of such group located outside the United States; (ii) the outstanding amount of stock or debt obligations of such group issued after December 31, 1971, to persons other than the United States persons or any member of such group; (ill) one-half the earnings and profits of foreign members of such group and for- eign branches of domestic members of such group; (iv) one-half the royalties and fees paid by foreign members of such group to do- mestic members of such group; and (v) the uncommitted transitional funds of the group as determined under para- graph (4). For purposes of this paragraph, assets which are qualified export assets of a DISC (or would be qualified export assets if owned by a DISC) shall not be taken into account. Amounts described in this para- graph (other than in subparagraphs (B)(ii) and (v)) shall be taken into account only to the extent they are attributable to taxable years beginning after December 31, 1971. (3) Actual foreign Investment The term "actual foreign investment" by domestic members of a controlled group means the sum of- (A) contributions to capital of foreign members of the group by domestic members of the group after December 31, 1971, (B) the outstanding amount of stock or debt obligations of foreign members of such group (other than normal trade indebted- ness) issued after December 31, 1971, to do- mestic members of such group, (C) amounts transferred by domestic members of the group after the December 31, 1971, to foreign branches of such mem- bers, and (D) one-half the earnings and profits of foreign members of such group and foreign branches of domestic members of such group for taxable years beginning after De- cember 31, 1971. As used in this subsection, the term "domestic member" means a domestic corporation which is a member of a controlled group (as defined in section 993(a)(3)), and the term "foreign member" means a foreign corpora- tion which is a member of such a controlled group. (4) Uncommitted transitional funds The uncommitted transitional funds of the group shall be an amount equal to the sum of- (A) the excess of- (i) the amount of stock or debt obliga- tions of domestic members of such group outstanding on December 31, 1971, and issued on or after January 1, 1968, to per- sons other than United States persons or any members of such group, but only to the extent the taxpayer establishes that such amount constitutes a long-term bor- rowing for purposes of the foreign direct investment program, over (ii) the net amount of actual foreign in- vestment by domestic members of such group during the period that such stock or debt obligations have been outstand- ing; and (B) the amount of liquid assets to the extent not included in subparagraph (A) held by foreign members of such group and foreign branches of domestic members of such group on October 31, 1971, in excess of their reasonable working capital needs on such date. For purposes of this paragraph, the term "liquid assets" means money, bank deposits (not including time deposits), and indebted- ness of 2 years or less to maturity on the date of acquisition; and the actual foreign invest- ment shall be determined under paragraph (3) without regard to the date in subpara- graph (A) of such paragraph and without regard to subparagraph (D) of such para- graph. Page 626 § 995
TITLE 26-INTERNAL REVENUE CODE (5) Special rule Under regulations prescribed by the Secre- tary the determinations under this subsection shall be made on a cumulative basis with proper adjustments for amounts previously taken into account. (e) Definitions and special rules relating to computa- tion of taxable income attributable to base period export gross receipts (I) Taxable income attributable to base period export gross receipts For purposes of this section, the taxable income attributable to base period export gross receipts shall be an amount equal to that portion of the adjusted taxable income of a DISC which- (A) the amount of the adjusted base period export grosa receipts, bears to (B) the amount of the export gross re- ceipts of the DISC for the taxable year. (2) Adjusted taxable income For purposes of this section, the term "ad- Justed taxable income" means the income of a DISC for the taxable year, reduced by the amounts described in subparagraphs (A), (B), (C), and (D) of paragraph (1) of subsection (b). (3) Adjusted base period export gross receipts For purposes of this section, the term "ad- justed base period export gross receipts" means 67 percent of the average of the export gross receipts of the DISC for taxable years during the base period (as defined in para- graph (5)). For purposes of the preceding sen- tence, If any property would not qualify during the taxable year as export property by reason of section 993(c)(2), gross receipts from such property shall be excluded from export gross receipts during the taxable years in the base period. (4) Export gross receipts For purposes of this section, the term "export gross receipts" means- (A) qualified export receipts described in subparagraphs (A), (B), (C), (G), and (H), of section 193(a)(1), reduced by (B) 50 percent of such qualified export re- ceipts which are attributable to military property (as defined in subsection (b)(3)(B)). (5) Base period For purposes of paragraph (3)- (A) for any taxable year beginning before 1980, the base period shall be the taxable years beginning in 1972, 1973, 1974, and 1975, and (B) for any taxable year beginning in any calendar year after 1979, the base period shall be the taxable years beginning in the fourth, fifth, sixth, and seventh calendar years preceding such calendar year. (6) No base period year If a DISC did not have a taxable year begin- ning in a calendar year specified in paragraph (5), then, for purposes of computing the ad- Justed base period export gross receipts, such DISC is deemed to have a taxable year and export gross receipts of zero for that year. (7) Short taxable year The Secretary shall prescribe such regula- tions as he deems necessary with respect to a short taxable year for purposes of computing base period export gross receipts of a DISC, or a short taxable year In which deemed dis- tributions (as described in subsection (b)) are made, including the circumstances under which the short taxable year shall be annua- lized, and the proper method of annualiza- tion. (8) Controlled group If more than one member of a controlled group (as defined in section 993(a)(3)) for the taxable year qualifies as a DISC, then subsec- tion (b)(1)(E), this subsection, and subsection (f) shall each be applied in a manner provided by regulations prescribed by the Secretary by aggregating the export gross receipts and tax- able income of such DISCs for the' taxable year and by aggregating the export gross re- ceipts of sur-h DISCs for each taxable year in the base period. (9) Special rule where the ownership of DISC stock and the trade or business giving rise to export gross receipts of the DISC are separated (A) In general If, at any time after the beginning of the base period, there has been a separation of the ownership of the stock in the DISC from the ownership of the trade or business which (during the base period) produced the export gross receipts of the DISC, then the persons who own the trade or business during the taxable year shall be treated as having had additional export gross receipts during the base period attributable to such trade or business. (B) Exceptions Subparagraph (A) shall not apply- (i) where the stock in the DISC and the trade or business are owned throughout the taxable year by members of the same controlled group; and (ii) to the extent that the taxpayer's ownership of the stock in the DISC for the taxable year is proportionate to his ownership during the taxable year of the trade or business. (10) DISC base period attributed through share- holders in certain cases (A) In general If- (I) any person owns 5 percent or more of the stock of a DISC (hereinafter in this paragraph referred to as "first DISC"), and (ii) such person at any time during the base period of the first DISC owned 5 per- cent or more of the stock of a second DISC, then, to the extent provided in such regula- tions as the Secretary may prescribe to pre- vent circumvention of the application of subsection (b)(1)(E), an amount equal to such shareholder's share of the base period export gross receipts of the second DISC shall be added to the base period export gross receipts of the first DISC. Page 627 § 995
TITLE 26-INTERNAL REVENUE CODE (B) Ownership of stock For purposes of subparagraph (A), the ownership of stock shall be determined under section 318. (f) Small DISCs (1) Adjusted taxable Income of $100,000 or less If a DISC has adjusted taxable income of $100,000 or less for a taxable year, subsection (b)(1)(E) shall not apply with respect to such year. (2) Special rule If a DISC has adjusted taxable income of more than $100,000 for a taxable year, then the amount taken into account under subsec- tion (b)(1)(E) shall be deemed to be an amount equal to the excess (if any) of- (A) the amount which would (but for this paragraph) be taken into account under subsection (b)(1)(E), over (B) twice the excess (if any) of $150,000 over the adjusted taxable income. (g) Certain transfers of DISC assets If- (1) a corporation owns, directly or indirect- ly, all of the stock of a subsidiary and a DISC, (2) the subsidiary has been engaged in the active conduct of a trade or business (within the meaning of section 355(b)) throughout the 5-year period ending on the date of the transfer and continues to be so engaged thereafter, and (3) during the taxable year of the subsid- iary in which its stock is transferred and its preceding taxable year, such trade or business gives rise to qualified export receipts of the subsidiary and the DISC, then, under such terms and conditions as the Secretary by regulations shall prescribe, trans- fers of assets, stock, or both, will be deemed to be a reorganization within the meaning of sec- tion 368, a transaction to which section 355 ap- plies, an exchange of stock to which section 351 applies, or a combination thereof. The preced- ing sentence shall apply only to the extent that the transfer or transfers involved are for the purpose of preventing the separation of the ownership of the stock in the DISC from the ownership of the trade or business which (during the base period) produced the export gross receipts of the DISC. (Added Pub. L. 92-178, title V, § 501, Dec. 10, 1971, 85 Stat. 544, and amended Pub. L. 94-455, title X, §§ 1063(a), 1065(a)(2), title XI, § 1101(a), (d)(1), title XIX, §§ 1901(b)(3)(K), 1906(b) (13)(A), Oct. 4, 1976, 90 Stat. 1650, 1654, 1655, 1658, 1793, 1834.) REFERENCES IN TEXT The Military Security Act of 1954, referred to in subseu. (b)(3)(B), probably means the Mutual Security Act of 1954, which is act Aug. 26, 1954, ch. 937, 68 Stat. 832, as amended, and which is classified generally to chapter 24 (§1750 et seq.) of Title 22, Foreign Rela- tions and Intercourse. Pub. L. 94-329, title II, § 212(b)(1), June 30, 1976, 90 Stat. 745, provided: "Sec- tion 414 of the Mutual Security Act of 1954 [22 U.S.C. 1934) is repealed. Any reference to such section shall be deemed to be a reference to section 38 of the Arms Export Control Act [22 U.S.C. 2778] and any reference to licenses issued under section 38 of the Arms Export Control Act shall be deemed to include a reference to licenses issued under section 414 of the Mutual Securi- ty Act of 1954." AMENDMENTS 1976-Subsec. (b)(1)(C). Pub. L. 94-455, §1901(b)(3)(K), substituted "ordinary income" for "gain from the sale or exchange of property which is neither a capital asset nor property described In sec- tion 1231" following "treated as". Subsec. (b)(1)(D). Pub. L. 94-455, § 1101(a)(1), added subpar. (D). Former subpar. (D) redesignated (F). Subsec. (b)(1)(E). Pub. L. 94-455, § 1101(a)(1), added subpar. (E). Former subpar. (E) redesignated (0). Subsec. (b)(1)(P). Pub. L. 94-455, §§1063(a), 1065(a)(2), 1101(a)(1), redesignated former subpar. (D) as (F) and, as redesignated, made existing provision cl. (i), added cls. (ii) and (iii), and substituted "(C), (D), and (E)" for "(C)" following "(B), and". Subsec. (b)(1)(G). Pub. L. 94-455, § ll01(a)(1), rede- signated former subpar. (E) as (G). Subsec. (b)(2)(B). Pub. L. 94-455, § 1101(a)(2), substi- tuted "more than twice the number" for "more than the number" following "no case over". Subsec. (b)(3). Pub. L. 94-455, § 1101(a)(3), added par. (3). Subsec. (c). Pub. L. 94-455, § 1101(d)(1), redesignated existing provisions as pars. (1) and (2) and, as redesig- nated, added subpar. (1)(C). Subsec. (d)(5). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary". Subsec. Ce). Pub. L. 94-455, § 1101(a)(4), added subsec. (e). Subsec. (f). Pub. L. 94-455, §1101(a)(4), added subsec. (f). Subsec. (g). Pub. L. 94-455, § 1101(a)(4), added subsec. g). EFFECTIVE DATE OF 1976 AMkNDMENT Amendment of subsec. (b)(1)(F) by section 1063(a) of Pub. L. 94-455 applicable to participation in or cooper- ation with an international boycott more than 30 days after Oct. 4, 1976, with special provisions for existing contracts, see section 1066(a) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 908 of this title. Amendment of subsec. (b)(1)(F) by section 1065(a)(2) of Pub. L. 94-455 applicable to payments de- scribed in section 162(c) of this title made more than 30 days after Oct. 4, 1976, see section 1066(b) of Pub. L. 94-455, set out as an Effective Date of 1976 Amend- ment note under section £52 of this title. Section 1101(g)(1) of Pub. L. 94-455 provided that: "The amendments made by subsections (a) and (e) [amending subsecs. (b)(1), (2), (3), (e) to (g) of this sec- tion and section 996(a)(2) of this title] shall apply to taxable years beginning after December 31, 1975." Section 1101(g)(4) of Pub. L. 94-455 provided that: "The amendments made by subsection (d) (amending subsec. (c) of this section and section 751(c) of this title] shall apply to sales, exchanges, or other disposi- tions after December 31, 1975, in taxable years ending after such date." Amendmefit of subsec. (b)(1)(C) by section 1901(b)(3)(K) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see sec- tion 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. PRORATION OF BASE PERIOD IN CASE OF FIXED CONTRACTS Secton 1101(g)(5) of Pub. L. 94-455 provided that: "For purposes of determining adjusted base period export gross receipts (under section 995(e)(3) of the Internal Revenue Code of 1954 [subsec. (e)(3) of this section], as amended by this section), If any DISC has export gross receipts from export property by reason of paragraph (2) of section 603(b) of the Tax Reduc- tion Act of 1975, then the export gross receipts of such DISC for the taxable years of the base period shall be increased by an amount equal to the amount of gross § 995 Page 628
TITLE 26-INTERNAL REVENUE CODE receipts which were excluded from export gross re- ceipts during each taxable year of the base period by reason of the last sentence of section 993(e)(3) of such Code (section 993(e)(3) of this title] multiplied by a fraction, the numerator of which is the amount of the gross receipts in the taxable year which are export gross receipts by reason of paragraph (2) of section 603(b) of the Tax Reduction Act of 1975 and the de- nominator of whi.,h is the amount of total gross re- ceipts which are excluded from export gross receipts in the taxable year by reason of subparagraph (C) or (D) of paragraph (2) of section 993(c) [section 993(c)(2)(C), D, of this title] (determined without regard to paragraph (2) of section 603(b) of the Tax Reduction Act of 1975)." SECTION REFERRED TO IN OTHER SECTIONS This section is referred to in sections 246, 751, 861, 996, 999 of this title. § 996. Rules for allocation in the case of distributions and losses (a) Rules for actual distributions and certain deemed distributions (1) In general Any actual distribution (other than a distri- bution described in paragraph (2) or to which section 995(c) applies) to a shareholder by a DISC (or former DISC) which is made out of earnings and profits shall be treated as made- (A) first, out of previously taxed income, to the extent thereof, (B) second, out of accumulated DISC income, to the extent thereof, and (C) finally, out of other earnings and profits. (2) Qualifying distributions Any actual distribution made pursuant to section 992(c) (relating to distributions to meet qualification requirements), and any deemed distribution pursuant to section 995(b)(1)(E) (relating to foreign investment attributable to producer's loans), shall be treated as made- (A) first, out of accumulated DISC income, to the extent thereof, (B) second, out of the earnings and profits described in paragraph (1)(C), to the extent thereof, and (C) finally, out of previously taxed income. In the case of any amount of any actual dis- tribution made pursuant to section 992(c) which is required to satisfy the condition of section 992(a)(1)(A), the preceding sentence shall apply to one-half of such amount, and paragraph (1) shall apply to the remaining one-half of such amount. (3) Exclusion from gross income Amounts distributed out of previously taxed income shall be excluded by the distri- butee from gross income except for gains de- scribed in subsection (e)(2), and shall reduce the amount of the previously taxed income. (b) Ordering rules for losses If for any taxable year a DISC, or a former DISC, incurs a deficit in earnings and profits, such deficit shall be chargeable- (1) first, to earnings and profits described in subsection (a)(1)(C), to the extent thereof, (2) second, to accumulated DISC income, to the extent thereof, and (3) finally, to previously taxed income, except that a deficit in earnings and profits shall not be applied against accumulated DISC income which has been determined is to be deemed distributed to the shareholders (pursuant to section 995(b)(2)(A)) as a result of a revocation of election or other disqualifi- cation. (c) Priority of distributions Any actual distribution made during a tax- able year shall be treated as being made subse- quent to any deemed distribution made during such year. Any actual distribution made pursu- ant to section 992(c) (relating to distributions to meet qualification requirements) shall be treated as being made before any other actual distributions during the taxable year, (d) Subsequent effect of previous disposiion of DISC stock (1) Shareholder previously taxed income adjust- ment If- (A) gain with respect to a share of stock of a DISC or former DISC is treated under section 995(c) as a dividend or as ordinary income, and (B) any person subsequently receives an actual distribution made out of accumulat- ed DISC income, or a deemed distributidlh made pursuant to section 995(b)(2), with re- spect to such share, such person shall treat such distribution in the same manner as a distribution from previ- ously taxed income to the extent that (i) the gain referred to in subparagraph (A), exceeds (it) any other amounts with respect to such share which were treated under this para- graph as made from previously taxed income. In applying this paragraph with respect to a share of stock in a DISC or former DISC, gain on the acquisition of such share by the DISC or former DISC or gain on a transac- tion prior to such acquisition shall not be con- sidered gain referred to in subparagraph (A). (2) Corporate adjustment upon redemption If section 995(c) applies to a redemption of stock in a DISC or former DISC, the accumu- lated DISC income shall be reduced by an amount equal to the gain described in section 995(c) with respect to such stock which is (or has been) treated as ordinary income, except to the extent distributions with respect to such stock have been treated under para- graph (1). (e) Adjustment to basis (1) Additions to basis Amounts representing deemed distributions as provided in section 995(b) shall Increase the basis of the stock with respect to which the distribution is made. (2) Reductions of basis The portion of an actual distribution made out of previously taxed income shall reduce the basis of the stock with respect to which it is made, and to the extent that it exceeds the adjusted basis of such stock, shall be treated as gain from the sale or exchange of proper- 71-999 0 - 78 - 42 (vol. 1) Page 629 § 996
TITLE 26-INTERNAL REVENUE CODE ty. In the case of stock includible in the gross estate of a decedent for which an election is made under section 2032 (relating to alter- nate valuation), this paragraph shall not apply to any distribution made after the date of the decendent's death and before the alter- nate valuation date provided by section 2032. (f) Definition of divisions of earnings and profits For purposes of this part: (1) DISC Income The earnings and profits derived by a cor- poration during a taxable year in which such corporation is a DISC, before reduction for any distributions during the year, but re- duced by amounts deemed distributed under section 995(b)(1), shall constitute the DISC income for such year. The earnings and prof- its of a DISC for a taxable year include any amounts includible in such DISC's gross income pursuant to section 951(a) for such year. Accumulated DISC income shall be re- duced by deemed distributions under section 995(b)(2). (2) Previously taxed Income Earnings and profits deemed distributed under section 995(b) for a taxable year shall constitute previously taxed income for such year. (3) Other earnings and profits The earnings and profits for a taxable year which are described in neither paragraph (1) nor (2) shall constitute the other earnings and profits for such year. (g) Effectively connected Income In the case of a shareholder who is a nonresi- dent alien individual or a foreign corporation, trust, or estate, gains referred to in section 995(c) and all distributions out of accumulated DISC income including deemed distributions shall be treated as gains and distributions which are effectively connected with the con- duct of a trade or business conducted through a permanent establishment of such shareholder within the United States. (Added Pub. L. 92-178, title V, § 501 Dec. 10, 1971, 85 Stat. 547, and amended Pub. L. 94-455, title XI, § 1101(e), title XIX, §§ 1901(b)(3)(I), Oct. 4, 1976, 90 Stat. 1659, 1793.) AMENDMmErs 1976-Subsec. (a)(2). Pub. L. 94455, § 1101(e), added "In the case of any amount of any actual distribution made pursuant to section 992(c) which is required to satisy the condition of section 992(a)(1)(A), the pre- ceding sentence shall apply to one-half of such amount, and paragraph (1) shall apply to the remain- ing one-half of such amount" following subpar. (C). Subsec. d). Pub. L. 94-455, § 1901(b)(3)(I), substitut- ed "ordinary income" for "gain from the sale or ex- change of property which is not a capital asset" in par. (1)(A) following "dividend or as" and, in par. (2), fol- lowing "treated as". EFcTvE DATE or 1976 A IswmomEr Amendment of subsec. (a)(2) by section 1101(e) of Pub. L. 94455 applicable to taxable years beginning after Dec. 31, 1975, see section 1101(g)(1) of Pub. L. 94455, set out as an Effective Date of 1976 Amend- ment note under section 905 of this title. Amendment of subsec. d) by section 1901(b)(3)(I) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. § 997. Special subchapter C rules For purposes of applying the provisions of subchapter C of chapter 1, any distribution in property to a corporation by a DISC or former DISC which is made out of previously taxed income or accumulated DISC income shall- (1) be treated as a distribution in the same amount as if such distribution of property were made to an individual, and (2) have a basis, in the hands of the recipi- ent corporation, equal to the amount deter- mined under paragraph (1). (Added Pub. L. 92-178, title V, § 501, Dec. 10, 1971, 85 Stat. 549.) PART V-INTERNATIONAL BOYCOTT DETERMINATIONS sec. 999. Reports by taxpayers; determinations. AMmmuMETs 1976-Pub. L. 94-455, title X, § 1084(a), Oct. 4, 1976, 90 Stat. 1650, added Part heading and analysis of sec- tions. § 999. Reports by taxpayers; determinations (a) International boycott reports by taxpayers (1) Report required If any person, or a member of a controlled group (within the meaning of section 993(a)(3)) which includes that person, has op. erations in, or related to- (A) a country (or with the government, a company, or a national of a country) which is on the list maintained by the Secretary under paragraph (3), or (B) any other country (or with the gov- ernment, a company, or a national of that country) in which such person or such member had operations during the taxable year if such person (or, if such person is a foreign corporation, any United States shareholder of that corporation) knows or has reason to know that participation in or cooperation with an international boycott is required as a condition of doing business within such country or with such govern- ment, company, or national, that person or shareholder (within the mean- ing of section 951(b)) shall report such oper- ations to the Secretary at such time and in such manner as the Secretary prescribes, except that in the case of a foreign corpora- tion such report shall be required only of a United States shareholder (within the mean- ing of such section) of such corporation. (2) Participation and cooperation; request therefor A taxpayer shall report whether he, a for- eign corporation of which he is a United States shareholder, or any member of a con- trolled group which includes the taxpayer or such foreign t. rporation has participated in or cooperated with an international boycott at any time during the taxable year, or has been requested to participate in or cooperate with such a boycott, and, if so, the nature of any operation in connection with which there Page 630
TITLE 26-INTERNAL REVENUE CODE was participation in or cooperation with such boycott (or there was a request to participate or cooperate). (3) List to be maintained The Secretary shall maintain and publish not less frequently than quarterly a current list of countries which require or may require participation in or cooperation with an inter- national boycott (within the meaning of sub- section (b)(3)). (b) Participation in or cooperation with an interna- tional boycott (1) General rule If the person or a member of a controlled group (within the meaning of section 993(a)(3)) which includes the person partici- pates in or cooperates with an international boycott in the taxable year, all operations of the taxpayer or such group in that country and in any other country which requires par- ticipation in or cooperation with the boycott as a condition of doing business within that country, or with the government, a company, or a national of that country, shall be treated as operations in connection with which such participation or cooperation occurred, except to the extent that the person can clearly demonstrate that a particular operation is a clearly separate and identifiable operation in connection with which there was no partici- pation in or cooperation with an international boycott. (2) Special rule (A) Nonboycott operations A clearly separate and identifiable oper- ation of a person, or of a member of the controlled group (within the meaning of section 993(a)(3)) which includes that person, in or related to any country within the group of countries referred to in para- graph (1) shall not be treated as an oper- ation in or related to a group of countries associated in carrying out an international boycott if the person can clearly demon- strate that he, or that such member, did not participate in or cooperate with the interna- tional boycott in connection with that oper- ation. (B) Separate and identifiable operations A taxpayer may show that different oper- ations within the same country, or oper- ations in different countries, are clearly sep- arate and identifiable operations. (3) Definition of boycott participation and coopera- tion For purposes of this section, a person par- ticipates in or cooperates with an internation- al boycotL if he agrees- (A) as a condition of doing business direct- ly or indirectly within a country or with the government, a company, or a national of a country- (i) to refrain from doing business with or in a country which is the object of the boycott or with the government, compa- nies, or nationals of that country; (ii) to refrain from doing business with any United States person engaged in trade in a country which is the object of the boycott or with the government, com- panies, or nationals of that country; (iii) to refrain from doing business with any company whose ownership or man- agement is made up, all or in part, of indi- viduals of a particular nationality, race, or religion, or to remove (or refrain from se- lecting) corporate directors who are indi- viduals of a particular nationality, race, or religion; or (iv) to refrain from employing individ- uals of a particular nationality, race, or religion; or (B) as a condition of the sale of a product to the government, a company, or a nation- al of a country, to refrain from shipping or insuring that product on a carrier owned, leased, or operated by a person who does not participate in or cooperate with an in- ternational boycott (within the meaning of subparagraph (A)). (4) Compliance with certain laws This section shall not apply to any agree- ment by a person (or such member)- (A) to meet requirements imposed by a foreign country with respect to an interna- tional boycott if United States law or regu- lations, or an Executive Order, sanctions participation in, or cooperation with, that international boycott, (B) to comply with a prohibition on the importation of goods produced in whole or in part in any country which is the object of an international boycott, or (C) to comply with a prohibition imposed by a country on the exportation of products obtained in such country to any country which is the object of an international boy- cott. (c) International boycott factor (1) International boycott factor For purposes of sections 908(a), 952(a)(3), and 995(b)(3), the international boycott factor is a fraction, determined under regula- tions prescribed by the Secretary, the numer- ator of which reflects the world-wide oper- ations of a person (or, in the case of a con- trolled group (within the meaning of section 993(a)(3)) which includes that person, of the group) which are operations in or related to a group of countries associated in carrying out an international boycott in or with which that person or a member of that controlled group has participated or cooperated in the taxable year, and the denominator of which reflects the world-wide operations of that person or group. (2) Specifically attributable taxes and income If the taxpayer clearly demonstrates that the foreign taxes paid and income earned for the taxable year are attributable to specific operations, then, in lieu of applying the inter- national boycott factor for such taxable year, the amount of the credit disallowed under section 908(a), the addition to subpart F income under section 952(a)(3), and the amount of deemed distribution under section 995(b)(1)(D)(ii) for the taxable year, if any, shall be the amount specifically attributable to the operations In which there was partici- Page 631
TITLE 26-INTERNAL REVENUE CODE pation in or cooperation with an international boycott under section 999(b)(1). (3) World-wide operations For purposes of this subsection, the term "world-wide operations" means operations in or related to countries other than the United States. (d) Determination with respect to particular oper- ations Upon a request made by the taxpayer, the Secretary shall issue a determination with re- spect to whether a particular operation of a person, or of a member of a controlled group which includes that person, constitutes partici- pation in or cooperation with an international boycott. The Secretary may issue such a deter- mination in advance of such operation in cases which are of such a nature that an advance de- termination is possible and appropriate under the circumstances. If the request is made before the operation is commenced, or before the end of a taxable year in which the oper- ation is carried out, the Secretary may decline to issue such- a determination before close of the taxable year. (e) Participation or cooperation by related persons If a person controls (within the meaning of section 304(c)) a corporation- (1) participation in or cooperation with an international boycott by such corporation shall be presumed to be such participation or cooperation by such person, and (2) participation in or cooperation with such a boycott by such person shall be pre- sumed to be such participation or cooperation by such corporation. (f) Willful failure to report Any person (within the meaning of section 6671(b)) required to report under this section who willfully fails to make such report shall, in addition to other penalties provided by law, be fined not more than $25,000, imprisoned for not more than one year, or both. (Added Pub. L. 94-455, title X, § 1064(a), Oct. 4, 1976, 90 Stat. 1650.) EFTc'vE DATE Section applicable to participation in or cooperation with an international boycott more than 30 days after Oct. 4, 1976, with special provisions for existing con- tracts, see section 1066(a) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under sec- tion 908 of this title. REPORTS BY SECRETARY Section 1067 of Pub. L. 94-455 provided that: "(a) Reports to the Congress.-As soon after the close of each calendar year as the data become avail- able, the Secretary shall transmit a report to the Com. mittee on Ways and Means of the House of Represen- tatives and to the Committee on Finance of the Senate setting forth, for that calendar year- "(1) the number of reports filed under section 999(a) of the Internal Revenue Code of 1954 [subsec. (a) of this section] for taxable years ending with or within such taxable year, "(2) the number of such reports on which the tax- payer indicated international boycott participation or cooperation (within the meaning of section 999(b)(3) of such Code [subsec. (b)(3) of this sec- tion]), and "(3) a detailed description of the manner in which the provisions of such Code relating to Internationcl boycott activity have been administered during such calendar year. "(b) Initial list.-The Secretary of the Treasury shall publish an initial list of those countries which may require participation in or cooperation with an in- ternational boycott as a condition of doing business within such country or with the government, a compa- ny, or a national of such country (within the meaning of section 999(b) of the Internal Revenue Code of 1954 [subsec. (b) of tnis section]) within 30 days after the enactment of this Act [Oct. 4, 1976]." SECTION REFERRE TO IN OTHER SECTIONS This section is referred to in sections 908, 952, 995 of this title. Subchapter O-Gain or Loss on Disposition of Property Part I. II. III. IV. V. VI. VII. VIII. Determination of amount of and recognition of gain or loss. Basis rules of general application. Common nontaxable exchanges. Special rules. Changes to effectuate F.C.C. policy. Exchanges in obedience to S.E.C. orders. Wash sales of stock or securities. Distributions pursuant to Bank Holding Compa- ny Act. AMENDMENTS 1976-Pub. L. 94-455, title XIX, § 1901(b)(32)(I), Oct. 4, 1976, 90 Stat. 1800, struck out Part IX "Distribu- tions pursuant to orders enforcing the antitrust laws". Pub. L. 94-452, § 2(c), Oct. 2, 1976, 90 Stat. 1512, struck out in Part VIII "of 1956" following "Bank Holding Company Act". 1962-Pub. L. 87-403, § 1(b), Feb. 2, 1962, 76 Stat. 5. added Part IX. 1956-Act May 9, 1956, ch. 240, § 10(b), 70 Stat. 146, added Part VIII. PART I-DETERMINATION OF AMOUNT OF AND RECOGNITION OF GAIN OR LOSS Sec. 1001. Determination of amount of and recognition of gain or loss. [1002. Repealed.] AmENDUENTS 1976-Pub. L. 94-455, title XIX, § 1901(b)(28)(B)(ii), Oct. 4, 1976, 90 Stat. 1799, struck out item 1002 "Rec- ognition of gain or loss". § 1001. Determination of amount of and recognition of gain or loss (a) Computation of gain or loss The gain from the sale or other disposition of property shall be the excess of the amount real- ized therefrom over the adjusted basis provided in section 1011 for determining gain, and the loss shall be the excess of the adjusted basis provided in such section for determining loss over the amount realized. (b) Amount realized The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. In determining the amount realized- (1) there shall not be taken into account any amount received as reimbursement for real property taxes which are treated under § 1001 Page 632
TITLE 26-INTERNAL REVENUE CODE section 164(d) as Imposed on the purchaser, and (2) there shall be taken into account amounts representing real property taxes which are treated under section 164(d) as im- posed on the taxpayer if such taxes are to be paid by the purchaser. (c) Recognition of gain or loss Except as otherwise provided in this subtitle, the entire amount of the gain or loss, deter- mined under this section, on the sale or ex- change of property shall be recognized. (d) Installment sales Nothing in this section shall be construed to prevent (in the case of property sold under con- tract providing for payment in installments) the taxation of that portion of any ins.-lment payment representing gain or profit in the year in which such payment is received. (e) Certain term interests (1) In general In determining gain or loss from the sale or other disposition of a term interest in proper- ty, that portion of the adjusted basis of such interest which is determined pursuant to sec- tion 1014 or 1015 (to the extent that such ad- justed basis is a portion of the entire adjusted basis of the property) shall be disregarded. (2) Term Interest in property defined For purposes of paragraph (1), the term "term interest in property" means- (A) a life interest in property, (B) an interest in property for a term of years, or (C) an income interest in a trust. (3) Exception Paragraph (1) shall not apply to a sale or other disposition which is a part of a transac- tion in which the entire interest in property is transferred to any person or persons. (f) Cross reference For treatment of certain expenses incident to the sale of a residence which were deducted as moving expenses by the taxpayer or his spouse under section 217(a), see section 217(e). (Aug. 16, 1954, ch. 736, 68A Stat. 295; Dec. 30, 1969, Pub. L. 91-172, title II, § 231(c)(2), title V. § 516(a), 83 Stat. 579, 646; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(a)(121). 90 Stat. 1784.) AMENDMENTS 1976-Subsec. (c). Pub. L. 94-455 substituted provi- sion recognizing the entire amount of gain or loss, except as otherwise provided, for provision referring to section 1002 for the determination of the extent of gain or loss to be recognized. 1969-Subsec. (e). Pub. L. 91-172, §516(a), added subsec. (e). Subsec. (f). Pub. L. 91-172, § 231(c)(2), added subsec. (f). EFFEcTivE DATE OF 1976 AMENDMiENT Amendment of subsec. (c) by Pub. L. 94-455 effective for taxable years beginning after Dec. 31, 1976, see sec- tion 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. EcTmcrxvz DATE OF 1969 AmINDMENT Section 516(d) of Pub. L. 91-172 provided that: "(1) The amendment made by subsection (a) [amending this section] shall apply to sales or other dispositions after October 9, 1969. "(2) The amendment made by subsection (b) (amending section 1231 of this title] shall apply to taxable years beginning after December 31, 1969. "(3) The amendments made by subsection (c) [enact- ing section 1253 and amending sections 162 and 1016 of this title] shall apply to transfers after December 31, 1989, except that section 1253(d)(1) of the Internal Revenue Code of 1954 [section 1253(d)(1) of this title] (as added by subsection (c) shall, at the election of the taxpayer (made at such time and in such manner as the Secretary or his delegate may by regulations pre- scribe), apply to transfers before January 1, 1970, but only with respect to payments made in taxable years ending after December 31, 1969, and beginning before January 1. 1980." Amendment of section by section 231(c)(2) of Pub. L. 91-172 applicable to taxable years beginning after Dec. 31, 1969, see section 231(d) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under sec- tion 217 of this title. CROSS REFERENCES Gain or loss to shareholders in corporate liquida- tions, see section 331 of this title. Installment method of accounting, see section 453 of this title. Recognition of gain or loss on transfer of obsolete vessels under Merchant Marine Act, section 1101 et seq. of Title 46. see section 1160 of Title 46, Shipping. SECTION RErnz TO IN OTHER SECTIONS This section is referred to in sections 331, 368 of this title. [§1002. Repealed. Pub. L. 94-455, title XIX, § 1901(b)(28)(B)(i), Oct. 4, 1976, 90 Stat. 17991 Section, act Aug. 16, 1954, ch. 736, 68A Stat. 295, re- lated to the recognition of the entire amount of gain or loss determined under section 1001 on the sale or exchange of property. EFFETIvE DATE OF REPEAL Repeal of section effective for taxable years begin- ning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amend- ment note under section 2 of this title. PART II-BASIS RULES OF GENERAL APPLICATION SM. 1011. Adjusted basis for determining gain or loss. 1012. Basis of property-cost. 1013. Basis of property included in inventory. 1014. Basis of property acquired from a decedent. 1015. Basis of property acquired by gifts and trans- fers in trust. 1016. Adjustments to basis. 1017. Discharge of indebtedness. 1018. Adjustment of capital structure before Sep- tember 22, 1938. 1019. Property on which lessee has made Improve- ments. [1020. Repealed.] 1021. Sale of annuities. [1022. Repealed.] 1023. Carryover basis for certain property acquired from a decedent dying after December 31, 1976. 1024. Cross references. AMENDMENTs 1976-Pub. L. 94-455, title XIX, § 1901(b)(29)(B), (30)(C), title XX, § 2005(e)(1). Oct. 4, 1976, 90 Stat. 1799, 1878, struck out item 1020 "Election in respect of depreciation, etc., allowed before 1952". and item 1022 "Increase in basis with respect to certain foreign per- Page 633 § 1002
TITLE 26-INTERNAL REVENUE CODE sonal holding company stock or securities", added Item 1023. and redesignated former item 1023 as 1024. 1964-Pub. L. 88-272, title II, §225(j)(3), Feb. 26, 1964, 78 Stat. 93, added Item 1022, and redesignated former item 1022 as 1023. CROSS RMWEaRCzS Basis of transferee partner's interest, see section 742 of this title. PART REFERRED TO IN OTHER SECTIONS This part is referred to in section 742 of this title. § 1011. Adjusted basis for determining gain or loss (a) General rule The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis (determined under section 1012 or other appli- cable sections of this subchapter and sub- chapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses)), adjusted as provided in section 1016. (b) Bargain sale to a charitable organization If a deduction is allowable under section 170 (relating to charitable contributions) by reason of a sale, then the adjusted basis for determin- ing the gain from such sale shall be that por- tion of the adjusted ba.-'s which bears the same ratio to the adjusted basis as the amount real- ized bears to the fair market value of the prop- erty. (Aug. 16, 1954, ch. 736, 68A Stat. 296; Dec. 30, 1969, Pub. L. 91-172, title II, § 201(f), 83 Stat. 564.) 1969-Pub. L. 91-172 redesignated existing provisions as subsec. (a) and added subsec. (b). EFFECTivE DATE OF 1969 AmfmENr Amendment by Pub. L. 91-172 applicable with re- spect to sales made after Dec. 19, 1969, see section 201(g)(6) of Pub. L. 91-172, set out as an Effective Date of 1969 Amendment note under section 170 of this title. CROSS REFERmcm Bad debt deduction determined by reference to ad- justed basis provided in this section, see section 166 of this title. Basis for determining gain or loss on new vessel ac- quired in exchange for obsolete vessel under Merchant Marine Act, section 1101 et seq. of Title 46, see section 1160 of Title 46, Shipping. Computation of gain or loss by reference to adjusted basis provided in this section, see section 1001 of this title. Cost depletion basis as the adjusted basis provided in this section, see section 612 of this title. Depreciation basis as the adjusted basis provided in this section, see section 167 of this title. Loss deduction determined by reference to adjusted basis provided in this section, see section 165 of this title. SECTION RF'ED TO IN OTHER SECTIONS This section is referred to in sections 165, 166, 612, 1001 of this title. § 1012. Basis of property-cost The basis of property shall be the cost of such property, except as otherwise provided in this subchapter and subchapter C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses). The cost of real property shall not include any amount in respect of real property taxes which are treated under section 164(d) as imposed on the taxpayer. (Aug. 16, 1954, ch. 736, 68A Stat. 296.) Caoss RErxNczs Involuntary conversions, see section 1033 of this title. SECTION RzniMMU TO IN OTHER SECTIONS This section is referred to in sections 1011, 1033, 1039 of this title. § 1013, Basis of property included in inventory If the property should have been included in the last inventory, the basis shall be the last in- ventory value thereof. (Aug. 16, 1954, ch. 736, 68A Stat. 296.) Caoss Rumnnicms Capital assets as rot including property includible in inventory if on hand at close of taxable year, see sec- tion 1221 of this title. Character of gain or loss on disposition by distribu- tee partner of inventory items, see section 735 of this title. General rules for inventories, see section 471 of this title. Inventory carryovers, see section 381 of this title. LIFO inventories, generally, see section 472 cf this title, Property includible within inventories as not proper- ty used in trade or business, see section 1231 of this title. Taxability of corporation on distribution of inven- tories, see section 311 of this title. § 1014. Basis of property acquired from a decedent (a) In general Except as otherwise provided in this section, the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise dis- posed of before the decedent's death by such person, be the fair market value of the proper- ty at the date of the decedent's death, or, in the case of an election under either section 2032 or section 811(j) of the Internal Revenue Code of 1939 where the decedent died after October 21, 1942, its value at the applicable valuation date prescribed by those sections. (b) Property acquired from the decedent For purposes of subsection (a), the following property shall be considered to have been ac- quired from or to have passed from the dece- dent: (1) Property acquired by bequest, devise, or inheritance, or by the decedent's estate from the decedent; (2) Property transferred by the decedent during his lifetime in trust to pay the income for life to or on the order or direction of the decedent, with the right reserved to the dece- dent at all times before his death to revoke the trust; (3) In the case of decedents dying after De- cember 31, 1951, property transferred by the § 1011 Page 634
TITLE 26-INTERNAL REVENUE CODE decedent during his lifetime in trust to pay the income for life to or on the order or direc- tion of the decedent with the right reserved to the decedent at all times before his death to make any change in the enjoyment thereof through the exercise of a power to alter, amend, or terminate the trust; (4) Property passing without full and ade- quate consideration under a general power of appointment exercised by the decedent by will; (5) In the case of decedents dying after August 26, 1937, property acquired by be- quest, devise, or inheritance or by the dece- dent's estate from the decedent, if the proper- ty consists of stock or securities of a foreign corporation, which with respect to its taxable year next preceding the date of the dece- dent's death was, under the law applicable to such year, a foreign personal holding compa- ny. In such case, the basis shall be the fair market value of such property at the date of the decedent's death or the basis in the hands of the decedent, whichever Is lower; (6) In the case of decedents dying after De- cember 31, 1947, property which represents the surviving spouse's one-half share of com- munity property held by the decedent and the surviving spouse under the community property laws of any State or possession of the United States or any foreign country, if at least one-half of the whole of the commu- nity interest in such property was includible in determining the value of the decedent's gross estate under chapter 11 of subtitle B (section 2001 and following, relating to estate tax) or section 811 of the Internal Revenue Code of 1939; (7) In the case of decedents dying after Oc- tober 21, 1942, and on or before December 31, 1947, such part of any property, representing the surviving spouse's one-half share of prop- erty held by a decedent and the surviving spouse under the community property laws of any State or possession of the United States or any foreign country, as was included in de- termining the value of the gross estate of the decedent, if a tax under chapter 3 of the In- ternal Revenue Code of 1939 was payable on the transfer of the net estate of the decedent. In such case, nothing in this paragraph shall reduce the basis below that which would exist if the Revenue Act of 1948 had not been en- acted; (8) In the case of decedents dying after De- cember 31, 1950, and before January 1, 1954, property which represents the survivor's in- terest in a joint and survivor's annuity if the value of any part of such interest was re- quired to be included in determining the value of decedent's gross estate under section 811 of the Internal Revenue Code of 1939; (9) In the case of decedents dying after De- cember 31, 1953, property acquired from the decedent by reason of death, form of owner- ship, or other conditions (including property acquired through the exercise or non-exercise of a power of appointment), if by reason thereof the property is required to be includ- ed in determining the value of the decedent's gross estate under chapter 11 of subtitle B or under the Internal Revenue tCode of 1939. In such case, if the property is acquired before the death of the decedent, the basis shall be the amount determined under subsection (a) reduced by the amount allowed to the tax- payer as deductions in computing taxable income under this subtitle or prior income tax laws for exhaustion, wes. and tear, obso- lescence, amortization, and depletion on such property before the death of the decedent, Such basis shall be applicable to the property commencing on the death of the decedent. This paragraph shall not apply to- (A) annuities described in section 72; (B) property to which paragraph (5) would apply if the property had been ac- quired by bequest; and (C) property described in any other para- graph of this subsection. (c) Property representing income in respect of a dece- dent This section shall not apply to property which constitutes a right to receive an item of income in respect of a decedent under section 691. (d) Decedents dying after December 31, 1976 In the case of a decedent dying after Decem- ber 31, 1976, the section shall not apply to any property for which a carryover basis is provided by section 1023. (Aug. 16, 1954, ch. 736, 68A Stat. 296; Feb. 11, 1958, Pub. L. 85-320, § 2, 72 Stat. 5; Dec. 10, 1971, Pub. L. 92-178, title V, § 502(f), 85 Stat. 550; Oct. 4, 1976, Pub. L. 94-455, title XIX, § 1901(c)(8), title XX, § 2005(a)(1), 90 Stat. 1803, 1872.) REFERENCEs IN TEXT Section 811 of the Internal Revenue Code of 1939, referred to in subsecs. (a) and (b)(6), (8), was classified to section 811 of former Title 26, Internal Revenue Code. For table of comparisons of the 1939 Code to the 1954 Code, see Table I preceding section 1 of this title. See, also, section 7851(e) of this title for provi- sion that references in the 1954 Code to a provision of the 1939 Code, not then applicable, shall be deemed a reference to the corresponding provision of the 1954 Code, which is then applicable. Chapter 3 of the Internal Revenue Code of 1939, re- ferred to in subsec. (b)(7), was comprised of sections 800 to 951 of former Title 26, Internal Revenue Code. For table of comparisons of the 1939 Code to the 1954 Code, see Table I preceding section 1 of this title. See also section 7851(a)(2)(A) of this title for applicability of chapter 3 of former title 26. See also section 7851(e) of this title for provision that references in the 1954 Code to a provision of the 1939 Code, not then applica- ble, shall be deemed a reference to the corresponding provision of the 1954 Code, which is then applicable. Revenue Act of 1948, referred to in subsec. (b)(7), is act Apr. 2, 1948, ch. 168, 62 Stat. 110. The Internal Revenue Code of 1939, referred to in subsee. (b)(9), is act Feb. 10, 1939, ch. 2. 53 Stat. 1, as amended. Prior to the enactment of the Internal Rev- enue Code of 1954, the 1939 Code was classified to former Title 26, Internal Revenue Code. For table of comparisons of the 1939 Code to the 1954 Code, see Table I preceding section 1 of this title. AMENDMENTS 1976-Subsecs. (b)(6), (7). Pub. L. 94-455, § 1901(c)(8). struck out "Territory" following "under the community property laws of any State,". Subsec. (d). Pub. L. 94-455, § 2005(a)(1), substituted provisions relating to the applicability of this section Page 635 § 1014
TITLE 26-INTERNAL REVENUE CODE to decedents dying after 1976 for provisions relating to a special rule with respect to DISC stock. 1971-Subsec. d). Pub. L. 92-178 added subsec. (d). 1958-Subsec. (d). Pub. L. 85-320 repealed subsec. (d), which made section inapplicable to restricted stock options described In section 421 which the em- ployee has not exercised at death. EmccTivE DATE OF 1976 AmmomENT Amendment of subsecs. (b)(6), (7) by section 1901(c)(8) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Amendment of subsec. (d) by section 2005(a)(1) of Pub. L. 94-455 applicable in respect of decedents dying after Dec: 31, 1976, see section 2005(f) of Pub. L. 94- 455, set out as an Effective Date note under section 1023 of this title. EFFEcTIE DATE OF 1971 AMENDMENT Enactment of subsec. d) of this section by Pub. L. 92-178 applicable with respect to taxable years ending after Dec. 31, 1971, except that a corporation may not be a DISC for any taxable year beginning before Jan. 1972, see section 507 of Pub. L. 92-178, set out as an Effective Date of 1971 Amendment note under section 991 of this title. EFFEcTIvE DATE OF 1958 AMENDMENT Repeal of subsec. (d) of this section applicable with respect to taxable years ending after Dec. 31, 1956, but only 4n the case of employees dying after such date, see section 3 of Pub. L. 85-320, set out as an Effective Date of 1958 Amendment note under section 421 of this title. CRoss REFERENCES Definition of purchase for* purpose of determining basis of property received in' liltuidation of subsidiary as excluding a determination of basis under this sec- tion, see section 334 of this title. SEcTION RrMMzD TO\IN OTHER SECTIONS This section is referred to in sections 44, 179. 334, 382, 551, 644, 1001, 1023, 1223, 1232 of this title. § 1015. Basis of property acquired by gifts and trans. fers in trust (a) Gifts after December 31, 1920 If the property was acquired by gift after De- cember 31, 1920, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not ac- quired by gift, except that if such basis (adjust- ed for the period before the date of the gift as provided in section 1016) is greater than the fair market value of the property at the time of the gift, then for the purpose of determining loss the basis shall be such fair market value. If the facts necessary to determine the basis in the hands of the donor or the last preceding owner are unknown to the donee, the Secretary shall, if possible, obtain such facts from such donor or last preceding owner, or any other person cognizant thereof. If the Secretary finds it impossible to obtain such facts, the basis in the hands of such donor or last preceding owner shall be the fair market value of such property as found by the Secretary as of the date or approximate date at which, according to the best information that the Secretary is able to obtain, such property was acquired by such donor or last preceding owner. (b) Transfer in trust after December 31, 1920 If the property was acquired after December 31, .1920, by a transfer in trust (other than hy a transfer in trust by a gift, bequest, or devise), the basis shall be the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss rec- ognized to the grantor on such transfer under the law applicable to the year in which the transfer was made. () Gift or transfer in trust before January 1, 1921 If the property was acquired by gift or trans- fer in trust on or before December 31, 1920, the basis shall be the fair market value of such property at the time of such acquisition. (d) Increased basis for gift tax paid (1) In general If- (A) the property is acquired by gift on or after September 2, 1958, the basis shall be the basis determined under subsection (a), Increased (but not above the fair market value of the property at the time of the gift) by the amount of gift tax paid with re- spect to such gift, or (B) the property was acquired by gift before September 2, 1958, and has not been sold, exchanged, or otherwise disposed of before such date, the basis of the property shall be increased on such date by the amount of gift tax paid with respect to such gift, but such increase shall not exceed an amount equal to the amount by which the fair market value of the property at the time of the gift exceeded the basis of the property in the hands of the donor at the time of the gift. (2) Amount of tax paid with respect to gift For purposes of paragraph (1), the amount of gift tax paid with respect to any gift is an amount which bears the same ratio to the amount of gift tax paid under chapter 12 with respect to all gifts made by the donor for the calendar quarter (or calendar year if the gift was made before January 1, 1971) in which such gift is made as the amount of such gift bears to the taxable gifts (as defined in sec- tion 2503(a) but computed without the deduc- tion allowed by section 2521) made by the donor during such calendar quarter or year. For purposes of the preceding sentence, the amount of any gift shall be the amount in- cluded with respect to such gift in determin- ing (for the purposes of section 2503(a)) the total amount of gifts made during the calen- dar quarter or year, reduced by the amount of any deduction allowed with respect to such gift under section 2522 (relating to charitable deduction) or under section 2523 (relating to marital deduction). (3) Gifts treated as made one-half by each spouse For purposes of paragraph (1), where the donor and his spouse elected, under section 2513 to have the gift considered as made one- half by each, the amount of gift tax paid with respect to such gift under chapter 12 shall be the sum of the amounts of tax paid with re- spect to each half of such gift (computed in the manner provided in paragraph (2)). Page 636 § 1015
TITLE 26-INTERNAL REVENUE CODE (4) Treatment as adjustment to basis For purposes of section 1016(b), an increase in basis under paragraph (1) shall be treated as an adjustment under section 1016(a). (5) Application to gifts before 1955 With respect to any property acquired by gift before 1955, references in this subsection to any provision of this title shall be deemed to refer to the corresponding provision of the Internal Revenue Code of 1939 or prior rev- enue laws which was effective for the year in which such gift was made. (6) Special rule for gifts made after December 31, 1976 (A) In general In the case of any gift made after Decem- ber 31, 1976, the increase in basis provided by this subsection with respect to any gift for the gift tax paid under chapter 12 shall be an amount (not in excess of the amount of tax so paid) which bears the same ratio to the amount of tax so paid as- (i) the net appreciation in value of the gift, bears to (ii) the amount of the gift. (B) Net appreciation For purposes of paragraph (1), the net ap- preciation in value of any gift is the amount by which the fair market value of the gift exceeds the donor's adjusted basis immedi- ately before the gift. (Aug. 16, 1954, ch. 736, 68A Stat. 298; Sept. 2, 1958, Pub. L. 85-866, title I, §43(a), 72 Stat. 1640; Dec. 31, 1970, Pub. L. 91-614, title I, § 102(d)(1), 84 Stat. 1841; Oct. 4, 1976, Pub. L. 94-455, title XIX, §§ 1901(a)(122), 1906(b) (13)(A), title XX, § 205(c), 90 Stat. 1784, 1834, 1877.) REFERENCES IN TEXT Section 2521, referred to in subsec. (d)(2), was re- pealed by Pub. L. 94-455, title XX, § 2001(b)(3), Oct. 4, 1976, 90 Stat. 1849. The Internal Revenue Code of 19J9, referred to in subsec. (d)(5), is act Feb. 10, 1939, ch. 2. 53 Stat. 1, as amended. Prior to the enactment of the Internal Rev- enue Code of 1954, the 1939 Code was classified to former Title 26, Internal Revenue Code. For table of comparisons of the 1939 Code to the 1954 Code, see Table I preceding section 1 of this title. AMENDMENTS 1976-Subsec. (a). Pub. L. 94-455, § 1906(b)(13)(A), struck out "or his delegate" following "Secretary" in four places. Subsec. (d)(1). Pub. L. 94-455, 1901(a)(122), substi- tuted in subpars. (A) and (B) "September 2, 1958" for "the date of enactment of the Technical Amendments Act of 1958". Subsec. (d)(6). Pub. L. 94-455, § 2005(c), added subsec. (d)(6). 1970-Subsec. (d)(2). Pub. L. 91-614 substituted "cal- endar quarter (or calendar year if the gift was made before January 1, 1971)" for "calendar year" the first place it appears and "calendar quarter or year" for "calendar year" every other place it appears therein. 1958-Subsec. (d). Pub. L. 85-866 added subsec. (d). ErEcTivE DATE OF 1976 AMEDiMENT Amendment of subsec. (d)(1) by section 1901(a)(122) of Pub. L. 94-455 applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as an Effective Date of 1976 Amendment note under section 2 of this title. Amendment of subsec. (d)(6) by section 2005(c) of Pub. L. 94-455 applicable to gifts made after Dec. 31, 1976, see section 2005(f)(2) of Pub. L. 94-455 set out as an Effective Date note under section 1023 of this title. EFFECTIVE DATE OF 1970 AMEmNT Amendment by Pub. L. 91-614 applicable with re- spect to gifts made after Dec. 31, 1970, see section 102(e) of Pub. L. 91-614, set out as an Effective Date of 1970 Amendment note under section 2501 of this title. EmrECTxvE DATE OF 1958 AMENDMENT Subsec. (M) of this section applicable to taxable years bekinning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 1(c) of Pub. L. 85-866, set out as an Effective Date of 1958 Amendment note under sec- tion 165 of this title. CROSS REFERENCES Basis of property after erroneous treatment of a prior transaction, see section 1312 of this title. Gift tax, see section 2501 et seq. of this title. Gifts specifically excluded from gross income, see section 102 of this title. Valuation of gifts, see section 2512 of this title. SECTION REFERRM TO IN OTHER SECTIONS This section is referred to in sections 382, 1001, 1312, 2511 of this title. § 1016. Adjustments to basis (a) General rule Proper adjustment in respect of the property shall in all cases be made- (1) for expenditures, receipts, losses, or other items, properly chargeable to capital ac- count, but no such adjustment shall be made- (A) for taxes or other carrying charges de- scribed in section 266, or (B) for expenditures described in section 173 (relating to circulation expenditures), for which deductions have been taken by the taxpayer in determining taxable income for the taxable year or prior taxable years; (2) in respect of any period since February 28, 1913, for exhaustion, wear and tear, obso- lescence, amortization, and depletion, to the extent of the amount- (A) allowed as deductions in computing taxable income under this subtitle or prior income tax laws, and (B) resulting (by reason of the deductions so allowed) in a reduction for any taxable year of the taxpayer's taxes under this sub- title (other than chapter 2, relating to tax on self-employment income), or prior income, war-profits, or excess-profits tax laws, but not less than the amount allowable under this subtitle or prior income tax laws. Where no method has been adopted under section 167 (relating to depreciation deduction), the amount allowable shall be determined under section 167(b)(1). Subparagraph (B) of this paragraph shall not apply in respect of any period since February 28, 1913, and before January 1, 1952, unless an election has been made under section 1020 (as in effect before the date of the enactment of the Tax Reform Act of 1976). Where for any taxable year before the taxable year 1932 the depletion Page 637 § 1016
TITLE 26-INTERNAL REVENUE CODE allowance was based on discovery value or a percentage of income, then the adjustment for depletion for such year shall be based on the depletion which would have been allowa- ble for such year if computed without refer- ence to discovery value or a percentage of income; (3) in respect of any period- (A) before March 1, 1913, (B) since February 28, 1913, during which such property was held by a person or an organization not subject to income taxation under this chapter or prior income tax laws, (C) since February 28, 1913, and before January 1, 1958, during which such proper- ty was held by a person subject to tax under part I of subchapter L (or the correspond- ing provisions of prior income tax laws), to the extent that paragraph (2) does not apply, and (D) since February 28, 1913, during which such property was held by a person subject to tax under part II of subchapter L (or the corresponding provisions of prior income tax laws), to the extent that paragraph (2) does not apply, for exhaustion, wear and tear, obsolescence, amortization, and depletion, to the extent sustained; (4) in the case of stock (to the extent not provided for in the foregoing paragraphs) for the amount of distributions previously made which, under the law applicable to the year in which the distribution was made, either were tax-free or were applicable in reduction of basis (not including distributions made by a corporation which was classified as a personal service corporation under the provisions of the Revenue Act of 1918 (40 Stat. 1057), or the Revenue Act of 1921 (42 Stat. 227), out of its earnings or profits which were taxable in accordance with the provisions of section 218 of the Revenue Act of 1918 or 1921); (5) in the case of any bond (as defined in section 171(d)) the interest on which is wholly exempt from the Lax imposed by this subtitle, to the extent of the amortizable bond premium disallowable as a deduction pursuant to section 171(a)(2), and in the case of any other bond (as defined in section 171(d)) to the extent of the deductions al- lowable pursuant to section 171(a)(1) with re- spect thereto; (6) in the case of any municipal bond (as de- fined in section 75(b)), to the extent provided in section 75(a)(2); (7) in the case of a residence the acquisition of which resulted, under section 1034, in the nonrecognition of any part of the gain real- ized on the sale, exchange, or involuntary conversion of another residence, to the extent provided in section 1034(e); (8) in the case of property pledged to the Commodity Credit Corporation, to the extent of the amount received as a loan from the Commodity Credit Corporation and treated by the taxpayer as income for the year in which received pursuant to section 77, and to the extent of any deficiency on such loan with respect to which the taxpayer has been relieved from liability; (9) for amounts allowed as deductions as de- ferred expenses under section 616(b) (relating to certain expenditures in the development of mines) and resulting in a reduction of the taxpayer's taxes under this subtitle, but not less than the amounts allowable under such section for the taxable year and prior years; [(10) Repealed. Pub. L. 94-455, title XIX, § 1901(b)(21)(G), Oct. 4, 1976, 90 Stat. 1798] (11) for deductions to the extent disallowed under section 268 (relating to sale of land with unharvested crops), notwithstanding the provisions of any other paragraph of this sub- section; (12) to the extent provided in section 28(h) of the Internal Revenue Code of 1939 in the case of amounts specified in a shareholder's consent made under section 28 of such code; (13) to the extent provided in section 551(e) in the case of the stock of United States shareholders in a foreign personal holding company; (14) for amounts allowed as deductions as deferred expenses under section 174(b)(1) (re- lating to research and experimental expendi- tures) and resulting in a reduction of the tax- payers' taxes under this subtitle, but not less than the amounts allowable under such sec- tion for the taxablp :ear and prior years; (15) for deductions to the extent disallowed tnder section 272 (relating to disposal of coal or domestic iron ore), notwithstanding the provisions of any other paragrarh oi this sub- section; (16) for amounts allowed as deductions for expenditures treated as deferred expenses under section 177 (relating to trademark and trade name expenditures) and resulting in a reduction of the taxpayer's taxes under this subtitle, but not less than the amounts al- lowable under such section for the taxable year and prior years; (17) in the case of any evidence of indebted- ness referred to in section 818(b) (relating to amortization of premium and accrual of dis- count in the case of life insurande compa- nies), to the extent of the adjustments re- quired under section 818(b) (or the corre- sponding provisions of prior income tax laws) for the taxable year and all prior taxable years; (18) to the extent provided in section 1376 in the case of stock of, and indebtedness owing, shareholders of an electing small busi- ness corporation (as defined in section 1371(b)); (19) to the extent provided in section 961 in the case of stock in controlled foreign corpo- rations (or foreign corporations which were controlled foreign corporations) and of prop- erty by reason of which a person is considered as owning such stock; (20) for amounts allowed as deductions for payments made on account of transfers of franchises, trademarks, or trade names under section 1253(d)(2); E(21) Repealed] [(22) Renumbered (20)] (23) to the extent provided in section 1023, relating to carryover basis for certain proper- ty acquired from a decedent dying after De- cember 31, 1976. Page 638 § 1016
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