accumulated earnings and profits of $10,000 on December 31, 1963, on which date corporation F redeems shareholder A's stock for cash in the amount of $4,000. A is a 20-percent shareholder. Under the amendment the earnings and profits of the corporation are reduced by only $2,000 (20 percent of $10,000).

Paragraph (2) of section 14(b) of the bill amends section 751 (d) (2) of the code (relating to inventory items of a partnership which have appreciated substantially in value) by adding new subparagraphs (C) and (D) which provide treatment for the sale or exchange of an interest in a partnership which holds stock in a foreign investment company. The amendment treats foreign investment company stock as an inventory item of the partnership under subsection (d)(2) of section 751. If an interest in a partnership, holding stock in a foreign investment company, is sold or exchanged, and if section 1246 (a) would apply to the gain on the sale or exchange of such stock were such stock sold or exchanged by the partnership, the amount received for such interest which is attributable to the inventory items under section 751(d) (2) (including foreign investment company stock) will be taxed at ordinary income rates, provided under section 751(d)(1) the substantial appreciation tests for inventory items of the partnership are satisfied.

Paragraph (3) of section 14 (b) of the bill amends section 1223 of the code (relating to holding period of property) by redesignating paragraph (10) as paragraph (11) and adding a new paragraph (10). Paragraph (10) requires a taxpayer in determining the period for which he held certain trust certificates to which section 1246(d) applies (relating to entities holding foreign investment company stock), or the period for which he held stock to which such section applies, to include the period for which the trust or corporation held the stock of foreign investment companies.

(c) Effective date.-Subsection (c) of section 14 of the bill provides that the amendments made by section 14 are to apply with respect to taxable years beginning after December 31, 1962.

SECTION 15. GAIN FROM CERTAIN SALES OR EXCHANGES OF STOCK IN CERTAIN FOREIGN CORPORATIONS

(a) Treatment of gain from the redemption, cancellation, or sale of stock in certain foreign corporations. Subsection (a) of section 15 of the bill, corresponding to section 16 of the bill as passed by the House, amends part IV of subchapter P of chapter 1 (relating to special rules for determining capital gains and losses) by adding after section 1247 (as added by sec. 14 of the bill) a new section 1248.

SECTION 1248. GAIN FROM CERTAIN SALES OR EXCHANGES OF STOCK IN CERTAIN FOREIGN CORPORATIONS

Section 1248 provides that gain recognized on the sale or exchange of stock by a U.S. person owning 10 percent or more of the voting stock of a foreign corporation shall be included in gross income of such person as a dividend to the extent of the earnings and profits of the foreign corporation attributable to the period the stock sold or exchanged was held by such person while the foreign corporation was a controlled foreign corporation. Section 1248 also provides a limita

673762 0-63- -64

(i) Loss on sale or exchange of certain stock held less than 6 mer Subsection (i) which is identical to subsection (e) of section 1247 the bill as passed by the House, provides that if a share of stock is e by a qualified shareholder for less than 6 months and if he treats amount designated under section 1247(a)(1)(B) as long-ter gain with respect to such shares, then any loss on the sale or extáz of such share (to the extent of the amount so treated as longes capital gain) shall be treated as loss from the sale or exchange capital asset held for more than 6 months. For example, on Decemb 20, 1963, A purchases a share of stock in corporation F. an er foreign investment company, for $50. Corporation F (which is calendar-year basis) designates A's share of its long-term capital for the year 1963 as being $5. No distribution with respect to capa gains is made. A, therefore, includes $5 in computing his long-ter capital gains in his return for 1963. On January 10, 1964, As such share for $49. Since A has a basis of $55 (the $50 original plus the $5 capital gain included in income but not distributed sale results in a loss of $6. Subsection (e) treats $5 of this loss long-term capital loss.

SECTION 14. FOREIGN INVESTMENT COMPANIES

(Continued)

(b) Conforming amendments.-Paragraph (1) of section 14b. the bill amends section 312 of the 1254 Code (relating to effect a earnings and profits) by adding after subsection (k) thereof a new su section (1).

Paragraph (1) of subsection (1) provides that upon the sale or change of stock in a foreign investment company by a sharehole who is a U.S. person, if such foreign investment company is a mente of an affiliated group (as defined in par. (2)), then the accumula earnings and profits of all member companies are to be allocate. under regulations prescribed by the Secretary of the Treasury his delegate, in such a manner as to carry out the purposes of secr 1246.

Paragraph (2) of subsection (1) defines the term "affiliated gro for purposes of subsection (1) (1) to have the same meaning as such te has in section 1504 (a) except that (A) "more than 50 percent substituted for "80 percent or more" wherever appearing in sec 1504 (a), and (B) all corporations are treated as includible corporat without regard to section 1504 (b).

Paragraph (3) of new subsection (1) provides a rule governing reduction in the earnings and profits of a foreign investment comp as a result of amounts distributed by a foreign investment compe in a partial liquidation or in redemptions to which section 302 303 applies. The portion of the distribution which is chargeable earnings and profits shall be an amount which is not in excess of t redeemed stock's ratable share of the earnings and profits of the cor pany accumulated after February 28, 1913. The effect of this p vision is to allocate to each share of stock (whether or not redeem an equal amount of the company's accumulated earnings and pr at the time of the redemption. Paragraph (3) of subsection (1) app only to such distributions made after December 31, 1962. The plication of subsection (1)(3) of section 312 may be illustrated by following example: Corporation F, a foreign investment company,

te

ulated earnings and profits of $10,000 on December 31, 1963, ich date corporation F redeems shareholder A's stock for cash amount of $4,000. A is a 20-percent shareholder. Under the dment the earnings and profits of the corporation are reduced by $2,000 (20 percent of $10,000).

agraph (2) of section 14(b) of the bill amends section 751(d) (2) e code (relating to inventory items of a partnership which have eciated substantially in value) by adding new subparagraphs (C) (D) which provide treatment for the sale or exchange of an int in a partnership which holds stock in a foreign investment >any. The amendment treats foreign investment company stock n inventory item of the partnership under subsection (d)(2) of on 751. If an interest in a partnership, holding stock in a foreign stment company, is sold or exchanged, and if section 1246(a) ld apply to the gain on the sale or exchange of such stock were stock sold or exchanged by the partnership, the amount received such interest which is attributable to the inventory items under ion 751(d)(2) (including foreign investment company stock) will axed at ordinary income rates, provided under section 751(d)(1) substantial appreciation tests for inventory items of the partner› are satisfied.

'aragraph (3) of section 14 (b) of the bill amends section 1223 of code (relating to holding period of property) by redesignating agraph (10) as paragraph (11) and adding a new paragraph (10). agraph (10) requires a taxpayer in determining the period for ich he held certain trust certificates to which section 1246(d) plies (relating to entities holding foreign investment company ck), or the period for which he held stock to which such section plies, to include the period for which the trust or corporation held e stock of foreign investment companies.

(c) Effective date.-Subsection (c) of section 14 of the bill provides at the amendments made by section 14 are to apply with respect taxable years beginning after December 31, 1962.

ECTION 15. GAIN FROM CERTAIN SALES OR EXCHANGES OF STOCK IN CERTAIN FOREIGN CORPORATIONS

(a) Treatment of gain from the redemption, cancellation, or sale of ock in certain foreign corporations.-Subsection (a) of section 15 of e bill, corresponding to section 16 of the bill as passed by the House, mends part IV of subchapter P of chapter 1 (relating to special rules or determining capital gains and losses) by adding after section 1247 as added by sec. 14 of the bill) a new section 1248.

ECTION 1248. GAIN FROM CERTAIN SALES OR EXCHANGES OF STOCK IN CERTAIN FOREIGN CORPORATIONS

Section 1248 provides that gain recognized on the sale or exchange of stock by a U.S. person owning 10 percent or more of the voting stock of a foreign corporation shall be included in gross income of such person as a dividend to the extent of the earnings and profits of the oreign corporation attributable to the period the stock sold or exchanged was held by such person while the foreign corporation was a controlled foreign corporation. Section 1248 also provides a limita

673762 0-63- 64

(i) Loss on sale or exchange of certain stock held less than 6 morti – ma Subsection (1) which is identical to subsection (e) of section 1247 a the bill as passed by the House, provides that if a share of stock sin by a qualified shareholder for less than 6 months and if he treats a amount designated under section 1247(a)(1)(B) as long-term c gain with respect to such shares, then any loss on the sale or exist? of such share (to the extent of the amount so treated as long-63 capital gain) shall be treated as loss from the sale or exchange capital asset held for more than 6 months. For example, on Decete 20, 1963, A purchases a share of stock in corporation F, an electar foreign investment company, for $50. Corporation F (which is on a calendar-year basis) designates A's share of its long-term capital pas for the year 1963 as being $5. No distribution with respect to capa gains is made. A, therefore, includes $5 in computing his long-te capital gains in his return for 1963. On January 10, 1964, As such share for $49. Since A has a basis of $55 (the $50 original s plus the $5 capital gain included in income but not distributed i sale results in a loss of $6. Subsection (e) treats $5 of this loss st long-term capital loss.

SECTION 14. FOREIGN INVESTMENT COMPANIES

(Continued)

(b) Conforming amendments.-Paragraph (1) of section 14b) * the bill amends section 312 of the 1954 Code (relating to effect & earnings and profits) by adding after subsection (k) thereof a new s section (1).

Paragraph (1) of subsection (1) provides that upon the sale or change of stock in a foreign investment company by a shareh who is a U.S. person, if such foreign investment company is a mente of an affiliated group (as defined in par. (2)), then the accumula:*: earnings and profits of all member companies are to be alloca under regulations prescribed by the Secretary of the Treasury his delegate, in such a manner as to carry out the purposes of secr

1246.

Paragraph (2) of subsection (1) defines the term "affiliated gro for purposes of subsection (1) (1) to have the same meaning as such te has in section 1504 (a) except that (A) "more than 50 percent substituted for "80 percent or more" wherever appearing in sec 1504(a), and (B) all corporations are treated as includible corporat without regard to section 1504(b).

Paragraph (3) of new subsection (1) provides a rule governing reduction in the earnings and profits of a foreign investment comp as a result of amounts distributed by a foreign investment comp in a partial liquidation or in redemptions to which section 302 303 applies. The portion of the distribution which is chargeable earnings and profits shall be an amount which is not in excess of th redeemed stock's ratable share of the earnings and profits of the c pany accumulated after February 28, 1913. The effect of this pr vision is to allocate to each share of stock (whether or not redeeme an equal amount of the company's accumulated earnings and pre at the time of the redemption. Paragraph (3) of subsection (1) appl only to such distributions made after December 31, 1962. The plication of subsection (1)(3) of section 312 may be illustrated by following example: Corporation F, a foreign investment company.

ulated earnings and profits of $10,000 on December 31, 1963, ich date corporation F redeems shareholder A's stock for cash › amount of $4,000. A is a 20-percent shareholder. Under the dment the earnings and profits of the corporation are reduced by $2,000 (20 percent of $10,000).

Dany.

ragraph (2) of section 14(b) of the bill amends section 751 (d) (2) e code (relating to inventory items of a partnership which have eciated substantially in value) by adding new subparagraphs (C) (D) which provide treatment for the sale or exchange of an int in a partnership which holds stock in a foreign investment The amendment treats foreign investment company stock n inventory item of the partnership under subsection (d)(2) of on 751. If an interest in a partnership, holding stock in a foreign stment company, is sold or exchanged, and if section 1246 (a) ld apply to the gain on the sale or exchange of such stock were 1 stock sold or exchanged by the partnership, the amount received such interest which is attributable to the inventory items under ion 751(d)(2) (including foreign investment company stock) will axed at ordinary income rates, provided under section 751(d)(1) substantial appreciation tests for inventory items of the partner› are satisfied.

'aragraph (3) of section 14 (b) of the bill amends section 1223 of code (relating to holding period of property) by redesignating agraph (10) as paragraph (11) and adding a new paragraph (10). agraph (10) requires a taxpayer in determining the period for ich he held certain trust certificates to which section 1246(d) lies (relating to entities holding foreign investment company ck), or the period for which he held stock to which such section plies, to include the period for which the trust or corporation held stock of foreign investment companies.

(c) Effective date.-Subsection (c) of section 14 of the bill provides at the amendments made by section 14 are to apply with respect taxable years beginning after December 31, 1962.

CCTION 15. GAIN FROM CERTAIN SALES OR EXCHANGES OF STOCK IN CERTAIN FOREIGN CORPORATIONS

(a) Treatment of gain from the redemption, cancellation, or sale of ock in certain foreign corporations.-Subsection (a) of section 15 of e bill, corresponding to section 16 of the bill as passed by the House, nends part IV of subchapter P of chapter 1 (relating to special rules r determining capital gains and losses) by adding after section 1247 s added by sec. 14 of the bill) a new section 1248.

ECTION 1248. GAIN FROM CERTAIN SALES OR EXCHANGES OF STOCK IN CERTAIN FOREIGN CORPORATIONS

Section 1248 provides that gain recognized on the sale or exchange f stock by a U.S. person owning 10 percent or more of the voting tock of a foreign corporation shall be included in gross income of such erson as a dividend to the extent of the earnings and profits of the oreign corporation attributable to the period the stock sold or exhanged was held by such person while the foreign corporation was a controlled foreign corporation. Section 1248 also provides a limita