rendition of technical, etc. services to an unrelated person; and interest from export trade assets. 170, 301, 312, 341, 453, 751, 1245 Gain from dispositions of certain depreciable property.—Under prior law, the excess of gains over losses from the sale or exchange of most depreciable property used in a trade or business was treated as capital gain under section 1231. Under new section 1245, gain upon the sale, exchange, or other disposition of certain depreciable property will be ordinary income to the extent that the basis of the property in the hands of the taxpayer has been reduced by deductions for depreciation (or amortization under section 168) for periods after December 31, 1961. Any gain in excess of ordinary income recog nized under section 1245 will continue to be treated as gain to which section 1231 applies. New section 1245 also provides for recognition of ordinary income in certain cases where gain was not recognized under prior law. Property to which the section applies is called "section 1245 property." Such property is depreciable property (other than livestock) which is personal property, or which is tangible real property (other than a building) if used as an integral part of manufacturing, production, extraction, or in certain public service activities, or is a research or storage facility used in connection with one of the enumerated activities. Subsection (b) of new section 1245 provides certain exceptions to the general rule. Under subsection (b) no ordinary income will result by reason of a transfer at death, or a disposition by gift. Section 170 is amended, however, to provide that if section 1245 property is given to a charitable organization, the deduction for charitable contributions is to be reduced by the amount of ordinary income that would have been recognized under section 1245 if the property had been sold at its fair market value. Under subsection (b), ordinary income will result upon certain tax-free transfers (contributions of property to a corporation or partnership, certain corporation liquidations, etc.), like-kind exchanges, and involuntary conversions of depreciable property, only to the extent that gain is recognized without regard to section 1245. A special rule governs the application of new section 1245 to partnership distributions, etc. New section 1245 applies only to dispositions during a taxable year beginning after December 31, 1962. 167 Section 167, relating to depreciation, is amended to permit taxpay ers to elect to change from a declining balance or sum of the years digits method to the straight line method of depreciating property subject to section 1245. The election (to be made in a manner prescribed by regulations) may be made on or before the due date for filing the income tax return for the first taxable year beginning after December 31, 1962. Section 167 is also amended to allow a reduction of salvage value required to be taken into account for purposes of computing depreciation. The salvage value of depreciable personal property (other than livestock) with a useful life of 3 years or more may be reduced by an amount equal to 10 percent of the basis of the property. The salvage value amendment applies only to taxable years E beginning after December 31, 1961, and to property acquired after October 16, 1962. 613 Section 613(a), relating to percentage depletion, is amended to provide that, for purposes of computing the limitation on allowable percentage depletion to 50 percent of taxable income from the property, expenses of mining will be reduced by any ordinary income under section 1245 which is properly attributable to the property. The amendment to section 613(a) is applicable to taxable years beginning after December 31, 1962. 1246 Gain on foreign investment company stock.-Section 14 of this Act adds new sections 1246 and 1247 to the Code. Generally, section 1246 treats the gain on a sale or exchange after December 31, 1962, of stock in a foreign corporation which was a foreign investment company at any time during the period which the taxpayer held such stock as gain from the sale or exchange of property which is not a capital asset. This provision also applies to certain redemptions and distributions under sections 302 and 331. Such ordinary income treatment applies only to the extent of the taxpayer's ratable share of earnings and profits of the foreign investment company for taxable years beginning after December 31, 1962, and during the period that the taxpayer held such stock. This section does not apply to short-term capital gains. The burden is on the taxpayer to establish the amount of the accumulated earnings and profits of the foreign investment company and his share of such earnings and profits for the period during which the taxpayer held such stock. Failure to establish this information will result in treating all the gain from the sale or exchange of stock in such company as ordinary income. A foreign investment company for purposes of section 1246 means a foreign corporation (1) which is registered under the Investment Company Act of 1940 either as a management company or as a unit investment trust, or (2) which is not so registered, is engaged in the investment business, and more than 50 percent of the voting power or value of the stock is held directly or indirectly by United States persons (as defined in section 7701(a) (30)). The second category does not apply to brokers, banks, and small loan companies. Rules relating to stock having transferred or substituted basis apply and the holding period for such stock is determined under section 1223. Special rules are provided for stock acquired from a decedent and stock of a foreign investment company held through a domestic corporation or through a domestic trust to which section 677 (relating to income for benefit of grantor) applies. Every United States person owning 5 percent in value of stock of a foreign investment company must furnish with respect to such foreign corporation such e information as the Secretary or his delegate prescribes by regulations. 1247 Election by foreign investment companies to distribute income currently. This section of the Code provides that if a registered foreign investment company (described in section 1246 (b) (1)) elects on or before December 31, 1962, with respect to each taxable year beginning after December 31, 1962, to (1) distribute at least 90 percent of it taxable income currently (computed as though it were a domesti corporation) with certain modifications, (2) inform its shareholder. in writing their proportionate amount of long-term gains, whether o not distributed, and (3) provide information required under regula tions then section 1246 will not apply to those shareholders (desig nated qualified shareholders) who include in their income their pro rata share of long-term capital gains, whether or not distributed. The election terminates with the failure to comply with the terms of the election unless there is reasonable cause, or when the company becomes a foreign personal holding company, or when the company ceases to be a foreign investment company. The company can elect within two and one-half months after the end of the taxable year to consider distributions made within that period as distributed during such taxable year. An electing foreign investment company may under certain conditions elect to pass through its foreign income taxes to its shareholders. Under such election, the foreign taxes will not be allowed as a deduction to the foreign investment company and each qualified shareholder must include his share of such foreign taxes in income but he will be entitled to a foreign tax credit. The shareholder's share of the foreign taxes must be designated by the company in a written notice to the shareholder within 45 days after the end of the company's taxable year. Provisions are made for adjustments to earnings and profits and the shareholder's basis to reflect the inclusion of the undistributed capital gains in the shareholder's income. Any loss from the sale of stock held six months or less will be treated as a long-term capital loss to the extent that the basis of such stock was increased by reported and undistributed long-term capital gains. 312 Allocation within affiliated group.-Section 14(b) (1) of this Act amends section 312 by adding a new subsection (1). Paragraphs (1) and (2) of subsection (1) provide that earnings and profits of an affiliated group in which the foreign investment company is a member, are to be allocated. Paragraph (3) of subsection (1) provides rules governing the reduction of earnings and profits of a foreign investment company as a result of amounts it distributes after December 31, 1962, in a partial liquidation or in a redemption to which section. 302 (a) or 303 applies. 751(d) (2) (C) and (D) Sale or exchange of interest in partnership.-Section 14(b) (2) of this Act amends section 751 (d) (2) by striking subparagraph (C) and adding new subparagraphs (C) and (D) which treat as an inventory item for purposes of subchapter K of the Code certain stock of a foreign investment company. 1223 (10) Holding period of property.-Section 14(b) (3) of this Act amends section 1223 by redesignating paragraph (10) as paragraph (11) and adding a new paragraph (10) which includes the period foreign investment company stock is held by a trust or by a corporation covered by section 1246(d). Effective date. The amendments made by section 14 of the Act. apply to taxable years beginning after December 31, 1962. 1248 Gain from certain sales or exchanges of stock in certain foreign corporations.-Section 15(a) adds section 1248 to apply with respect to sales or exchanges of stock in a foreign corporation occurring after December 31, 1962. Generally, section 1248 (a) 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. In determining stock ownership the attribution rules of new section 958 are applicable. Section 1248(b) provides a limitation on the amount of tax payable by a U.S. person who is an individual in the case of a sale of a capital asset held in excess of 6 months, and subsections (c) and (d) provide rules for determining earnings and profits for purposes of this section. Generally, earnings and profits of the foreign corporation include earnings and profits of its subsidiaries for the periods the subsidiaries were controlled foreign corporations, but exclude (1) earnings and profits attributable to income taxed under section 951, (2) earnings and profits attributable to gain from the sale or exchange of property in pursuance of a plan of complete liquidation, (3) earnings and profits accumulated by a foreign corporation while it was a less developed country corporation, (4) income from U.S. sources while engaged in business there, and (5) earnings and profits of the foreign corporation which was a foreign investment company for taxable years in which the U.S. shareholder whose stock is sold or exchanged was a qualified shareholder as defined in section 1247. Subsection (e) provides rules relating to the sale or exchange of stock of certain domestic corporations. Subsection (f) provides certain exceptions to this section. These are generally any amount treated under the 1954 Code as a dividend, gain from the sale of noncapital assets, and short-term capital gains; distributions to which section 303 applies; and gain realized on section 356 exchange. Subsection (g) places the burden on the taxpayer to establish the amount of earnings and profits. Failure to establish this amount will result n treating all of the gain as a dividend under subsection (a). Also, unless the taxpayer establishes the amount of foreign taxes required under subsection (b) of this section the limitation provided in subsecion (b) is not to apply. 1249 Gain from certain sales or exchanges of patents, etc., to certain foreign corporations.-Section 16 of this Act amends part IV of subchaper P of chapter 1 of the Code by adding section 1249 which provides hat gain from the sale or exchange after December 31, 1962, of a pat ent, invention, model, or design (whether or not patented), copyrigh secret formula or process, or other similar property right by a Unite States person (as defined in new section 7701(a)(30)) to a foreig corporation which such person controls is considered as gain from t sale or exchange of property which is neither a capital asset nor proj erty described in section 1231. For this rule to apply, such gain mu (but for this section) be gain from the sale or exchange of a capita asset or of property described in section 1231. For purposes of th section, a United States person controls a foreign corporation if h owns directly or indirectly, using the constructive ownership rules c new section 958, more than 50 percent of the voting stock of such co poration. This section applies to taxable years beginning after De cember 31, 1962. 1381(a), 1381(b), 1382 (a), 1382 (b), 1382 (c), 1382 (d), 1382 (e) Tax treatment of cooperatives and patrons.-Section 17(a) of thi Act adds a new subchapter T consisting of parts I, II, and ÌIÍ (relat ing to cooperatives and their patrons) to chapter 1 of the Code, so as t impose, upon either the cooperatives or on their patrons, a single ta: on the income of the cooperatives. Part I (consisting of sections 1381, 1382, and 1383 (relates to the ta treatment of cooperatives. Section 1381 (a) specifies those organiza tions to which such part applies; that is, so-called tax-exempt farmers cooperatives (section 521), other farm and consumer cooperatives, and any corporation operating on a cooperative basis. Such part I doe not apply to mutual savings banks, building and loan associations, mu tual insurance companies, mutual ditch, irrigation or REA coopera tives, or to organizations which furnish electric energy or provide tele phone service to persons in rural areas. Section 1381 (b) continues the rule that so-called tax-exempt farmers' cooperatives (section 521) are subject to the taxes imposed by section 11 or 1201. Section 1382 (relating to taxable income of cooperatives) provides in subsection (a) that "gross income" is to be determined without any adjustment by reason of any allocation or distribution to a patron out of the net earnings of the organization; any amount which is "not taken into account" in computing taxable income under subsection (b) is to be treated in the same manner as if it were an item of gross income and a deduction there from. Subsection (b) provides that, in computing "taxable income" of the cooperative, there is not to be taken into ac count patronage dividends paid with respect to patronage occurring during the taxable year or amounts paid in redemption of nonqualified written notices of allocation (paid during the "payment period" for the taxable year). In addition, deductions are allowed for amounts paid as dividends on capital stock of so-called tax-exempt farmers' cooperatives and, to such organizations only, amounts paid on a patronage basis on earnings derived from business done with the United States or its agencies or from sources other than patronage as well as amounts paid in redemption of certain nonqualified written notices of allocation. Under subsection (d), "payment period" for any taxable |