State Of New York et al v. Mnuchin et al

Filing 47

DECLARATION of Owen T. Conroy in Support re: 44 CROSS MOTION for Summary Judgment .. Document filed by State Of Connecticut, State Of New York, State of Maryland, State of New Jersey. (Attachments: # 1 Exhibit 1, # 2 Exhibit 2, # 3 Exhibit 3, # 4 Exhibit 4, # 5 Exhibit 5, # 6 Exhibit 6, # 7 Exhibit 7, # 8 Exhibit 8, # 9 Exhibit 9, # 10 Exhibit 10, # 11 Exhibit 11, # 12 Exhibit 12, # 13 Exhibit 13, # 14 Exhibit 14, # 15 Exhibit 15, # 16 Exhibit 16, # 17 Exhibit 17, # 18 Exhibit 18, # 19 Exhibit 19, # 20 Exhibit 20, # 21 Exhibit 21, # 22 Exhibit 22, # 23 Exhibit 23, # 24 Exhibit 24, # 25 Exhibit 25, # 26 Exhibit 26, # 27 Exhibit 27, # 28 Exhibit 28, # 29 Exhibit 29, # 30 Exhibit 30, # 31 Exhibit 31, # 32 Exhibit 32, # 33 Exhibit 33, # 34 Exhibit 34, # 35 Exhibit 35, # 36 Exhibit 36, # 37 Exhibit 37, # 38 Exhibit 38, # 39 Exhibit 39, # 40 Exhibit 40, # 41 Exhibit 41, # 42 Exhibit 42, # 43 Exhibit 43, # 44 Exhibit 44, # 45 Exhibit 45, # 46 Exhibit 46, # 47 Exhibit 47, # 48 Exhibit 48, # 49 Exhibit 49, # 50 Exhibit 50, # 51 Exhibit 51, # 52 Exhibit 52, # 53 Exhibit 53, # 54 Exhibit 54, # 55 Exhibit 55, # 56 Exhibit 56, # 57 Exhibit 57, # 58 Exhibit 58, # 59 Exhibit 59, # 60 Exhibit 60, # 61 Exhibit 61, # 62 Exhibit 62, # 63 Exhibit 63, # 64 Exhibit 64, # 65 Exhibit 65, # 66 Exhibit 66, # 67 Exhibit 67, # 68 Exhibit 68, # 69 Exhibit 69, # 70 Exhibit 70, # 71 Exhibit 71, # 72 Exhibit 72, # 73 Exhibit 73, # 74 Exhibit 74, # 75 Exhibit 75, # 76 Exhibit 76, # 77 Exhibit 77, # 78 Exhibit 78, # 79 Exhibit 79, # 80 Exhibit 80, # 81 Exhibit 81, # 82 Exhibit 82, # 83 Exhibit 83, # 84 Exhibit 84, # 85 Exhibit 85, # 86 Exhibit 86, # 87 Exhibit 87, # 88 Exhibit 88, # 89 Exhibit 89, # 90 Exhibit 90, # 91 Exhibit 91, # 92 Exhibit 92, # 93 Exhibit 93, # 94 Exhibit 94, # 95 Exhibit 95, # 96 Exhibit 96, # 97 Exhibit 97, # 98 Exhibit 98, # 99 Exhibit 99, # 100 Exhibit 100, # 101 Exhibit 101, # 102 Exhibit 102, # 103 Exhibit 103, # 104 Exhibit 104, # 105 Exhibit 105, # 106 Exhibit 106)(Conroy, Owen)

Exhibit 43

862

PUii

LAWS---OH.

240, 247-UNE 28 20, 1939

[53 STAT.

Payment for(un
Ing of blood for triofficer,
fusion.
within

and payments of not to exceed $50 in any one case to persons
the Government service who shall furnish blood from their
veins for transfusion to the veins of patients in Panama Canal hosProvkfo.
pitals: Provided, That expenditures heretofore made to any person
Validation of
penditures hereto fore within the Government service for blood furnished to patients in
made.
Panama Canal hospitals are hereby validated; $962,035.
Civil goveinm d . For civil government of the Panama Canal and Canal Zone, includPanama Canal
Canal Zone.
ing gratuities and necessary clothing for indigent discharged prisoners, $1180,802.
Availability.
Total anama Canal, $24,714,924, to be available until expended.
Additional sums
In addition to the foregong sums there is appropriated for the
fiscal year 1940 for expenditures and reinvestment under the several
heads of appropriation aforesaid, without being covered into the
Treasury of the United States, and to remain available until
expended all moneys received by the Panama Canal during the fiscal
year 1940 and prior fiscal years (exclusive of net profits for such
prnor fiscal years) from services rendered or materials and supplies
furnished to the United States, the Panama Railroad Company, the
Canal Zone government, or to their employees, respectively, or to
the Panama Government, from hotel and hospital supplies and services; from rentals, wharfage, and like service; from labor, materials,
and supplies and other services furnished to vessels other than those
passing through the Canal and to others unable to obtain the same
elsewhere; from the sale of scrap and other byroducts of manufacturing and shop operations; from the sale of obsolete and unserviceable materials, supplies, and equipment purchased or acquired for
the operation, maintenance, protection, sanitation and government
Disposition of net of the Canal and Canal Zone* and any net profits accruing from
profits.
such business to the Panama banal shall annually be covered into
the Treasury of the United States.
There is also appropriated for the fiscal year 1940 for the operaWaterworks,wsew ers.
and pavements, Pa
tion, maintenance, an extension of waterworks, sewers, and paveme and Colon.
ments in the cities of Panama and Colon, to remain available until
expended the necessary portions of such sums as shall be paid during
that fiscal year as water rentals or directly by the Government of
Panama for such expenses.
Sort title.
SEQ. 2. This Act may be cited as the "War Department Civil
Appropriation Act, 1940".
Approved, June 28, 1939.
[CHAPTER 247]

AN ACT
To provide revenue, equalize taxation, and for other purposes.

June29 1939
(. R.(s1)1
(Publie, No. 165]

revenue
19se.

Act

of

Be it enacted by the enate and House of Repre8entatives of the
United State8 of America in Congress assembled, That this Act may

be cited as the "Revenue Act of 1939".

TITLE I-EXCISE TAXES AND POSTAL RATES
SEC. 1. CONTINUATION OF EXCISE TAXES AND POSTAL RATES.
continuation untiU
Atl, pp. 18, 195
. n0.o.<1700 (a)
118113403 f
m46stas2
d0etat. 8 *
s9U. 8. C Supp.
IV, 12W0;$e..
48 8Stat. 2U4

Sections 1100 (a) (1), 1801, 1802, 3403 (f) (1) 3452, 3460 (a),
3465, 8481 (b), and 8482 of the Internal Revenue dode are amended
by striking out "1939" wherever app hearing therein and inserting in
lieu thereof "1941". Section 1001 a), as amended, of the Revenue
Act of 1982, and section 2, as amended, of the Act entitled "An Act
to extend the gasoline tax for one year, to modify postage rates on
mail matter, and for other purposes" ap roved une 16, 1938, are
further amended by striking out "1986" Werever appearing therein
and inserting in lieu thereof "1941".

-

-.

,-

~

21

U

58 STAT.]
SEC.

7rTH CONG.,

.-. SPORTING

ST

863

SESS.-CH. 247-JUNE 20, 1089

ARMS AND AMMUNITION TAX.

Section 8407 of the Internal Revenue Code (relating to the tax
on firearms, shells, and cartridges) is amended by adding at the. end
thereof the followig new paragraph:
"The provisions of section 8452 (relating to expiration of taxes)
shall not apply to the tax imposed by this section.'

Firearms, shnes,
slid cartridges.
I. R.

. 13401.

Expiration of taxes.
1 R". j3432.

SEC. 8. TOILET PREPARATIONS. TAX AMENDMENTS.

(a) Section 3401 of the Internal Revenue Code (relating to the
tax on toilet preparations) is amended by inserting at the end thereof
the following new paragraphs:
"In the case of a sale by a manufacturer to a selling corporation of
an article to which the tax under this section applies, the transaction
shall be prima face presumed to be otherwise than at arm's length
if either the manufacturer or the selling corporation owns more than
75 per centum of the outstanding stock of the other, or if more than
75 per centum of the outstanding stock of both corporations is owned
by the same persons in substantially the same proportions. Sales
by a manufacturer to a selling corporation shall in all other cases
be prima facie presumed to be at arm's length.
"Notwithstanding section 8441 (a),in determining, for the purpose of this section, the price for which an article is sold whether
at arm's length or not, there shall be included any charge or coverings and containers of whatever nature, only ifumnshed by the
actual manufacturer of the article, and any charge incide'it'to lacin
the article in condition packed ready for shipment,
performed
by the actual manufacturer of the article, but there only ifbe excluded
shall
the amount of the tax imposed by this section, whether or not stated
as a separate charge. Wether sold at arm's length or not, a transportation, delivery, insurance, or other charge, and the wholesaler's
salesmen's commissions and costs and expenses of advertising and
selling (not required by the foregoing sentence to be included shall
be excluded from the price only if the amount thereof is estabished
to the satisfaction of the Commissioner, in accordance with the regulations."
(b) The amendments made by subsection (a) shall be effective only
with respect to sales made after the date of the enactment of this
Act.

Toilet preparations.
e,S.410
Transactions other.
wI-* than at arm's
length.

Presumptionofsale
at arm's length.
Charge for cover.
"gs" and containers.

Ante. p. 416.
I. R. 0.f3441 ()

Items excluded from
price.

Effective date
amendments.

of

TITLE II-INCOME TAX AMENDMENTS
SEC. 201. CORPORATION TAX IN GENERAL

Sections 18 14, and 15 of the Internal Revenue Code are amended
to read as follows:

Ante,

7-0.

"SEC. 18. TAX ON CORPORATIONS IN GENERAL

"(a) DmrrirowtOs.-For the purposes of this chapter"(1) AeoSTrED N'WP INCOM.-The term 'adjusted net income'
means the net income minus the credit provided in section 26
(), relating to interest on certain obligations of the United
States and Government corporations.
"(2) NoRMAL-TAx Nr INCOMEo.-The term 'normal-tax not in-

come' means the adjusted net income minus the credit for dividends received provided in section 20 (b).
"(b) Isrosrrrow or TAx.-There shall be levied, collected, and paid
for each taxable year upon the normal-tax net income of every corporation the normalotax net income of which is more than $25,000

Definitions.
"Adjusted neot In.
Ante, p
1. R. C.120(a).
*Normal-tax net In.
come."
I R.S.I12 ta(b.
iImposition or tat.-

864

PUBLIC LAWS-OH. 247-JUNE 29, 1939

Ante, pp. 78, 71-75*

98,99.

1. R. 0. 1 231 (a),
Supp. 0, Supp. Q.

general rule.
AlIternative tax; normal-tax net Income In
excess of $250.o

Exempt corpora*
tions.
Ane, P. 33.
I. R. C. 1101.

Personal holding
companies.
Ante p.104.
R.
.s1n6.
*.

Improper accumnulation of surplus.
I. . 8

*02.

[58 8*TrT.

(except a corporation subject to the tax imposed by section 14 section 231 (a), Supplement G, or Supplement Q) whichever of the
following taxes is the lesser:
"(1) GENERAL RULE.-A tax of 18 per centum of the normaltax net income; or
"(2) ArERNATIVE TAX (OORRATIONS WI NORMAL-TAX NMU
NcOME SLIGHTLY MORE THAN $25,00o).-A tax of $3,525, plus 32

per centum of the amount of the normal-tax net income in excess
of $25,000.
"(c) Exaner Conro
Ns."For corporations exempt from taxation under this chapter, see sec.
tion 101.
"(d) TAx oN PERSONAL HOLDING COMPANIE."For surtax on personal holding companies, see section 500.
"(e) IMPROPER AcoUMULAnoN or SJRusB."For surtax on corporations which accumulate surplus to avoid surtax
on shareholders, see section 102.
"SEC. 14. TAX ON SPECIAL CLASSES OF CORPORATIONS.

Imposition of tax.
Ante, p. 863.
Normal-tax net Incomes, not more than
$05.000.

"(a) IMPosrioN or TAt.-There shall be levied, collected, and paid
for each taxable year upon the normal-tax net income of the following
corporations (in lieu of the tax imposed by section 18) the tax hereinafter in this section specified.
"(b) CoRPOrAToIs WrrT NoRMAL-TAX NEr INCOMEs or Nor MORE
THAW $25,000.-If the normal-tax net income of the corporation is
not more than $25,000, and if the corporation does not come within
one of the classes specified in subsection (c), (d), or (e) of this section, the tax shall be as follows:
"Upon normal-tax not incomes not in excess of $5,000, 12Y2 per
centum.
"$625 upon normal-tax net incomes of $5,000, and upon normaltax net incomes in excess of $5,000 and not in excess of $20,000,

14 per centum in addition of such excess.

"$2,725 upon normal-tax net incomes of $20,000, and upon normal-tax net incomes in excess of $20,000, 16 per centum in addiForeign corpora*,
tons.

Ro.
1.'n'8

Insurance companies.
1.Re.77.

Mutual'investment

companies.

1. n:.10, upp. Q.
Exempt corporattoni.
Ante,o.33.
1. R. 0

101.

Personal holding
companies.
Art,. to4.
Improperaccumu.
la oo of solus,

-A'ft,14

tion of such excess.
"(C) FOREIGN CORPORATIONS."(1) In the case of a foreign corporation engaged in trade or

business within the United States or having an office or place of
business therein, the tax shall be an amount equal to 18 per
centum of the normal-tax net income, regardless of the amount
thereof.
"(2) In the case of a foreign corporation not engaged in trade
or business within the United States and not having an office or
place of business therein, the tax shall be as provided in section
281 (a).
"(d) INSuRANOBI COMPANIES-In the case of insurance companies,
the tax shall be asprovided in Supplement G.
"(e) MUrrUAL INVESTMENT COMPANIES.-In the case of mutual
investment companies, as defined in Supplement Q, the tax shall be
as provided in such Supplement.
"'(f) EXEMPr CORPORATIONS."For corporations exempt from taxation under this chapter, see see.
tion 101.

11
(g) TAX ON PERSONAL HOLDING COMPANIES.-

"For surtax on personal holding companies, see section 500.

"(h) IMPROPER ACCUMULATION or SuRPus.-

"For surtax on corporations which accumulate surplus to avoid surtax

on shareholders, see section- 102."

53 STAT.]

76TH CONG., 1ST SESS.-CH. 247-JUNE 2,

865

1939

SEC. 202. TAX ON BANKS AND TRUST COMPANIES.

Section 104 (b) of the Internal Revenue Code relating1 to the tax
on banks) is amended to read as follows;
"(b) RAss or TAx.-Banks shall be subject to tax under, section 18
or section 14 (b)."
SEC. 203. TAX ON LIFE INSURANCE COMPANIES.
Section 201 (b) of the Internal Revenue Code (relating to the tax
on life insurance companies) is amended to read as follows:
"(b) Imosmoi or TAX.-

"(1) 1 oERAL.-In lieu of the tax imposed by sections 18

and 14, there shall be levied, collected, and paid for each taxable
year upon the normal-tax net income of every life insurance companya tax at the rates provided in section 18 or section 14 (b).

Banks and
companies,

trust

"Au., p.'s8.
1,s oRi'. 04 (b).
Rate

of tax.

1. R.

13,'14 ).

Life insurance companis.
1. R. 201(b).
.
Impoition of tax.
In general.
Anat4 p.83, 864.
1. R. 0.1113, 14.

"(2)

Normal-tax net In.
NORMAL-TAX NET INCOME Or FOREIGN LIFE INSURANCE COMcome of foreign com.
PANIES.-In the case of a foreign life insurance company, the panes.

normal-tax net income shall be an amount which bears the same
ratio to the normal-tax net income, computed without regard to
this paragraph, as the reserve funds required by law and held
by it at the end of the taxable year upon business transacted
within the United States bear to the reserve funds held by it at
the end of the taxable year upon all business transacted.
"(8) No UnrrED STATES INSURANOB BusINEss.-Foreign life No United States
insurance companies not carrying on an insurance business within business.
the United States and holding no reserve funds upon business
transacted within the United States, shall not be taxable under
this section but shall be taxable as other foreign corporations."
SEC. 204. TAX ON INSURANCE COMPANIES OTHER THAN LIFE OR
MUTUAL,
Section 204 (a) of the Internal Revenue Code (relating to the tax Insurance compa.
on insurance companies other than life or mutual) is amended to read Wes other than life or
mutual.
as follows:
1.R.:j 204 (a).
a)IMPOSITION or TAx."1) 1N GENERAL.-In lieu of the tax imposed by sections 18

and 14, there shall be levied, collected, and paid for each taxable
year upon the normal-tax net income of every insurance company
(other than a life or mutual insurance company) a tax at the
rates provided in section 18 or section 14 (b).
"(2) NORMAL-TAX NET INCOME OF FOREIGN
oOMPANIES.-In the
case of a foreign insurance company (other than a life or mutual
insurance company), the normal-tax net income shall be the net
income from sources within the United States minus the sum of-

Imposition of tax.
In general.

Normal-tax not In.
ome of foreign com.
panles.

"(A) INTEREST ON OBLIGATIONS OF T1E UNITED STATES AND Interest on obli.
tos of United States
ITS INSTRUMENTALrIES.-The credit provided in section 26 (a). and its instrumnentall.
B) DIVIDENDS RECEIVED.-The credit provided in section ties.

26 b),
(8)
UNITED

Ad.,

STATES INSURANCE

BUSNES.-Foreign insur-

ance companies not carrying on an insurance business within the
United States shall not be taxable under this section but shall be
taxable as other foreign corporations."
SEC. 205. TAX ON MUTUAL INSURANCE COMPANIES OTHER THAN LIFE.
Section 207 (a) of the Internal Revenue Code (relating to the tax
on mutual insurance companies other than life) is amended to read
M follows:
(4)

IMrorrion or TAX.-

"(1) INGmENRAl.-There shall be levied, collected, and paid:
for each taxable year upon the normal-tax net income of every

(R

p. 18,
26 <a).
Dividendreceived.
Arde, p. 19.
1. R.203(b).
No TnlSted
atee
Insurance business.
1. n. 0.

Mutual companies
other than life.
207 >>.,
I.t.'.
Imposition of lat.
In general.

-z.- 4It

866

PUBLIC LAWS-C.

Foreign corpora.
tions.

247-JUNE 29, 1939

[58 STAT.

mutual insurance company (other than a life insurance company)
a tax at the rates provided in section 13 or section 14 (b).
"1(2) FonmoN conoRATos.-The tax imposed by paragraph
(1) shall apply to foreign corporations as well as domestic
corporations; but foreign insurance companies not carrying on
an insurance business within the United States shall be taxable
as other foreign corporations."

SEC. 206. TAX ON RESIDENT FOREIGN CORPORATIONS.
Resident oreign corSection 281 (b) of the Internal Revenue Code (relating to the tax
porations.
Anle, 78.
on resident foreign corporations) is amended to read as follows:
231 (b).
I. R.
"(b) REsEPfr CoRPrnoNs.-A foreign corporation engaged in
trade or business within the United States or having an office or place
A
8:,p(0)1). of business therein shall be taxable as provided in section 14 (e) (1)."
1. R. .114o)()
SEC. 207. TAX ON CORPORATIONS ENTITLED TO THE BENEFITS OF
SECTION 251.
income from sources
Section 251 (e) (1) of the Internal Revenue Code (relating to tax
within a United
States possession.
on corporations deriving a large part of their income from sources
Ante,
tp.80.
is amended to read as follows:
1.R.C0.1251 (c) (1). within possession)
Copration tax.
"(1) CoRouAno 'TAx.-A domestic corporation entitled to the
Ae .. 13,1'bM).
benefits of this section shall be subject to tax under section 18
or section 14 (b)."
China Trade Act
corporations.
Ante, p.81.
R. 0. t21 (a).
15 U. S. 0. ch. 4.
Aneqo. 8684.
1.R..f13 14 (b).

Mutual Investment
companies.
1. R. 0

32()

Imposition of tax.

Technical
ments.

amend-

ARe,p.1(.

cosverobip.
AtSe, D.59
China Trade Act
corporatio,
addI.
tnonalcredita.
##8:
.
Ante, pp. 83, 884,

1 R.4. its13,14,e00.

SEC. 208. TAX ON CHINA TRADE ACT CORPORATIONS.
Section 261, (a) of the Internal Revenue Code (relating to the tax
on China Trade Act corporations) is amended to read as follows:
"(a) CoRnPOArON TAX.-A cor oration organized under the China
Trade Act 1922, 42 Stat. 849 (.S. C., 1934 ed., title 15, chap. 4),
shall be subject to tax under section 18 or section 14 (b)."
SEC. 209. TAX ON MUTUAL INVESTMENT COMPANIES.
Section 862 (b) of the Internal Revenue Code (relatin to the tax
on mutual investment companies) is amended to read as lows:
"(b) IMPosrION or TAx.-There shall be levied, collected, and paid
for each taxable year upon the Supplement Q net income of every
mutual investment company a tax equal to 18 per centum of the
amount thereof."
SEC. 210. TECHNICAL AMENDMENTS MADE NECESSARY BY CHANGE
IN CORPORATION TAX.
(a) Section 21 (b) of the Internal Revenue Code is amended to
read as follows:
"(b) Cios RRmENrs.-For definition of 'adjusted net income'
and 'normal-tax net income', see section 18."
(b) Section 141 (j) of the Internal Revenue Code (relating to
affiliated corporations in bankrupt or receivership) shall not apply
with respect to a taxable year begmning after December 81, 1989.
(e) Section 262 of the Internal Revenue Code (relatin to additional credits of China Trade Act corporations) is amended by striking out "sections 14 and 600" and inserting in lieu thereof "sections
18, 14, and 600"; and by striking out "section 14" wherever it appears
and inserting in lieu thereof "section 18 or 14".

Vill!

I

53 STAT.J

7TH CONG., lST SESS.-CH. 247-JUNE 29, 1939

867

SEC. 211. NET OPERATING LOSSES.

(a) Section 28 of the Internal Revenue Code (relating to deduetions from gross income) is amended by inserting at the end thereof
the following:
"(s) Nar OPERATING Ls DEDucroN.-For any taxable year beginning after December 81 1989, the net operating loss deduction
computed under section 122.1'
(b) The Internal Revenue Code is amended by inserting after section 121 the following new section:
"SEC. 122. NET OPERATING LOSS DEDUCTION.
"(a) DarINITroN or Nwr Ornatrio Loss.-As used in this section,

the term 'net operating loss' means the excess of the deductions
allowed by this chapter over the gross income, with the exceptions
and limitations provided in subsection (d).
"(b) Axounm or CAna-Ov.-The term 'net operating loss carryover' means in the case of any taxable year the sum of:
"(1) The amount if any, of the net operating loss for the
first preceding taxable year; and
"(2)The amount of the net operating loss, if any, for the
second preceding taxable year reduced by the excess, if any,
of the net income (computed with the exceptions and limitations
provided in subsection (d) (1), (2), (8), and (4)) for the first
preceding taxable year over the not operating loss for the third
preceding taxable year.
"(o) AMour or Nir OPERATING Loss DEucmoN.-The amount of
the net operating loss deduction shall be the amount of the net operating loss carry-over reduced by the amount, if any, by which the net
income (computed with the exceptions and limitations provided in
subsection (d).(1), (2), (8), and (4)) exceeds, in the case of a
taxpayer other than a corporation, the net income (computed without such deduction), or, in the case of a corporation, the normal-tax
net income (computed without such deduction);
"(d) EXCEPTIONS AND LIMITATIONS.-The exceptions and limitations referred to in subsections (a), (b), and (o) shall be as follows:
"(1) The deduction for depletion shall not exceed the amount
which would be allowable if computed without reference to discovery value or to percentage depletion under section 114 (b)
(2, 8), or (4);
(2 There shall be included in computing gross income the
amount of interest received which is wholly exempt from the
taxes imposed by this chapter decreased by the amount of interest paid or accrued which is not allowed as a deduction by
section 28 (b), relating to interest on indebtedness incurred or
continued to purchase or carry certain tax-exempt obligations;
No net operating loss deduction shall be allowed;
g-term capital gains and long-term capital losses
shabetaken into account without regard to the provisions of
section 117 (b). As so computed the amount deductible on
account of long-term capital losses shall not exceed the amount
includible on account of the long-term capital gains, and the
amount deductible on account of short-term capital losses shall
not exceed the amount ineludible on account of the short-term
capital gains;

Qisbi

Deduotions from
gross Income.
1. R. 0. 12s.

Not operating loss
deduction.
An,

p. 88.

"Not operating

loss" defined.

Amount of carry.

over.

Amount of net operating loss deduo.
tion.

Exceptions and lim.
Itations.
Depletion.

(2) (3), (4).
Interest.

.3(b).
No net oeratin
loss deduction ar.
lowed.
Long-term capital
gains and losses.
IR.117

(b).

*sow

wplwmmlw

-

.

-

868

--

.1

1

.

.

1.1 5 i6wi.

9"

. -

4

PUBLIC LAWS-CI. 247-JUNE 29, 1939

No carry-over from
year prior to 193.

Estates, trusts, and
pairticipants In ornmon trust funds.
Ante, p. 68.

[58 STrwr.

"(5) Deductions otherwise allowed by law not attributable to
the operation of a trade or business regularly carried on by
the taxpayer shall (in the case of a taxpayer other than a corporation) be allowed only to the extent of the amount of the
gross income not derived from such trade or business. For the
purposes of this paragraph deductions and gross income shall
be computed with the exceptions and limitations specified in
paragraphs (1) to (4) of this subsection.
(e)ro ARRY-OVER 1ROM YEAR PRIOR TO 1989.-As used in this
section, the terms 'third preceding taxable year', 'second preceding
taxable year' and 'first preceding taxable year' do not include any
taxable year beginning prior to January 1, 1939."

(c) ALLWANCE OF DEDUCTION TO ESTATES, TRUSTS, AND
PANTS IN COMMON TRUsr FuNns.-The Internal Revenue

PAllOI-

Code is
amended by inserting after the section 169 the following new section:
"SEC. 170. NET OPERATING LOSSES.

Allowance of deduction for net operating
losses.
Ante, p. 807.

Partners.
Ante, p. 71,

"The benefit of the deduction for not operating losses allowed by
section 23 (s) shall be allowed to estates and trusts under regulations
prescribed by the Commissioner with the approval of the Seretary.
The benefit of such deduction shall not be allowed to a common trust
fund, but shall be allowed to the participants in the common trust
fund under relations prescribed by the Commissioner with the approval of the Secretary.
(d) ALLOWANCE OF DEDUCTION TO PARTNzas.-The Internal Revenue Code is amended by inserting after section 188 the following new
section:
"SEC. 189. NET OPERATING LOSSES.

Net operating loss
deduction.
Ante, p. 867.

LifeInsuance oompanies, deductions.
Ante, p.71.

At

.8.

Ane, ..

o6*.

"The benefit of the deduction for net operating losses allowed by
section 23 (s) shall not be allowed to a partnership but shall be
allowed to the members of the partnership under regulations prescribed by the Commissioner with the approval of the Secretary."
(e) ALLOwAxoN or DEDUOrON TO INSURANCE COMPANIS.(1) Section 203 (a) of the Internal Revenue Code (relating
to deductions of life insurance companies) is amended by insertinu at the end thereof the following new paragraph:
(8) The amount of the net operating loss deduction provided
in section 28 (s)."
(2) The Internal Revenue Code is amended by inserting after
section 207 the following:
"SEC. 208. NET OPERATING LOSSES.

Insurance compa*
"The benefit of the deduction for net operating loss allowed by
lose.
pies, not operating section 23 (s) shall be allowed to insurance
companies subject to the
Ante, p. 867.

Section 102 net In*

come, definition modl*

I., '. 110P-2 (d).

taxes imosed in this supplement under regulations prescribed by the
Commissioner with the approval of the Secretary."
(f DENIAL oFDucrIoN To SEON 102 CoORAToN.-Section
102 (d) (1) of the Internal Revenue Code (relating to the definition

of section 102 net income) is amended by striking out "The term
'section 102 net income' means the net income minus the sum of" and
inserting in lieu thereof "The term 'section 102 net income' means
the net income, computed without the net operating loss deduction
provided in section28 (s), minus the sum of

U

53 STAT.]

76Ta CONG., la S88.-H. 247-JUNE 29, 1930

(g) DmAL or DEDuoTON mo FoRrGN PERSONAL HOLDING COMPANIE8.-SectiOn 836 (b) of the Internal Revenue Code (relating to
disallowed deductions in computing net income of foreign personal
holding companies) is amended by inserting at the end thereof the

869
Foreign personal
holding compd.
Wles disallowed doducions.
I. R.'8.&1336(b).

follwig:

"1(31) Nr Loss oAnY-OVER DISALLOwED.-The deduction for net
operating losses provided in section 28 (s) shall not be allowed."

(h) DENIAL

OF DEDUTION

O MUTUAL INVESTMENT COMPANIES.-

Section 862 (a) of the Internal Revenue Code (relating to definition
of Suplement Q net income) is amended to read as follows:
"(a) SUPPLEMENT Q NrL INcoME.-For the purposes of this chapter the term 'Supplement Q net income' means the adjusted net income, computed without the net operating loss deduction provided in
section 28 (s); minus the basic surtax credit comuted under section
27 (b) without the application of paragraphs (2) and (8),."
(i) DENIAL OF DEDUCTION TO DoMEsTIO PERSONAL HOLDING COMPANIES.-Section 505 of the Internal Revenue Code (relating to definition of subehapter A net income) is amended by inserting at the
end thereof the following:
"(o) Nwr Loss CARRY-OVER DISALLOWED.-The deduction for net
operating losses provided in section 23 (s) shall not be allowed."
(j) TEOHNIoAL AMENDMENT.-0ectiOn 26 () (2) of the Internal
Revenue Code (relating to operating loss credit is amended by striking out "chapter" and inserting in lieu thereof 'section".
SEC. 212. CORPORATION CAPITAL LOSSES.
(a) LimrrATIoNs.-Section 117 (d) of the Internal Revenue Code
relating to limitation on capital losses) is amended to read as
ollows:
"(d) LIMrTATIowon CAPrrAL LossEs.-Long-term capital losses
shall be allowed, but short-term capital losses shall be all owed only
to the extent of short-term capital gains."
(b) NEr SHoIr-TERM Loss CARRY-OVER.--Section 117 (e) of the
Internal Revenue Code (relatin to the one-year carry-over of net
short-term capital loss) is amended to read as follows:
"(e) Nxr SHORT-TERM CAPrrAL Loss CArm-Ovmt.-If any taxpayer sustains in any taxable year, beginning after December 81,
1981, in the case of a taxpayer other than a corporation, or beginning
after December 81, 1989, in the case of a corporation, a net shortterm capital loss, such loss (in an amount not in excess of the net
income for such year) shall be treated in the succeeding taxable year
as a short-term capital loss, except that it shall not be included in
computing the not short-term capital loss for such year."
(c CAPITAL LossEs or FOREIGN PERSONAL HOLDING COMPANIES.Section 836 of the Internal Revenue Code (relating to definition of
Supplement P net income) is amended by inserting at the end thereof
the following new subsection:
i(c) CAPIAL LOSSES.-The net income shall be computed without
regard to section 117 (d) and (e), and losses from sales qr exchanges
of capital assets shall be allowed only to the extent of $2,000 plus the
gains from such sales or exchanges."
(d) CAPITAL LossEs or DOMESTIC PERSONAL HOLDING COMPANIES*
Section 505 of the Internal Revenue Code (relating to definition of
subchapter A net income) is amended by inserting at the end thereof
the following new subsection:
.
(OAPITAL LOSSE8.-The net income shall be computed without
regard to section 117 (d) and (e) and losses from sales or exchanges
of capital assets shall be allowed only to the extent of $2,000 plis
the gains from such sales or exchanges."

Anu, p. 8r7.
Mutual Investment
companies, disallowed
deductions.

i '8: o s

Qonet

"Supplement
Income"'. defined.

Ante, p. 867.
27(b).
Subchapter A not
Inconte.
I. RC
At,
I. R..

p. toS.

50oW.

Disallowed deduct.
tions.
Ante, p. 887.
Operating loss cred.
it, technical amend.
ment.
L

8:2(1o) (2).

Corporation capital
losses,.
I. R. 8.&117 (d).
Limitation on cap.
ital losses.
Net short-term loss
carry-over.
Ante, . 562.
I.
. 1117 (e).

Net short-term cap.
Vital loss carry-over.

Supplement P
income.

1117i (d),

Subchapter A not
income.

capital losse.
A,
. 62.
I. n:U. 117 (d),
0
(e

p
870

PvBLIC LAWS-OH. 247-JUNE 29, 1939

[53 STAT.

SEC. 213. ASSUMPTION OF INDEBTEDNESS.
Recognition of gain

or loss,
Ant"e, p. 37.
1. R. 01112,

Assumption of liability.
Ante, P. 37.

Ante, p. 39.
It purpose was to
avoid Federal income
tax.

Not a bona fide
transaction.

Burden of proof.

Reorganization,
amendment to definItion.
Ante, p.40.

(a) Assumrox or LiAnnrr Nor REcoGNIzED.-Section 112 of the
Internal Revenue Code (relating to recognition of gain or loss) is
amended by adding at the end thereof the following new subsection:
"(k) Assumerzon or LIAmrrr Nor RECOGNIZED.-Whero upon an
exchange the taxpayer receives as part of the consideration property
which would be permitted by subsection (b) (4) or (5) of this
section to be received without the recognition of gain if it were the
sole consideration, and 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, such assumption or acquisitioxi shall not be considered as 'other property or money' received
b the taxpayer within the meaning of subsection (c), (d), or (e)
of this section and shall not revent the exchange from being within
the provisions of subsection
(4) or (5) ; except that if, taking into
consideration the nature of thiability and the circumstances in the
light of which the arrangement for the assumption or acquisition was
made, it appears that the principal purpose of the taxpayer with
respect to the assumption or acquisition was a purpose to avoid Federal income tax on the exchange, or, if not such purpose, was not a
bona fide business purpose such assumption or acquisition (in the
amount of the liability) shall, for the purposes of this section, be
considered as money received by the taxpayer upon the exchange.
In any suit or proceeding where the burden is on the taxpayer to
prove that such assumption or acquisition is not to be considered as
money received by the taxpayer, such burden shall not be considered
as sustained unless the taxpayer sustains such burden by the clear
preponderance of the evidence."
(b) AMENDMENT To DEFINITION OF REoRGANIZATIN.-Section 112
(g) (1) of the Internal Revenue Code (relating to definition of re-

organization) is amended to read as follows:
"(1) The term 'reorganization' means (A) a statutory merger
or consolidation, or () the acquisition by one corporation, in
exchange solely or all or a part of its voting stock, of at least
80 per centum of the voting stock and at least 80 per centum of
the total number of shares of all other classes of stock of another

corporation, or (0) the acquisition by one corporation, in
exchange solely for all or a part of its voting stock, of substantially all the properties of another corporation, but in determining whether the exchange is solely for voting stock the
assumption by the acquiring corporation of a liability of the
other or the fact that property acquired is subjecttoa liability,
shall be disregarded, or (D) a transfer by a corporation of all or
a part of its assets to another corporation if immediately after

Requirement of subataly proportionate Interests.
AWt, P.t37.

1.R. 0. 1112 (b) (5)-

Where transferee assumes liability of
transferor,

the transfer the transferor or its shareholders or both are in control of the corporation to which the assets are transferred, or
(E) a recapitalization, or (F) a mere change in identity, form, or
place of organization however effected."
(e) REQIlREMENT OF

Section 112 (b)

UBSTANTIALLY

PROPORTIONATE INTERESTS.-

(5) of the Internal Revenue Code (relating to

requirement of substantially proportionate interests) is amended by
adding at the end thereof the following new sentence: "Where
the transferee assumes a liability of a transferor, or where the
property of a transferor is transferred subject to a liability, then

for the purpose only of determining whether the amount of stock or
securities received by each of the transferors is in the proportion
required by this paragraph, the amount of such liability (if under
subsection (k) it is not to be considered as 'other property or money'
shall be considered as stock or securities received by such transferor.

I

-f ~A~'-~

53 STAT.]

I

___________

.

-

-

-

871

76TH CONG., 1sT SESS.-OH. 247-JUNE 29, 1939

(d) BAIS or PRoPRTmy.-Section 118 (a)(6) of the Internal Revenue Code (relating to basis of propertlais amended by inserting
before the last sentence thereof the followmg: "Where as part of the
consideration to the taxpayer another party to the exchange assumed
a liability of the taxpayer or acquired from the taxpayer property
subject to a liability such assumption or acquisition in the amount
of the liability) shall, for the purposes of this paragraph, be considered as money received by the taxpayer upon the exchange."
(e) TAXABLE YARS To WHIGH ArroPPABa.-The amendments made
by subsections (a), (b), (c), and (d) shall be applicable to taxable
years beginning after December 31, 1938.
(f) AssumpOx or LIABILITY NoTr REONIzED UNDER PRIOR Aers.(1) Where upon an exchange occurring in a taxable year ending
after December 31, 1923, and beginning before January 1, 1939, the
taxpayer received as part of the consideration property which would
be permitted by subsection (b) (4) or (5) of section 112 of the Revenue Act of 198, or the corresponding provisions of the Revenue Act
of 1924 or sbsquent revenue Acts, to be received without the recognition of gain if it were the sole consideration, and as part of the
consideration another party to the exchange assumed a liability of the
taxpayer or acquired from the taxpayer property subject to a liability,
such assumption or acquisition shall not be considered as "other
property or mone" received by the taxpayer within the meaning of
subsection (c), (d), or (e) of section 112 of the Revenue Act of 1938,
or the corresponding provisions of the Revenue Act of 1924 or subsequent revenue Acts, and shall not prevent the exchange from being
within the provisions of subsection (b) (4) or (5) of section 112 of the
Revenue Act of 1938, or the corresponding provisions of the Revenue
Act of 1924 or subsequent revenue Acts; except that if, in the determination of the tax liability of such taxpayer for the taxable year in
which the exchange occurred, by a decision of the Board of Tax
Appeals or of a court which became final before the ninetieth day
after the date of enactment of the Revenue Act-of 1989, or by a closing agreement, gain was recognized to such taxpayer by reason of
such assumption or acquisition of property, then for the purposes
of section 112 of the Revenue Act of 1938, and corresponding provisions of the Revenue Act of 1924 or subsequent revenue Acts, such
assumption or acquisition (in the amount of the liability considered
in computing the gain) shall be considered as money received by the
taxpayer upon the exchange.
(2) Paragraph (1) shall be effective with respect to the Revenue
Act of 1924 and subsequent revenue Acts as of the date of enactment
of each such Act.
(g) DxrnON OF REORGANIZATION UNDER PRIOR Ars.Section 112 (g) (1) of the Revenue Acts of 1938, 1936, and
1934 are amended to read as follows:
"(1) The term 'reorganization' means (A) a statutory merger
or consolidation, or (B) the acquisition by one corporation, in
exchange solely for all or a part of its voting stock1 of substantially a the properties of another corporation, but in determining whether the exchange is solely for voting stock the assumption by the acquiring corporation of a liability of the other
or the fact that property acquired is subject to a liability shali
be disregarded; or the acquisition by one corporation in exchange
solely for all or a part of its voting stock of at least 80 per
centum of the voting stock and at least 80 per centum of the
total number of shares of all other classes of stock of another
corporation, or (C)a transfer by a corporation of all or a part
of its assets to another corporation if immediately after the transfer the transferor or its shareholders or both are in control of the

-

Basis of property,
Ante, p. 41.
I. R. O.

(1113(a) (6).

Money received by
taxpayer upon the ex*
change.

Taxable years
which applicable.

to

Assumption of Ilability not recognized
under prior Acts.
Post, p. 1402.

62 Stat. 485.
43 Stat. 250.
Ante, Pp.8,80
I.R.(112 (b)

(4) (5).

Acquisition not con.
sidered as "other prop.
erty or money" received by taxpayer.
62 Stat. 488, 489; 43
Stat. 267.

Exception.

52 Stat. 483.
43 Stat. 268.
Ante, pp. 37, 870.
I. R. 0. f112.

Effective
paragraph.

date

of

Definition of reor.
gankzation under prior
Acts.
62 Stat. 489; 49 Stat.
1681; 48 Stat. 705.

I

872

PUBLIC LAWS-OH. 247-JUNE 29, 1939

Effective date.

Substantially proportionate Interests
under prior Acts.
52 Stat. 485; 49 Stat.
1670; 48 Stat. 704; 47
Stat. 198; 45 Stat. 816;
44 Stat. 12;43Stat.256.
Assumption oftrans.
feror's liability by
transferee; property
transferred subject to
a liability, etc.

[53 STAT.

corporation to which the assets are transferred, or (D) a recapitalization, or (E) a mere change in identity, form, or place of
organization, however effected,"
(2) The amendments made by paragraph (1) to the respective
Acts amended shall be effective as to each of such Acts as of the
date of enactment of such Act.
M SUBSTANTIALLY PROPORTIONATE INTERESTS UNDER PRIOR Ao.Section 112 (b) (5) of the Revenue Acts of 1988 1986, 1934,
1932, and 1928, and section 203 (b) (4) of the Revenue kcts of 1926
and 1924 are amended by inserting at the end thereof the following:
"Where the transferee assumes a liability of a transferor, or where the
property of a transferor is transferred subject to a liability, then for
the purpose only of determining whether the amount of stock or
securities received by each of the transferors is in the proportion required by this paragraph, the amount of such liability (if under
section 213 of the Revenue Act of 1939 it is not considered as 'other
property or money') shall be considered as stock or securities received bysuch transferor. If, as the result of a determination of the
tax liability of the taxpayer for the taxable year in which the exchange occurred, by a decision of the Board of Tax Appeals or of a
court which became final before the ninetieth day after the date of
the enactment of the Revenue Act of 1939, or by a closing agreement,
the treatment of the amount of such liability was different from the
treatment which would result from the application of the preceding

Effective date.

Basis under prior
Acts.
62 Stat. 491; 49 Stat.
1682; 48 Stat. 708; 47
Stat.19 4. Stat. 819;
44 Stat. 1; 43 Stat. 258.
Where taxpayer's
liability assumed by
transferee, etc.

Effective date.

sentence, such sentence shall not apply and the result of such determination shall be deemed- proper.'
(2) The amendments made by paragraph (1) to the respective
Acts amended shall be effective as to each of such Acts as of the date
of enactment of such Act.

i)

BASIS UNDER PRIOn

Aors.-

1) Section 118 (a) (6) of the Revenue Acts of 1938, 1936, 1934
1932, and 1928, and section 204 (a) (6) of the Revenue Acts oi
1926 and 1924 are amended by inserting before the last sentence
thereof the following: "Where as part of the consideration to the
taxpayer another party to the exchange assumed a liability of the
taxpayer or acquired from the taxpayer property subject to a liability, such assumption or acquisition (in the amount of the liability)
shall, for the purposes of tis paragraph, be considered as money
received by the taxpayer upon the exchange."
(2) The amendments made by paragraph (1) to the respective
Acts amended shall be effective as to each of such Acts as of the
date of enactment of such Act.
SEC. 214. BASIS OF STOCK DIVIDENDS AND STOCK RIGHTS.

Unadjusted basis of
property.
1.

in. usoc.
o

locationss of stock.

(a) BASIS UNDER INTERNAL REvENun CoDE.-Section 113 (a) of the
Internal Revenue Code (relating to the unadjusted basis of property)
is amended by inserting at the end thereof the following new
par'19) (A) If the property was
acquired by a shareholder in
a corporation and consists of stock in such corporation, or rights
to acquire such stock, acquired by him after February 28, 1913,
in a distribution by such corporation (hereinafter in this paragraph called 'new stock'), or consists of stock in respect of which
such distribution was made (hereinafter in this paragraph called
'old stock') and
"(i) the new stock was acquired in a taxable year beginning before January 1, 1986; or
"(ii) the new stock was acquired in a taxable year beginning after December 81, 1985, and its distribution did not

I
63 STAT.]

70TH CONG., 1sT SESS.-CH. 247-JUNIC 29, 1939

constitute income to the shareholder within the meaning
of the Sixteenth Amendment to the Constitution;
then the basis of the new stock and of the 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 to be made under regulations which
shall be prescribed by the Commissioner with the approval of
the Secretary.
"(B) Where the new stock consisted of rights to acquire stock
and such rights were sold in a taxable year beginning before
January 1, 1939, and there was included in the gross income
for such year the entire amount of the proceeds of such sale
then, if before the date of the enactment of the Revenue Act oi
1939 the taxpayer has not asserted (by claim for a refund or
credit or otherwise) that any part of the proceeds of the sale
of such new stock should be excluded from gross income for the
year of its sale, the basis of the old stock shall be determined
without regard to subparagraph (A); and no part of the proceeds of the sale of such new stock shall ever be excluded from
the gross income of the year of such sale.
Subparagraph (A) shall not apply if the new stock was
acquired in a taxable year beginning before January 1, 1986,
and there was included, as a dividend, in gross income for such
year an amount on account of such stock, and after such inclusion such amount was not (before the date of the enactment of
the Revenue Act of 1939) excluded from gross income for such
year.
"(D) Subparagraph (A) shall not apply if the new stock or
the old stock was sold or otherwise disposed of in a taxable year
beginning prior to January 1, 1936, and the basis (determined by
a decision of a court or the Board of Tax Appeals, or a closing

873
Basis.

Where proceeds of
acquired stock, etc.,
were Included in gross
income before January
1, ' 939.
Claim for refund,
etc., not asserted.

Allocation inappli*
cable in certain cases.

agreement, and the decision or agreement became final before the

ninetieth day after the date of the enactment of the Revenue
Act of 1989) for determining gain or loss on such sale or other
disposition was ascertained by a method other than that of
allocation of the basis of the old stock."
(b) DisTREmfloNs NoT TREATED AS DIVmENDs.-Section 115 (d)
of the Internal Revenue Code (relating to distributions applied in
reduction of basis) is amended to read as follows:
"(d) OrnER DISTmWONs FROM CAPRAL.-If any distribution
made by a corporation to its shareholders is not out of increase in
value of property accrued before March 1, 1918 and is not a dividend, then the amount of such distribution shall be applied against
and reduce the adjusted basis of the stock provided in section 113,
and if in excess of such basis, such excess shall be taxable in the
same manner as a gain from the sale or exchange of property. This
subsection shall not apply to a distribution in partial or con lete
liquidation or to a distribution which, under subsection (f) (1, is
not treated as a dividend, whether or not otherwise a dividend."
(c) DmERMINATION OF PEmoD)Por WniO HELD.---Section 117 (h)
of the Internal Revenue Code (relating to determination of period
for which property is held) is amended by adding at the end thereof
the following new paragraph:
"(5) In determining the period for which the taxpayer has held
stock or rights to acquire stock received upon a distribution, if the
basis of such stock or rights is determined under section 118 (a) (19)
(A), there shall (under regulations prescribed by the Commissioner
with the approval of the Secretary) be included the period for which
he held the stock in the distributing corporation prior to the receipt
of such stock or rights upon such distribution."
mw

!,P-

Distributions not
treated as dividends.
Ante, p.47.
I. R. 0, 11IIS(d).

Other distributions
from capital.

Ante, pp. 40, 871.
I. R. C. 1113.
Distribution in
liquidation, etc.

Determination of
period for which held.

AntDe,P. 872.

to,

, rm

M

w

874
Taxablu
which appil

PUBLIO LAWS--OH. 247-JUNE 29, 1939
aom to

d
Basis un
Acts.
62 Stat. C47.

ror

r

[58 STAT,

(d) TAxABL YEARS To WIoH APPIOAM.-The amendments
made by subsections (a), (b), and (c) shall be applicable to taxable
years beginning after December 31, 1988.
(e) BASIS UNDER PRIOR Amrs.-The following rules shall be applied, for the purposes of the Revenue Act of 1988 or any prior
revenue Act as if such rules were a part of each such Act when it was
enacted 1 in determining the basis of property acquired by a shareholder ina corporation which consists of stock in such corporation,
or rights to acquire such stock, acquired by him after February 28,

1913, ina distribution by such corporation (hereinafter in this
subsection called "new stock"), or consisting of stock in respect of
which such distribution was made (hereinafter in this subsection
called "old stock") if the new stock was acquired in a taxable year
beginning before January 1, 1986, or acquired in a taxable year beginning after December 81, 1985, and its distribution did not con-

stitute income to the shareholder within the meaning of the Sixteenth

Deterni
basis of nlow adof old
stock.

Where on
ceds ofe iti)
were included In gros
income.
Claim forr efund not
asserted.

Allocation
cable In cart an cum

Dotenninal
der prior Act sof pert.
od for which hold.

Amendment to the Constitution:

(1) The basis of the new stock and of the old stock, respeetively, 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 to be made under regulations which
shall be prescribed by the Commissioner with the approval of
the Secretary.
Where the new stock consisted of rightsto acquire stock

an such rights were sold and there was included in the gross
income for the taxable year of the sale the entire amount of the
proceeds of such sale, then, if before the date of the enactment
of this Act the taxpayer has not asserted (by claim for a refund
or credit or otherwise) that any part of the proceeds of the sale
of such new stock should be excluded from gross income for the
year of its sale, the basis of the old stock shall be determined
without regard to paragraph (1) and no part of the proceeds
of the sale of such new stock shall ever be excluded from the
gross income of the ear of such sale.

(8) Paragraph 1) shall not apply if the new stock was
acquired in a taxable year begining before January 1, 1938, and
there was included, as a dividend, in gross income for such year
an amount on account of such stock, and after such inclusion such
amount was not (before the date of the enactment of this Act)
excluded from gross income for such year.
(4) Paragraph (1) shall not apply if the new stock or the old
stock was sold or otherwise disposed of in a taxable year begining before January 1, 1936, and the basis (determined by a decision of a court or the Board of Tax Appeals, or a closing agreement and the decision or agreement became final before the
ninetieth day after the date of the enactment of this Act) for
determining gain or loss on such sale or other disposition was
ascertained by a method other than that of allocation of the basis
of the old stock.
D(f 1'ERMINATION UNDER PRIOR Aors or PERIOD 1"R WHIMt
HEW.-For the purposes of the Revenue Act of 1988 or any prior
revenue Act, in determining the period for which the taxpayer has
held stock or rights to acquire stock received upon a distribution, if
the basis of such stock or rights is determined under section 214(e)
)of the Revenue Act of 1939, there shall (under regulations which
shall be prescribed by the Commissioner with the approval of the
Secretary)be included the period for which he held the stock in the
distributing corporation prior to the receipt of such stock or rights
upon such distribution. This subsection shall be applicable as if it
were a part of each such Act when such Act was enacted.

Romomppw-

53 STAT.]

76TH

CONG., lar SESS.-OH. 247-JUNE 29, 193)

875

SEC. 215. DISCHARGE OF INDEBTEDNESS.

INCOM FRoM DISCHARGE or INDEBTEDNESS.--Section 22 (b) of
the internal Revenue Code (relating to exclusions from gross income)
is amended by adding at the end thereof the following new para(

graph:

" (9) INCOME FROM DISCHARGE OF IDEBTEDNs.-In the case of
a corporation, the amount of any income of the taxpayer attributable to the discharge, within the taxable year, of any indebtedness of the taxpayer or for which the taxpayer is liable evidenced
by a security (as hereinafter in this paragraph defined) if(A) it is established to the satisfaction of the Commissioner, or
(B) it is certified to the Commissioner by any Federal
agency authorized to make loans on behalf of the United
States to such corporation or by any Federal agency authorized to exercise regulatory power over such corporation,
that at the time of such discharge the taxpayer was in an unsound
financial condition, and if the taxpayer makes and files at the
time of filing the return, in such manner as the Commissioner,
with the approval of the Secretary, by regulations prescribes, its
consent to the regulations prescribed under section 118 (b) (8)
then in effect. In such case the amount of any income of the
taxpayer attributable to any unamortized premium (computed
as of the first day of the taxable year in which such discharge
occurred) with respect to such indebtedness shall not be
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. As used in this paragraph the term 'security' means any
bond, debenture, note, or certificate, or other evidence of indebtedness, issued by any corporation, in existence on June 1 1989
This paragraph shall not apply to any discharge occurring fore
the date of the enactment of the Revenue Act of 1989, or in a
taxable year beginning after December 81 1942."
(b) BAss REucED.-Section 113 (b) of the internal Revenue Code
(relating to the adjusted basis of property) is amended by adding at
the end thereof the following new paragraph:
"(8) DIsoNARGE oP INDEBTEDN8.-Where in the case of a corporation any amount is excluded from gross income under section
22 (b) (9) on account of the discharge of indebtedness the
whole or a part of the amount so excluded from gross income
shall be aplied in reduction of the basis of any property held
(whether fore or after the time of the discharge) by the taxpayer during any portion of the taxable year in which such
discharge occurred. The amount to be so applied (not in excess
of the amount so excluded from gross income, reduced by the
amount of any deduction disallowed under section 22 (b) (9))
and the particular properties to which the reduction sha be
allocated, shall be determined under regulations (prescribed by
the Commissioner with the approval of the Secretary) in effect
at the time of the filing of the consent by the taxpayer referred
to in section 22 (b) (9. The reduction shall be made as of the
first day of the taxa be year in which the discharge occurred
except in the case of property not held by the taxpayer on such
first day, in which case it shall take effect as of the time the
holding of the taxpayer began."

0800

-*-30--PT
2-

24

Exclusions from
gross Income.
AqMe, 8.10.22 (b).
I. R. O
Income from dis.
charge of corporate
indebtedness.
I

"Security" defined.

A piloation of para*

Adjusted basis of
property reduced.
I. R. 0.,113 (b).
Discharge of lndebt*'
edness.

______________________-.

L---,A-01

876

PUBLIC LAWS-CH. 247-JUNE 29, 1939

Taxable years to

which applicable.

1'411

-

Ia
AA'k-

[53 STAT.

(c) TAXABLD YEARS TO WHIOH ArmoAxu.-The amendments
made by this section shall be applicable to taxable years beginning
after December 31, 1938.
SEC. 216. FOREIGN TAX CREDIT.

Allowance of foreign tax credIt.
Ante,p.6
1. it.CS. I131 (a).
1. R.'9.-

i

>.

Limit on foreign tax
credit.
Ante, 1. 66.

Taxes of foreign sub.
sIdlary, credit.
Ant. 67.
n
R. 13().
1n

(a) DISALLoWANCE or CREDIT TO SIm'ON 102 ConronArIos.-Section 131 (a) of the Internal Revenue Code (relatin to allowance of
foreign tax credit) is amended by striking out "If the taxpayer
signifies in his return his desire to have the benefits of this section,
the tax imposed by this chapter shall be credited with" and inserting
in lieu thereof "If the taxpayer sigmfi es in his return his desire to
have the benefits of this section, the tax imposed by this chapter,
except the tax imposed under section 102 shall be credited with".
(b) LIMrr on CRED.-Section 131 (b) of the Internal Revenue
Code (relating to the limit on foreign tax credit) is amended to read
as follows:
"(b) Lim on CREDiT.-The amount of the credit taken under
this section shall be subject to each of the following limitations:
"(1) The amount of the credit in respect of the tax paid or
accrued to any country shall not exceed the same proportion of
the tax against which such credit is taken, which the taxpayer's
net income from sources within such country bears to his entire
net income, in the case of a taxpayer other than a corporation, or
to the normal-tax net income, in the case of a corporation, for the
same taxable year; and
"(2) The total amount of the credit shall not exceed the same
proportion of the tax against which such credit is taken which
the taxpayer's net income from sources without the United States
bears to his entire net income, in the case of a taxpayer other than
a corporation or to the normal-tax net income, in the case of a
corporation for the same taxable year."
(0) FoREaN UBSIDIARY.-Section 181 (f) of the Internal Revenue
Code (relating to credit for taxes of foreign subsidiary) is amended
by striking out "entire net income" and inserting in lieu thereof
"normal-tax net income".
SEC. 217. EXEMPTION OF CERTAIN FEDERAL EMPLOYEES' ORGANI-

Ta exemption of
certain Federal em.
pioyees'organitations.
1. R.0.

101.

'axsblo years to
whIch applicable.

ZATIONS.
(a) Section 101 of the Internal Revenue Code (relating to exemptions from tax on corporations) is amended by adding at the end
thereof the following new paragraph:
"(19) Voluntary employees' beneficiary associations providing
for the payment of life, sick, accident, or other benefits to the
members of such association or their dependents or their designated beneficiaries, if (A) admission to membership in sueh
association is limited to individuals who are officers or employees
of the United States Government, and (B) no part of the net
earnings of such association inures (other than through such
payments) to the benefit of any private shareholder or
individual."
(b) The amendment made by this section shall be applicable to
taxable years beginning after December 81, 1988.
SEC. 218. EMPLOYEES' TRUSTS.

Npioyees' trusts,
3. es.

Section 165 of the Internal Revenue Code (relating to exemption
from tax of certain trusts for the benefit of employees) is amended
4
bie
y

l

ry,

g

wi
i
befor

ers

he
4I

rw4
Ath

t.

LI7

p

aVAgrapat;

h

"(,,anb EtA E
lROmc
a)Q.

X

PI.

M

TONJ

-'

53 STAT.1

-

m

~

877

76TH CONG., 1sT SESS.-CH. 247-JUNE 290, 1939

TAx.-" and by inserting at the end thereof the following new subsection:
"(b)ITAxnm YEAR BEGINNING PRIOR TO JANUARY 1, 1940.-The
provisions of clause (2) of subsection (a) shall not apply to a taxable
year beginning prior to January 1, 1940."
SEC. 219. INVENTORIES.
(a) AMENDMENT TO CoDE.-Section 22 (d) of the Internal Revenue

Code (relating to inventories in certain industries) is amended to
read as follows:
"(d) (1) A taxpayer may use the following method (whether or
not such method has been prescribed under subsection (c)) in inventorying goods specified in the application required under paragraph
(2) :
"(A) Inventory them at cost;
B Treat those remaining on hand at the close of the taxable year as being: First, those included in the opening inventory
of the taxable year (in the order of acquisition) to the extent
thereof, and second, those acquired in the taxable year; and
"(0) Treat those included in the opening inventory 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.
"(2) The method described in paragraph (1) may be used"(A) Only in inventorying goods (required under subsection
(c) to be inventoried) specified in an application to use such
method filed at such time and in such manner as the Commissioner may prescribe; and
"(B) Only if the taxpayer establishes to the satisfaction of
the Commissioner that the taxpayer has used no procedure other
than that specified in subparagraphs (B) and (0 of paragraph
(1) in inventorying (to ascertain income, profit, or loss, or
credit purposes, or for the purpose of reports to shareholders,
partners, or other proprietors, or to beneficiaries) such goods for
any period begnnmg with or during the first taxable year for
which the method described in paragraph (1) is to be used.
"(A8) The change to, and the use of, such method shall be in acordance with suchregulations as the Commissioner, with the approval of the Secretary, may prescribe as necessary in order that
the use of such method may clearly reflect income.
"(4) In determining income for the taxable year preceding the
taxable year for which such method is first used the closing inventory of such preceding year of the goods specified in such application shall be at cost.
"(5) If a taxpayer, having complied with paragraph (2), uses
the method described in paragraph (1) for any taxable year, then
such method shall be used in all subsequent taxable years unless-"(A) With the approval of the Commissioner a change to a
different method is authorized; or
"(B) The Commissioner determines that the taxpayer has
used for any period beginning with or during any subsequent
taxable year some procedure other than that specified in subparagraph (B) of paragph (1) in inventorymg (for ascertaining income, profit, or loss, for credit purposes, or for the purpose of reports to shareholders, partners, or other proprietors
or to beneficiaries) the goods specified in the application, and
requires a change to a method different from that prescribed
in paragraph (1J beginning with such subsequent taxable year or
any taxable year thereafter.
~:

q~j4

4

Taxable year beginning prior to Janu
ary 1, 1940.

Inventories in cer*
tain Industries.
Ant~e, p. 11.
Election of method.

Restriction.

Regulations
change, etc.

as to

Inventory at cost.

Restriction

change of method.

on

878

PUBLIC LAWS-Oil. 247-JUNE 29, 1089

ya, to

caable

[68 SwrT.

In either of the above cases, the change to, and the use of, the different
method shall be in accordance with such regulations as the Commissioner, with the approval of the Secretary, may prescribe as necessary
in order that the use of such method may clearly reflect income."
Y
(b) TAxAman Ans a Wmon Armonu.-The amendment made
by subsection (a) shall be applicable to taxable years beginning

after December 31, 1938.
(e) AMENDMENTP 'T 1988 Aor.-Section 22 (d) of the Revenue Act
tain nsr.esnr
62 Stat. 459.
of 1938 (relating to inventories in certain industries) is amended to
26 Uo 8.o., Supp.
read as follows:
22(d).
IVn
.
"(d) If the inventory method described in section 22 (d) (1),
.
() (1)
.
as amended,of the Internal Revenue Code is used for the first taxable
(2).
. .y22a(d) yOr beginning after December 31 1938, then, in determining income
for the precedin taxable year, the closing mventory of such year
of the goods specified in the application under section 22 (d) (2), as
amended, of such Code shall be at cost."
SEC. 220. COMPENSATION FOR SERVICES RENDERED FOR A PERIOD
OF FIVE YEARS OR MORE.

(a) The Internal Revenue Code is amended by inserting after

Ane, P. 38.

section 106 the following new section:

"SEC. 107. COMPENSATION FOR SERVICES RENDERED FOR A PERIOD
OF FIVE YEARS OR MORE.
Cas where con
pensation Is paid only

on completion of serv*
iCO

Inclsioning

"In theby0**~ compensation (a) received, for personal services
case of
rendered by an individual in his individual capacity, or as a member
of a partnership, and covering a period of five calendar years or
more from the beginning to the completion of such services, (b)paid
(or not less than 95 per centum of which is paid) only on completion
of such services, and (c) required to be included in gross income
of such individual for any taxable year beginning after December

year after 1938.

31, 1938, the tax attributable to such compensation shall not be greater
than the aggregate of the taxes attributable to such compensation had
it been received in equal portions in each of the years included in
TaxableYomtsuch period."a
(b The amendment made by subsection (a) shall be applicable to
which applicable.

taxable years beginning after December 81, 1988.

SEC. 221. EXTENSION OF TIME OF ORDERS OF SECURITIES AND
EXCHANGE COMMISSION.
Securities and Exchange Commrission
orders.
A Woo,-102.
ER. 1373a). .
Term defined.

49 Stat.82.

IV, I79k (b).

Taxable

years

wl~oh applicable.'

pp.

(a) Section 37 (a) of the Internal Revenue Code (relating to
the definition of orders of the Securities and Exchange Commission
with respect to which Supplement R applies) is amended to read as
follows:
"(a) The term 'order of the Securities and Exchange Commission'
means an order (1) issued after May 28, 1938, and prior to January
1, 1941, by the Securities and Exchange Commission to effectuate the
provisions of section 11 (b) of the Public Utility Holding Com any
,
Act of 1935, 49 Stat. 820 (U. S. C., Supp. III, Title 15, § 79(
to December 31,1940
or (2) issued by the Commission subsequent
in which it is expressly stated that an order of the character specific
in clause (1) is amended or supplemented, and (8) which has become
final in accordance with law.)
(b) The amendment made by subsection (a) shall be applicable
to taxable years beginning after December 81, 1938.

-

-i

QOWA
ah

53 STAT.]

&g 4

A

WA

CONG., 1ST SESS.-OH. 247-JUNE 29, 1939

7r

879

SEC. 222. RENEWAL OF INDEBTEDNESS.

(a) Section 27 a) (4) of the Internal Revenue Code (relating
to corporation credit for amounts used or set aside to pay indebtexness) is amended by inserting at the end thereof the following new
sentence: "A renewal (however evidenced) of an indebtedness shall
be considered an indebtedness."
(b) The amendment made by subsection (a) shall be applicable
to taxable years beginning after December 81, 1988.
(c) Section 27a) (4) of the Revenue Act of 1988 (relating to
corporation credit or amounts used or set aside to pay indebtedness)
is amended by inserting at the end thereof the following new sentence: "A renewal (however evidenced) of an indebtedness shall be
considered an indebtedness."
(d) The amendment made by subsection (e) shall be applicable
to taxable years beginning after December 81, 1987.

Renewal of Indebtedness.
Ante, .20.
1. R. .427 (a) (4).

Taxable years to
which applicable.
Renewal of Indebtedness.
62 Stat. 468.

Taxable years
which applicable.

to

SEC. 223. COMMODITY CREDIT LOANS.

(a) The Internal Revenue Code is amended by inserting after
section 121 the following new section:

,opp.8,
867.

"SEC. 123. COMMODITY CREDIT LOANS.

"(a) Amounts received as loans from the Commodity 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) If a taxpayer exercises the election provided for in subsection (a) for an taxable year beginning afr December 81 1988
then the method of computing income so adopted shall be ahered
to with respect to all subsequent taxable years unless with the
approval of the Commissioner a change to a different method is
authorized."
(b) ADJUSTMENT or BAsis.-Section 118 (b) (1) of the Internal
Revenue Code is amended by adding at the end thereof a new subparagraph reading as follows:
"G) 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 128 of this chapter, and to the extent of any defliency
on such loan with respect to which the taxpayer has been relieved
from liability."
(c) The amendments made by subsections (a) and (b) shall be
ap cable to taxable years beginning after December 81, 1988.
d) R rAOIvE AP OATION.-The provisions of subsection (a)
shall be retroactively applied in computing income for any taxable
year subject to the provisions of the Revenue Act of 1984, the Revenue Act of 1936, or the Revenue Act of 1988, or any of such Acts
as amended, if-.
(1) The taxpayer elects in writing (in accordance with regulations prescribed by the Commissioner with the approval of the
Secretary) within one year from the date of the enactment of
this Act to treat such loans as income for such year and
(2) The records of the taxpayer are sufficient to permit an
accurate computation of income for such year, and
(8) The taxpayer consents in writing to the assessment within
such period as may be agreed upon, of any deficiency for such
year, even though the statutory period for the assessment of any
such deficiencyhad expired prior to the filing of such consent.

-

-

-

~

-----

4

i~~
,

~2~W*

2

-

-

-

Commodity credit
loans; treatment of.

Restriction s to
change of method.

Ant.

4ut..

Adjustment of
basis.

Taxable years to
which applicable.
Retroactie appliea.
48 Stat. 68; 49 Stat.
1648;,62 Stat. 447.

~--~'

~

'~~42~

.

I- I

-

-

I

ikg "

880

- --

-

PUBLIC LAWS-Oil. 247-JUNE 29, 1939

Credit for overpaid
tax.
Adjustment of basis
for prior years.
48 Stat.
49 .;
Stat.
1648; 62 Stat. 447.

POSSESSIONS

OrHER

AND

THAN CORPO-

RATIoN.-Section 23 (o) (1) and (2) of the Internal Revenue Code
are amended to read as follows:

other than corpora-

..

23(o) (1)
R
(.n .
or publiopurposes.
For religious, charl.

[58 SrATr.

Any tax overpaid for any such year shall be credited or refunded,
subject to the statutory period of limitation properly applicable
thereto.
(e) ADJUSTMENT OF BAsiS FOR PRIOR YEAR.-In computing
income for any taxable year subject to the provisions of the Revenue
Act of 1934, the Revenue Act of 1936, or the Revenue Act of 1938,
or any of such Acts as amended, the basis, for determinin
in or
loss from the sale or other disposition of any property g to
the Commodity Credit Corporation as security on a loan obtained
therefrom, shall be adjusted for the amount of such loan to the extent
it was considered as income and included in gross income for the
year in which received, and for the amount of any deficiency on such
loan with respect to which the taxpayer was relieved from liability.

SEC, 224. CHARITABLE CONTRIBUTIONS TO
CHARITIES IN POSSESSIONS.
Charitable deduc*
(a) CR
rAMi DEDUOrlONS or TAXPAYERS
tions of taxpayers

sten

44

I

"(1) The United States, any State Territory, or any political
subdivison thereof or the District of Lolumbia, or any possession
of the United States, for exclusively public purposes;

A corporation, trust, or community chest, fund, or
foundation, created or organized in the United States or in any
possession thereof or under the law of the United States or of
any State or Territory or of any possession of the United States,
organized and operated exclusively for religious, charitable , scientific, literary, or educational purposes, or for the pt.evention of
cruelty to children or animals, no part of the net earnings of
which inures to the benefit of any private shareholder or ndividual, and no substantial part of the activities of which is carrying on propaganda, or otherwise attempting, to influence
legislation;".
Ante,.
.
(b) CHARITABLE DEDUOTON OF CORPORATIONS.-Section 23 (q) of
1.It.
23(q).
the Internal Revenue Code is amended to read as follows:
Deductions allowed.
"1(q) CHARITABLE AND OTHER CONMIMUTIONS BT CoRPoRAToN.-In
the case of a corporation contributions or gifts payment of which
is made within the taxable year to or for the use of a corporation
trust, or community chest, fund, or foundation, created or organized
in the United States or in any possession thereof or under the law
of the United States, or of any State or Territory or of the District
of Columbia or of any possession of the United States organized
and operated exclusively for religious, charitable, scientife, literary,
or educational purposes or for the prevention of cruelty to children
(but in the case of contributions or gifts to a trust, chest, fund, or
foundation, only if such contributions or gifts are to be used within
the United States or any of its possessions exclusively for such purposes), no part of the net earnings of which inures to the benefit
of any private shareholder or individual, and no substantial part
of the activities of which is carrying on propaganda or otherwise
attempting, to influence legislation; to an amount which does not
exceed 5 per centum of the taxpayer's net income as computed without
Yetlcatceon.
the benefit of this subsection. Such contributions or gifts shall be
allowable as deductions only if verified under rules and regulations
prescribed by the Commissioner, with the approval of the Secretary."

tableto.,perp

Ante, p. 00.

se-(2)

SEC. 225. PAN-AMERICAN TRADE CORPORATIONS.
The Internal Revenue Code is amended by inserting after section
1111 the following new section:

58 STAT.]

76TH

881

CONG., 1sT SESS.-CH. 247-JUNE 29, 1939-

"SEC. 152. PAN-AMERICAN TRADE CORPORATIONS.

"If a domestic corporation engaged in the active conduct of a trade
or business within the United States (hereinafter referred to as the
'parent corporation') owns directly 100 per centum of the capital
stock of one or more domestic corporations each of which is engaged
solely in the active conduct of a trade or business in Central or South
America (hereinafter referred to as a Pan-American trade corporation), such corporations (including the 'parent corporation') shall be
deemed to be an affiliated group of corporations within the meaning
of section 141 of this chapter, provided that the following conditions
are satisfied:
"(1) At least 80 per centum of the gross income for the taxable
year of the parent corporation is derived from sources other than
royalties, rents, dividends, interest, annuities, and gains from the
sale or exchange of stock or securities; and
"(2) At least 90 per centum of the gross income'for the taxable
year of each of the Pan-American trade corporations is derived
from sources other than royalties, rents, dividends, interest,
annuities, and gains from the sale or exchange of stock or
securities; and
"(8) No part of the gross income for the taxable year of any
of the Pan-American trade corporations is derived from sources
within the United States."

Benefits to domestic
corporations in active
conduct of Pan-Amer.
ican trade.

Ante,Pp.68P86".
1. R. S. 1141.
Conditions.

SEC. 226. DEDUCTIONS OF INSURANCE COMPANIES OTHER THAN LIFE
OR MUTUAL

(a) Section 204 (c) (10) of the Internal Revenue Code is amended
to read as follows:
"(10) Deductions (other than those specified in this subsection) as provided in section 23."
(b) The amendment made by subsection (a) shall be applicable to
taxable years beginning after December 81, 1988.

Deductionsallowed.
Ante, 74.
1I-R. C. 1204 (0) (10).

p.

A1.te, p. 12,860,8W.

1..0123.
Taxable years
which applicable.

to

SEC. 227. DEFINITION OF GROSS INCOME OF CERTAIN INSURANCE
COMPANIES FOR PERSONAL HOLDING COMPANY TAX.

(a) Section 507 of the Internal Revenue Code is amended to read
as follows:

1.

"SEC. 507. MEANING OF TERMS USED.

"(a) GENERAL RuILE.-The terms used in this subchapter shall have
the same meaning as when used in chapter 1.
"(b) InsuancE COMPANIES Omm THAN LAFE OR MU'rUIAL.-NOtwithstanding subsection (a), the term 'gross income', as used in this
subchapter, means, in the case of an insurance company other than
life or mutual, the gross income, as defined in section 204 (b) (1)
increased by the amount of losses incurred, as defined in section 20I
and the amount of expenses incurred as defined in section
(b)
(7), and decreased by the amount deuctible under section
204
204 c) (7) (relating to tax-free interest)."
(b TAXABLE YAiS 'o W aICH APPLICABL.-The amendments
made by this section shall be applicable to taxable years beginning
after December 81, 1938.

General rule.
"Gross income."

AiWtep .73,74.

.I. R IM b

(1) (6) (7), 204 (0) 01

Taxablesneas to
which applicable.

SEC. 228. COMPUTATION OF DIVIDEND CARRY-OVER FOR PERSONAL.
HOLDING COMPANY TAX.

(a) Section 504 (a) of the Internal Revenue Code is amended by,

inserting before the semicolon at the end thereof a comma and the
following: "and, in the computation of the dividend carry-over for

WF

Iowanco.

I.U. .160a0.

882
Ante, P.20@

1. R. 0. f27 ()
T
rblea ato
which applble.

PUBLIC LAWS-OH. 247-JUNE 29, 1939

[58 Star,

the purposes of this subehapter, the term 'adjusted net income' as
used in section 27 (c) means the adjusted net income minus the deduction allowed for Federal taxes under section 505 (a) (1)".
(b) The amendment made by subsection (a) shall be applicable to
taxable years beginning after December 81, 1 38.
SEC. 229. TAXABLE YEARS TO WHICH AMENDMENTS APPLICABLE.

Taxable years to
whichaamendments
applicable.
Ante, pp. 867l 870,

872, 87, 876, 877, 878,
879,881.

Except the amendments made by sections 211, 218,214 215, 217,219,
220 221,222,223, 226,227 and 228 the amendments made by this title
to tle Internal Revenue do shall be applicable only with respect to
taxable years beginning after December 81, 1939.

TITLE III-CAPITAL STOCK AND EXCESS PROFITS
TAXES
SEC. 301. DECLARATION OF VALUE FOR CAPITAL STOCK PURPOSES,
1939 AND 1940.
Declaration of value.

1.R'8. 1202.
Additional declare.
tion years.

Section 1202 of the Internal Revenue Code (relating to declaration
of capital stock value) is amended by inserting at the end thereof the
following new subsection:
1t(e) ADDITIONAL DECLARATION YEAR.-In the case of any domestic
corporation, the year ending June 80, 1989, and the year ending
June 80, 1940, shall each, if not otherwise a declaration year, constitute an additional declaration year if with respect to such year
(1) the taxpayer so elects (which election cannot be changed) in its
return filed before the expiration of the statutory filing period or
any authorized extension thereof, and (2) the value declared by
the taxpayer is in excess of the adjusted declared value computed

under paragraph (1) of subsection (b). If, under this subsection,
the year ending June 80, 1989, is a declaration year, the computation, under paragraph (1) of subsection (b), of the adjusted declared value for the year ending June 80, 1940, shall be made on
the basis of the value declared for the year ending June 80, 1989."

TITLE IV-MISCELLANEOUS AMENDMENTS
SEC. 401. TAX LIENS ON SECURITIES.
Tax liens on secui.
ties.
Ante, p. 440.
I. R. O. f 3672.

Section 8672 of the Internal Revenue Code is amended to read as
follows:
"SEC.

Invaidity of lion
without notice.

3872. VALIDITY

AGAINST

MORTGAGEES

PLEDGEES,

PUR-

CHASERS, AND JUDGMENT CREDI7RS.
"(a) INVAADrr or LrEN WrrnouT Noric.-Such lien shall not
be valid as against any mortgagee, pledge purchaser, or judgment
creditor until notice thereof as been filed Ly thecollector" (1) UNDE SATE ORTRORIALLW.-In accordance with
the law of the State or Territory in which the property subject
to the lien is situated whenever the State or Territory has by
law provided for the ling of such notice; or
"t)WrrHcLERK oF DISTRIor courr.-In the office of the clerk
of the United States district court for the judicial district in
which the property subject to the lien is situated, whenever the
State or Territory has not by law provided for the filing of
such notice; or
" (8) Wrri cLERK OF DISrIOr CouRT OF THE UNrrW STATES
roR THE DIaTror or CoLmnr.-In the office of the clerk of the

A;k

NOR

Ad"'"s, "

STAT.]
58-U

70rH CONG., 1eT SFSS.-OH. 247-JUNE 29, 1939

003

District Court of the United States for the District of Columbia
if the property subject to the lien is situated in the District of
Columbia.

"(b) (1) Exoarrion xx oAsa or arounrrlES.-Even though notice
of a lien provided in section 8670 has been filed in the manner prescribed in subsection (a) of this section, or notice of a lien provided
in section 3186 of the Revised Statutes, as amended? has been filed
in the manner prescribed in such section or subsection (a) of this
section, the lien shall not be valid with respect to a security, as
defined in paragraph (2) of this subsection, as against any mortgaglee, pledgeeor purchaser, of such security, for an adequate and
fulonsideration in money or money's wortli, if at the time of such
mortgage, pledge, or purchase such mortgagee, pledgee, or purchaser is without notice or knowledge of the existence of such lien.
"(2) DarzrrlON OF sOUrrr.-As used in this subsection the
term 'security' means an bond, debenture, note, or certificate or
other evidence of indebteess, issued by any corporation (including
one issued by a government or political subdivision thereof), with
interest coupons or in registered form, share of stock, voting trust
certificate, or any certificate of interest or participation in, certificate
of deposit or receipt for, temporary or interim certificate for, or
warrant or right to subscribe to or purchase, any of the foregoing;
negotiable instrument; or money.
"(8) ArPioAnarr OF

BSEioN.-Except

where the lien has

been enforced by a proceeding, suit, or civil action which has become
final before the date of enactment of the Revenue Act of 1989, this
subsection shall apply regardless of the time when the mortgage,
pledge, or purchase was made or the lien arose."

Exe

tion In can of

Au4, p.s.
1. R. 013670.
S. S. 13186.
Antefp.44"640,
1.R.0. J13870-3877.

"Security" defined.

Agplcabilityof sub.
a 'on

SEC. 402. TAX ON TRANSFERS OF WORTHLESS SECURITIES BY EXEC.

UTOR, ETC.

Section 1802 (b) of the Internal Revenue Code (relating to the
tax on transfers of capital stock and similar interests) is amended
by inserting at the end thereof the following new paragraph:
"The tax unposed bythis subsection shall not be imposed upon any
delivery or transfer by an executor or administrator to a legatee,
heir, or distributee of shares or certificates of stock if it is shown to
the satisfaction of the Commisioner that the value of such shares or
certificates is not greater than the amount of the tax that would
otherwise be imposed on such delivery or transfer."

Transfers of worth
les seuites by e*
e a.
ecut r
1. R. 0.118S0 2(b).

SEC. 403. CREDITS AGAINST ESTATE TAX OF TAX PAID TO POSSES.
SIONS.
(a) Section 818(b of the Internal Revenue Code (relating to the
80 per centum credit for estate, legacy, succession, and inheritance
taxes paid) is amended by inserting after "District of Columbia," the
followig: "or any possession of the United States"
(b)The amendment made by subsection (a) shall be applicable
only with respect to estates of decedents dying after the date of the
enactment of this Act.

Credit against es.
tate tax of tax paid to
posessions.
Ask,, p.12>.

Effective as of the date of the enactment of the Internal Revenue
Code, section 3604 of such Code is amended by striking out "Nothing
in this section shall be construed to require the divulging of privilege
communications between attorney and client." and inserting in lieu
thereof "Nothing in this section shall be construed to require the

Returns by attor.
neys as to foreign oor*
poratlons.
AnWe 4.

1..0.1813(b).

Applicability.

*
SEC. 404. RETURNS BY ATTORNEYS AS TO FOREIGN CORPORATIONS.

4 w"

884

ft ma

Who0

ho bAumBA

I

...........

PUBLIC LAWS-CH, 247-JUNE 20, 1939

[58 STAT.

filing by an attorney-at-law of a return with respect to any advice
given or information obtained through the relationship of attorney
and client."
SEC. 405. FILING OF CLAIMS FOR REFUND OF AMOUNTS COLLECTED
UNDER THE AGRICULTURAL ADJUSTMENT ACT.

Fiing
ims, expiration of tim
49 Stat. 1747.

Section 903 of the Revenue Act of 1936 (relating to expiration of
time for filing claims for refund of amounts paid under the Agricultural Adjustment Act) is amended by striking out "July 1, 1987" and
inserting in lieu thereof "January 1, 1940".
SEC. 400. INSOLVENT BANKS.

Insolvent banks.

1.n. .379s (e).

Erroneous colleo.

(a) Section 8798 (c) of the Internal Revenue Code is amended to
read as follows:
(c) (1) Any such tax collected, whether collected before, on, or
after the date of enactment of the Revenue Act of 1988, shall be

deemed to be erroneously collected, and shall be refunded subject to
all provisions and limitations of law, so far as applicable, relating to
the refunding of taxes.
"(2)An taxthe assessment, collection, or payment of which is
eto.,
baes n
nion (a), etc.
barred under subsection (a) of this section, or any such tax which
Ante, p. 470.
has been abated or remitted after May 28, 1938, shall be assessed or
reassessed whenever it shall appear that payment of the tax will
not diminish the assets as aforesaid.
Barred under sub.
"(3)An tax the assessment, collection, or payment of which is
Ate,p.o70.
barred under subsection (b) of this section or any such tax which
has been refunded after May 28, 1938, shall be assessed or reassessed
after full payment of such claims of depositors to the extent of the
remaining assets segregated or transferred as described in subseetion (b)
Susfnsio ofstat.
(I
utditioseon
(4) The running of the statute of limitations on the making o
of
making of assessment, assessment and collection shall be suspended, during, and for ninety
etc.
days beyond, the period for which, pursuant to this section, assessment or collection may not be made, and a tax may be reassessed as
provided in paragraphs (2) and (8) of this subsection, and collected,
during the tune within which, had there been no abatement, collection
might have been made."
"Agent" defined.
Ante, _p. 470.~
oeTeThe term "agent" as used in 8798 (b) of the Internal Revenue
oaa
I R. .38(b).
Codeshall be deemed to include a corporation acting as a liquidating
agent.

Effective date of
(e) The amendments made by this section shall
6
62 Stat. 447.
the date of enactment of the Revenue Act of 1938.
SEC. 407. SALE OF INFORMATION
RETURNS.
Sale ofkinformation
derived from Income
tax returns.
Ante8s
o5.

Penalty.

Proviso.
Exceptions.

DERIVED

be effective as of

FROM INCOME TAX

Section 148 (f) of the Internal Revenue Code is amended by
adding at the end thereof the following new sentence: "It shall be
unlawful for any person to sell, offer for sale, or circulate, for any
consideration whatsoever, any copy or reproduction of any list, or
part thereof, authorized to be made public by this Act or by any
prior Act relating to the publication of information derived from
income-tax returns; and any offense against the foregoing provision
shall be a misdemeanor and be punished by a fine not exceeding
$1,000 or by imprisonment not exceeding one year or both, at the
discretion of the court: Provided, That nothing in tbis sentence shall
be construed to be applicable with respect to any newspaper, or other
periodical publication, entitled to admission to the mails as secondclass mail matter."

to6m

53

STAT.]

7r6T

11-didiliftfAlillf"

885

CONG., lar SESS.-CHS. 247, 248--JUNEO 29, 1939

SEQ. 408. EXEMPTION FROM INTERNAL REVENUE TAX OF ARTICLES
BROUGHT INTO GUAM OR AMERICAN SAMOA.

Section 8361 (b) of the Internal Revenue Code is amended by
adding a comma and the words "Guam, and American Samoa" after
the words "Puerto Rico".
Approved, June 29, 1939, 10 p. m. E. S. T.

uam and Ame*n
exemption
oAf ts

. 133>>(b).

[CHAPTER 248)

AN ACT
Making appropriations for the Departments of State and Justice and for the
Judiciary, and for the Department of Commerce, for the fiscal year ending
June 80, 1940, and for other purposes.

une 29, 1939

[ff.R. 692)

(Publie, No. 16)

Be it enacted by the Senate and Houe of Representatives of the
United State8 of America int iongressa88embld, That the following
sums are appropriated, out of any money in the Treasury not otherwise appropriated, for the Departments of State and Justice and
for the Judiciary, and for the Department of Commerce, for the
fiscal year ending June 30, 1940, namely:
TITLE I-DEPARTMENT OF STATE

Department of
State Appropriation
Act, 1940.

OFFICE OF THE SEORWrARY OF STATE

Salaries: For Secretar of State; Under Secretary of State,
$10,000; counselor., $10,00; and other personal services in the District of Columbia, including temporary employees, and not to exceed
$6,500 for employees engaged on piecework at rates to be fixed by
the Secretary of State; $2,192,000: Provided, That in expending
appropriations or portions of appropriations, contained in this Act,
for the payment of personal services in the District of Columbia in
accordance with the Classification Act of 1928, as amended, with the
exception of the four Assistant Secretaries of State and the legal
adviser of the Department of State, the Assistant to the Attorney
General, the Assistant Solicitor General, and six Assistant Attorneys
General, the Assistant Secretaries of Commerce, the average of the
salaries of the total number of persons under any grade in any
bureau, office, or other appropriation unit shall not at any time
exceed the average of the compensation rates specified for the grade
by such Act, as amended, and in grades in which only one position
is allocated the salary of such position shall not exceed the average
of the compensation rates for the grade, except that in unusual
meritorious cases of one position in a grade advances may be made
to rates higher than the average of the compensation rates of the
grade but not more often than once in any fiscal year and then only
to the next higher rate: Provided, That this restriction shall not
apply (1) to grades 1,2, 8 and 4 of the clerical-mechanical service,
or (2) to require the reduction in salary of any person whose compensation was fixed as of July 1, 1924, in accordance with the rules
of section 6 of such Act, or ( to require the reduction in salary of
any person who is transferred from one position to another position
in the same or different grade in the same or a different bureau, office,
or other appropriation unit or (4) to prevent the payment of a salary
under any grde at a rate higher than the maximum rate of the grade
when such higher rate is permitted by the Classification Act of 1923,
as amended, and is specifically authorized by other law, or (5) to
reduce the compensation of any person in a grade in which only one
position is allocated.

Salaries.
o'r P.133?.
Temporary and
piecework employees.
PrOVIeo.
Salaries limited to
average rates under
Classification Act; ex.
Ceutions.
5U. S. . 1661-674;
Supp. IV., Ip73, 673c.

It only one position
In grade.
Advances In un.
usually meritorious
cases.

Restriction not applicabie to clericalmechanicalservIce.
No reduction in
fixed salaries.
42 Stat. 1490.
6 U. S. C. 10"6.
Transfers without
reduction.
Higher salary rates
permitted.
No reduction Ifonly
one position In grade.