PERSONAL HOLDING COMPANIES.

SEC. 225. PERSONAL HOLDING COMPANIES. (a) Personal Holding Company Tax Rate.—Section 541 (relating to imposition of personal holding company tax) is amended by striking out “tax equal to” and all that follows and inserting in lieu thereof: “tax equal to 70 percent of the undistributed personal holding company income.” (b) Definition of Personal Holding Company.—Paragraph (1) of section 542(a) (relating to the gross income requirement for personal holding company purposes) is amended to read as follows: “(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 company income (as defined in section 543 (a)), and”. (c) Excluded Corporations.— (1) Domestic building and wan associations.—Paragraph (2) of section 542(c) (relating to corporations excepted from the definition of personal holding company) is amended to read as follows: “(2) a bank as defined in section 581, or a domestic building and loan association within the meaning of section 7701(a)(19) without regard to subparagraphs (D) and (E) thereof;”. (2) Lending and finance companies.—Section 542(c) is amended by striking out paragraphs (6), (7), (8), and (9), by renumbering paragraphs (10) and (11) as paragraphs (7) and (8), and by inserting after paragraph (5) the following new paragraph: “(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 tax-78 Stat. 80able 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 including 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 percent 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 ordinary gross income derived therefrom as does not exceed $500,000, plus “(ii) 5 percent of so much of the ordinary gross income derived therefrom as exceeds $500,000 but not $1,000,000; and “(D) the loans to a person who is a shareholder in such company during the taxable year by or for whom 10 percent or more in value of its outstanding stock is owned directly 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;”. (3) Special rules for section 542(c)(6).—Section 542 is amended by adding at the end thereof the following new subsection: “(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 business of— “(i) making loans, “(ii) purchasing or discounting accounts receivable, notes, or installment obligations, “(iii) rendering services or making facilities available in connection with activities described in clauses (i) and (ii) carried on by the corporation rendering services or making facilities available, or “(iv) rendering services or making facilities available to another corporation which is engaged in the lending or finance business (within the meaning of this paragraph), if such services or facilities are related to the mg or finance business (within such meaning) of such other corporation 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 discounting accounts receivable, notes, or installment obligations, if (at the time of the loan, purchase, or discount) the remaining maturity exceeds 60 months, unless the loans, notes, or installment obligations are evidenced or secured by contracts of conditional sale, chattel mortgages, 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 78 Stat. 81 “(ii) making loans evidenced by, or purchasing, 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 remaining maturity shall be treated as including any period for which there may be a renewal or extension under the terms of an option exercisable by the borrower. “(2) Business deductions.—For purposes of subsection (c) (6)(C), the deductions which may be taken into account shall include only— “(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 prom certain affiliated corporations.—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 personal 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 defined in section 1504) of which such company is a member.” (d) Personal Mowing Company Income.—Subsections (a) and (b) of section 543 (relating to personal holding company income) are amended to read as follows: “(a) General Rule.—For purposes of this subtitle, the term ‘personal holding company income’ means the portion of the adjusted ordinary gross income which consists of: “(1) Dividends, etc.—Dividends, interest, royalties (other than mineral, oil, or gas royalties or copyright royalties), and annuities. This paragraph shall not apply to— “(A) interest constituting rent (as defined in subsection (b)(3)), “(B) interest on amounts set aside in a reserve fund under section 511 or 607 of the Merchant Marine Act, 1936, and “(C) a dividend distribution of divested stock (as defined in subsection (e) of section 1111), but only if the stock with respect, to which the distribution is made was owned by the distributee on September 6, 1961, or was owned by the distributee for at least 2 years before the date on which the antitrust order (as defined in subsection (d) of section 1111) was entered. “(2) Rents.—The adjusted income from rents: 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, 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 section 563(c) (as limited by the second sentence of section 563(b)), and 78 Stat. 82 “(iii) the consent dividends for the taxable 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 holding company income copyright royalties and the adjusted income from mineral, oil, and gas royalties) exceeds 10 percent of the ordinary gross income. “(3) Mineral, oil, and 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 percent 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 personal services rendered by the shareholders, and “(ii) deductions which are specifically allowable 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, copyrights or interests in copyrights on works created in whole, or in pa it, by any shareholder) constitute 50 percent or more of the ordinary gross income, “(B) the personal holding company income for the taxable year computed— “(i) without regard to copyright royalties, other than royalties received for the use of, or right to use, copyrights or interests 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 corporation, “(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 percent of the total value of all classes of stock and which corporation meets the requirements of this subparagraph and subparagraphs (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 personal services rendered by the shareholders, “(ii) deductions for royalties paid or accrued, and “(iii) deductions which are specifically allowable under sections other than section 162, 78 Stat. 83equals 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 protection is also extended by the laws of any country other than the United States of America by virtue of any international treaty, convention, 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 film rents as defined in paragraph (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. “(5) 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 ordinary gross income. “(B) For purposes of this section, the term ‘produced film rents’ means payments received 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 acquired before substantial completion of production of such film. “(6) Use of corporation property by shareholder.—Amounts received as compensation (however 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 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 corporation or by means of a sublease or other arrangement. This paragraph shall apply only to a corporation which has personal holding company income for the taxable year (computed without regard to this paragraph and paragraph (2), and computed by including as personal holding company income copyright royalties and the adjusted income from mineral, oil, and gas royalties) in excess of 10 percent of its ordinary gross income. “(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 individual 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 particular 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 individual who has performed, is to perform, or may be 78 Stat. 84designated (by name or by description) as the one to perform, such services. “(8) Estates and trusts.—Amounts includible in computing the taxable income of the corporation under part I of subchapter J (sec. 641 and following, relating to estates, trusts, and beneficiaries). “(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 disposition of capital assets, and “(B) all gains (other than those referred to in subparagraph (A)) from the sale or other disposition of property described in section 1231(b). “(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 defined in the second sentence of paragraph (3) of this subsection) subtract the amount allowable as deductions for— “(i) exhaustion, wear and tear, obsolescence, and amortization of property other than tangible personal property which is not customarily retained by any one lessee for more than three years, “(ii) property taxes, “(iii) interest, and “(iv) rent, to the extent allocable, under regulations prescribed by the Secretary or his delegate, 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 working interests in an oil or gas well, subtract the amount allowable as deductions for— “(i) exhaustion, wear and tear, obsolescence, amortization, and depletion, “(ii) property and severance taxes, “(iii) interest, and “(iv) rent, to the extent allocable, under regulations prescribed by the Secretary or his delegate, to such gross income from royalties or such gross income from working interests in oil or gas wells. The amount subtracted under this subparagraph with respect to royalties shall not exceed the gross income from such royalties, and the amount subtracted under this subparagraph with respect to working interests shall not exceed the gross income from such working interests. “(C) Interest.—There shall be excluded— “(i) interest received on a direct obligation 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 obligations, and “(ii) interest on a condemnation award, a judgment, and a tax refund. “(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. 78 Stat. 85For purposes of the preceding sentence, the term ‘rents’ means compensation, however designated, for the use of, or right to use, property, and the interest 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 corporation; but does not include amounts constituting personal holding company income under subsection (a)(6), nor copyright royalties (as defined in subsection (a) (4)), nor produced film rents (as defined in subsection (a) (5) (B)). “(4) Adjusted income from mineral, oil, and gas royalties.—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 royalties), reduced by the amount subtracted under paragraph (2) (B) of this subsection in respect of such royalties.” (e) Foreign Personal Holding Company Income and Stock Ownership.—Section 553 (relating to foreign personal holding company income) and section 554 (relating to stock ownership) are amended to read as follows: “SEC. 553. FOREIGN PERSONAL HOLDING COMPANY INCOME. “(a) Foreign Personal Holding Company Income.—For purposes of this subtitle, the term ‘foreign 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. This paragraph shall not apply to a dividend distribution of divested stock (as defined in subsection (e) of section 1111) but only if the stock with respect to which the distribution is made was owned by the distributee on September 6, 1961, or was owned by the distributee for at least 2 years before the date on which the antitrust order (as defined in subsection (d) of section 1111) was entered. “(2) Stock and securities transactions.—Except in the case of regular dealers in stock or securities, gains from the sale or exchange of stock or securities. “(3) Commodities transactions.—Gains from futures transactions 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 producer, processor, merchant, or handler of the commodity which arise out of bona fide hedging transactions reasonably necessary to the conduct of its business in the manner in which such business is customarily and usually conducted by others. “(4) Estates and trusts.—Amounts includible in computing the taxable income of the corporation under part I of subchapter J (sec. 641 and following, relating to estates, 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 individual 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. 78 Stat. 86 This paragraph shall apply with respect to amounts received for services under a particular 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 individual who has performed, is to perform, or may be designated (by name or by description) as the one to perform, such services. “(6) Use of corporation property by shareholder.—Amounts received as compensation (however 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 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 corporation or by means of a sublease or other arrangement. This paragraph 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 compensation, however designated, for the use of, or right to use, property; but does not include amounts constituting foreign personal holding company income under paragraph (6). “(b) Limitation on Gross Income in Certain Transactions.—For purposes of this part— “(1) gross income and foreign personal holding 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 holding company income determined with respect to transactions described in subsection (a)(3) (relating to gains from commodity transactions) shall include only the excess of gains over losses from such transactions. “SEC. 554. STOCK OWNERSHIP. “(a) Constructive Ownership.—For purposes of determining whether a corporation is a foreign personal holding company, insofar as such determination is based on stock ownership under section 552(a)(2), section 553 (a) (3), or section 553(a)(6)— “(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 proportionately 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 sisters (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 paragraph, tin 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. 78 Stat. 87 “(4) Application of family-partnership and options rules.—Paragraphs (2) and (8) 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 corporation a foreign personal holding company; “(B) for purposes of section 553(a)(5) (relating 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 requirement 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) (relating to personal service contracts), but only if the effect of the inclusion of all such securities 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) (relating to the use of property by shareholders), but only if the effect, of the inclusion of all such securities is to make the amounts therein referred to includible under such paragraph 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 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.” (f) Dividends-Paid Deduction.— (1) Paragraph (2) of section 316(b) (relating to special rules for dividend defined) is amended to read as follows: “(2) Distributions by personal holding companies.— “(A) In the case of a corporation which— “(i) under the law applicable to the taxable year in which the distribution is made, is a personal holding company (as defined in section 542), or “(ii) for the taxable year in respect of which the distribution is made under section 563(b) (relating to dividends paid after the close of the taxable year), or section 547 (relating to deficiency dividends), or the cor-78 Stat. 88responding provisions of prior law, is a personal holding company under the law applicable to such taxable year, the term ‘dividend’ also means any distribution of property (whether or not a dividend 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), the term ‘distribution of property’ includes a distribution in complete liquidation occurring within 24 months after the adoption of a plan of liquidation, but— “(i) only to the extent of the amounts distributed to distributees other than corporate shareholders, and “(ii) only to the extent that the corporation designates such amounts as a dividend distribution and duly notifies such distributees of such designation, under regulations prescribed by the Secretary or his delegate, but “(iii) not in excess of the sum of such distributees’ allocable share of the undistributed personal holding company income for such year, computed without regard to this subparagraph or section 562(b).” (2) Section 331(b) (relating to nonapplication of section 301) is amended by inserting after “any distribution of property” the phrase “(other than a distribution referred to in paragraph (2) (B) of section 316(b))”. (3) Section 562(b) (relating to distributions in liquidation) is amended to read as follows: “(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 section 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 purposes of computing the dividends paid deduction, and “(B) in the case of a complete liquidation occurring within 24 months after the adoption of a plan of liquidation, any distribution 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 computing 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 liquidation, 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 distribution computed without regard to this paragraph and without regard to subparagraph (B) of section 316(b) (2).” (4) Section 551(b) (relating to amount included in gross income) is amended by striking out “received as a dividend” and inserting in lieu thereof “received as a dividend (determined as if 78 Stat. 89any distribution in liquidation actually made in such taxable year had not been made)”. (g) One-Month Liquidations.—Section 333 (relating to election as to recognition of gain in certain liquidations) is amended by adding at the end thereof the following new subsection: “(g) Special Rule.— “(1) Liquidations before January 1, 1967.—In the case of a liquidation occurring before January 1, 1967, of a corporation referred to in paragraph (3)— “(A) the date ‘December 31, 1953’ referred to in subsections (e) (2) and (f) (1) shall be treated as if such date were ‘December 31, 1962’, and “(B) in the case of stock in such corporation held for more than 6 months, the term ‘a dividend’ as used in subsection (e) (1) shall be treated as if such term were ‘long-term capital gain’. Subparagraph (B) shall not apply to any earnings and profits to which the corporation succeeds after December 31, 1963, pursuant to any corporate reorganization or pursuant to any liquidation to which section 332 applies, except earnings and profits which on December 31, 1963, constituted earnings and profits of a corporation referred to in paragraph (3), and except earnings and profits which were earned after such date by a corporation referred to in paragraph (3). “(2) Liquidations after December 31, 1966.— “(A) In general.—In the case of a liquidation occurring after December 31, 1966, of a corporation to which this subparagraph applies— “(i) the date ‘December 31, 1953’ referred to in subsections (e) (2) and (f) (1) shall be treated as if such date were ‘December 31, 1962’, and “(ii) so much of the gain recognized under subsection (e) (1) as is attributable to the earnings and profits accumulated after February 28, 1913, and before January 1, 1967, shall, in the case of stock in such corporation held for more than 6 months, be treated as long-term capital gain, and only the remainder of such gain shall be treated as a dividend. Clause (ii) shall not apply to any earnings and profits to which the corporation succeeds after December 31, 1963, pursuant to any corporate reorganization or pursuant to any liquidation to which section 332 applies, except earnings and profits which on December 31, 1963, constituted earnings and profits of a corporation referred to in paragraph (3), and except earnings and profits which were earned after such date by a corporation referred to in paragraph (3). “(B) Corporations to which applicable.—Subparagraph (A) shall apply only with respect to a corporation which is referred to in paragraph (3) and which— “(i) on January’ 1, 1964, owes qualified indebtedness (as defined in section 545 (c)), “(ii) before January 1, 1968, notifies the Secretary or his delegate that it may wish to have subparagraph (A) apply to it and submits such information as may be required by regulations prescribed by the Secretary or his delegate, and “(lii) liquidates before the close of the taxable year in which such corporation ceases to owe such qualified indebtedness or (it earlier) the taxable year referred to in subparagraph (C). 78 Stat. 90 “(C) Adjusted post-1963 earnings and profits exceed qualified indebtedness.—In the case of any corporation, the taxable year referred to in this subparagraph is the first taxable year at the close of which its adjusted post-1963 earnings and profits equal or exceed the amount of such corporation’s qualified indebtedness on January 1, 1964. For purposes of the preceding sentence, the term ‘adjusted post-1963 earnings and profits’ means the sum of— “(i) the earnings and profits of such corporation for taxable years beginning after December 31, 1963, without diminution by reason of any distributions made out of such earnings and profits, and “(ii) the deductions allowed for taxable years beginning after December 31, 1963, for exhaustion, wear and tear, obsolescence, amortization, or depletion. “(3) Corporations referred to.—For purposes of paragraphs (1) and (2), a corporation referred to in this paragraph is a corporation which for at least one of the two most recent taxable years ending before the date of the enactment of this subsection was not a personal holding company under section 542, but would have been a personal holding company under section 542 for such taxable year if the law applicable for the first taxable year beginning after December 31, 1963, had been applicable to such taxable year. “(4) Mistake as to applicability of subsection.—An election made under this section by a qualified electing shareholder of a corporation in which such shareholder states that such election is made on the assumption that such corporation is a corporation referred to in paragraph (3) shall have no force or effect if it is determined that the corporation is not a corporation referred to in paragraph (3).” (h) Exception for Certain Corporations.— (1) General rule.—Except as provided in paragraph (2), in the case of a corporation referred to in section 333(g)(3) of the Internal Revenue Code of 1954 (as added by subsection (g) of this section), the amendments made by this section (other than subsections (f) and (g)) shall not apply if there is a complete liquidation of such corporation and if the distribution of all the property under such liquidation occurs before January 1, 1966. (2) Exception.—Paragraph (1) shall not apply to any liquidation to which section 332 of the Internal Revenue Code of 1954 applies unless— (A) the corporate distributee (referred to in subsection (b) (1) of such section 332) in such liquidation is liquidated in a complete liquidation to which such section 332 does not apply, and (B) the distribution of all the property under such liquidation occurs before the 91st day after the last distribution referred to in paragraph (1) and before January 1, 1966. (i) Deduction for Amortization of Indebtedness.— (1) Section 545(a) (relating to definition of undistributed personal holding com puny income) is amended by striking out “subsection (b)” and inserting in lieu thereof “subsections (b) and (c)”. (2) Section 545 is amended by adding at the end thereof the following new subsection: “(c) Special Adjustment to Taxable Income.— “(1) In general.—Except as otherwise provided in this subsection, for purposes of subsection (a) there shall be allowed as 78 Stat. 91a deduction amounts used, or amounts irrevocably set aside (to the extent treasonable 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 respect to a corporation— “(A) which for at least one of the two most recent taxable years ending before the date of the enactment of this subsection was not a personal holding company under section 542, but would have been a personal holding company under section 542 for such taxable year if the law applicable for the first taxable year beginning after December 31, 1963, had been applicable 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 paragraph, for purposes of this subsection the term ‘qualified indebtedness’ means— “(i) the outstanding indebtedness incurred by the taxpayer after December 31, 1933, and before January 1, 1964, and “(ii) the outstanding indebtedness incurred 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 otherwise 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), qualified indebtedness does not include any amounts which were, at any time after December 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 outstanding 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 irrevocably set aside before the taxable year to pay or retire, such indebtedness; and no deduction 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 or his delegate, to treat as nondeductible 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 election 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 reduced by the sum of— 78 Stat. 92 “(A) the amount, if any, by which— “(i) the deductions allowed for the taxable year and all preceding taxable years beginning after December 31, 1963, for exhaustion, wear and tear, obsolescence, amortization, or depletion (other than such deductions which are disallowed in computing undistributed personal holding company income under subsection (b) (8)), exceed “(ii) any reduction, by reason of this subparagraph, of the deductions otherwise allowed by this subsection for such preceding taxable years, and “(B) the amount, if any, by which— “(i) the deductions allowed under subsection (b)(5) in computing undistributed personal holding company income for the taxable year and all preceding taxable years beginning after December 31, 1963, exceed “(ii) any reduction, by reason of this subparagraph, of the deductions otherwise allowed by this subsection for such preceding taxable years. “(6) Pro-rata reduction in certain cases.—For purposes of paragraph (3) (A), if property (of a character which is subject to an allowance for exhaustion, wear and tear, obsolescence, amortization, or depletion) is disposed of after December 31, 1963, the total amounts of qualified indebtedness of the taxpayer 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.” (3) Paragraph (15) of section 381 (e) (relating to carryovers in certain corporate acquisitions) is amended to read as follows: “(15) Indebtedness of certain personal holding companies.—The acquiring corporation shall be considered to be the distributor or transferor corporation for the purpose of determining the applicability of subsections (b)(7) and (c) of section 545, relating to deduction with respect to payment of certain indebtedness.” (j) Increase in Basis With Respect to Certain Foreign Personal Holding Company Stock or Securities.— (1) In general.—Part II of subchapter O of chapter 1 (relating to basis rules of general application) is amended by redesignating section 1022 as section 1023 and by inserting after section 1021 the following new section: “SEC. 1022. INCREASE IN BASIS WITH RESPECT TO CERTAIN FOREIGN PERSONAL HOLDING COMPANY STOCK OR SECURITIES. “(a) General Rule.—The basis (determined under section 1014(b) (5), relating to basis of stock or securities in a foreign personal holding company) of a share of stock or a security, acquired from a decedent dying after December 31, 1963, of a corporation which was a foreign personal holding company for its most recent taxable year ending before the date of the decedent’s death shall be increased by its proportionate share of any Federal estate tax attributable to the net appreciation in value of all of such shares and securities determined as provided in this section. “(b) Proportionate Share.—For purposes of subsection (a), the proportionate share of a share of stock or of a security is that amount which bears the same ratio to the aggregate increase determined under 78 Stat. 93subsection (c) (2) as the appreciation in value of such share or security bears to the aggregate appreciation in value of all such shares and securities having appreciation in value. “(c) Special, Rules and Definitions.—For purposes of this section— “(1) Federal estate tax.—The term ‘Federal estate tax’ means only the tax imposed by section 2001 or 2101, reduced by any credit allowable with respect to a tax on prior transfers by section 2013 or 2102. “(2) Federal estate tax attributable to net appreciation in value.—The Federal estate tax attributable to the net appreciation in value of all shares of stock and securities to which subsection (a) applies is that amount which bears the same ratio to the Federal estate tax as the net appreciation in value of all of such shares and securities bears to the value of the gross estate as determined under chapter 11 (including section 2032, relating to alternate valuation). “(3) Net appreciation.—The net appreciation in value of all shares and securities to which subsection (a) applies is the amount by which the fair market value of all such shares and securities exceeds the adjusted basis of such property in the hands of the decedent. “(4) Fair market value.—For purposes of this section, the term ‘fair market value’ means fair market value determined under chapter 11 (including section 2032, relating to alternate valuation). “(d) Limitations.—This section shall not apply to any foreign personal holding company referred to in section 342(a)(2).” (2) Amendment of section 1016(a).—Section 1016(a) (relating to adjustments to basis) is amended by striking out the period at the end thereof and by inserting in lieu thereof a semicolon and by adding at the end thereof the following new paragraph: “(21) to the extent provided in section 1022, relating to increase in basis for certain foreign personal holding company stock or securities.” (3) Clerical amendment.—The table of sections for part II of subchapter O of chapter 1 is amended by striking out “Sec. 1022. Cross references.” and inserting in lieu thereof the following: “Sec. 1022. Increase in basis with respect to certain foreign personal holding company stock or securities. “Sec. 1023. Cross references.” (k) Technical Amendments.— (1) Section 542(b) (relating to corporations filing consolidated returns) is amended by striking out “gross income” each place it appears and inserting in lieu thereof “adjusted ordinary gross income”. (2) Section 543 (relating to personal holding company income) is amended by striking out subsection (d) (relating to special adjustment on disposition of antitrust stock received as a dividend). (3) Section 544 (relating to rules for determining stock ownership) is amended— (A) by striking out “section 543(a)(5)” each place it appears and inserting in lieu thereof “section 543(a)(7)”, and 78 Stat. 94 (B) by striking out “section 543(a)(9)” each place it appears and inserting in lieu thereof “section 543(a) (4)”. (4) Real estate investment trusts.—Paragraph (6) of section 856(a) (relating to definition of real estate investment trust) is amended by striking out “gross income” and inserting in lieu thereof “adjusted ordinary gross income (as defined in section 543(b)(2))” (5) Unincorporated business enterprises electing to be taxed as domestic corporations.—Section 1361 (i) (relating to personal holding company income) is amended to read as follows: “(i) Personal Holding Company Income.— “(1) Excluded from income of enterprise.—There shall be excluded from the gross income of the enterprise as to which an election has been made under subsection (a) any item of gross income (computed without regard to the adjustments provided in section 543(b) (3) or (4)) it, but for this paragraph, such item (adjusted, where applicable, as provided in section 543(b) (3) or (4)) would constitute personal holding company income (as defined in section 543 (a)) of such enterprise. “(2) Income and deductions of owners.—Items excluded from the gross income of the enterprise under paragraph (1), and the expenses attributable thereto, shall be treated as the income and deductions of the proprietor or partners (in accordance with their distributive shares of partnership income) of such enterprise. “(3) Distributions.—If— “(A) the amount excluded from gross income under paragraph (2) exceeds the expenses attributable thereto, and “(B) any portion of such excess is distributed to the proprietor or partner during the year earned, such portion shall not be taxed as a corporate distribution. The portion of such excess not distributed during such year shall be considered as paid-in surplus or as a contribution to capital as of the close of such year.” (6) Assessment and collection of personal holding company tax.—Section 6501(f) (relating to personal holding company tax) is amended by striking out “gross income, described in section 543(a),” and inserting in lieu thereof “gross income and adjusted ordinary gross income, described in section 543,” (l) Effective Dates.— (1) The amendments made by this section (other than by subsections (c)(1), (f), (g), and (j)) shall apply to taxable years beginning after December 31, 1963. (2) The amendment made by subsection (c)(1) shall apply to taxable years beginning after October 16, 1962. (3) The amendments made by subsections (f) and (g) shall apply to distributions made in any taxable year of the distributing corporation beginning after December 31, 1963. (4) The amendments made by subsection (j) shall apply in respect of decedents dying after December 31, 1963. (5) Subsection (h) shall apply to taxable years beginning after December 31, 1963.