"(2) TIME, MANNER, AND EFFECT OF STATEMENT.-A statement under paragraph (1) for any taxable year shall be filed within the time prescribed by law (including extensions thereof) for filing the return for such taxable year, and shall be made and filed in such manner as the Secretary or his delegate shall prescribe by regulations. Such statement shall be binding on the taxpayer, and be effective, for such taxable year and for all subsequent taxable years and may not be revoked except with the consent of the Secretary or his delegate.

(3) CHANGE OF METHOD OF ACCOUNTING, ETC.-If, in connection with a statement under paragraph (1), a taxpayer changes his method of accounting in computing taxable income or changes a method of treating expenditures chargeable to capital account, such change shall be treated as having been made with the consent of the Secretary or his delegate and, in the case of a change in method of accounting, shall be treated as a change not initiated by the taxpayer.

"(c) CARRYBACK AND CARRYOVER OF DISALLOWED FARM OPERATING LOSSES.— "(1) IN GENERAL.-The disallowed farm operating loss for any taxable year (hereinafter referred to as the 'loss year') shall be

"(A) a disallowed farm operating loss carryback to each of the taxable years preceding the loss year, and

"(B) a disallowed farm operating loss carryover to each of the 5 taxable years following the loss year,

and (subject to the limitations contained in paragraph (2)) shall be allowed as a deduction for such years, under regulations prescribed by the Secretary or his delegate, in a manner consistent with the allowance of the net operating loss deduction under section 172.

"(2) LIMITATIONS.

"(A) IN GENERAL.-The deduction under paragraph (1) for any taxable year for disallowed farm operating loss carrybacks and carryovers to such taxable year shall not exceed the taxpayers' net farm income for such taxable year.

“(B) CARRYBACKS.-The deduction under paragraph (1) for any taxable year for disallowed farm operating loss carrybacks to such taxable year shall not be allowable to the extent it would increase or produce a net operating loss (as defined in section 172(c)) for such taxable year. (3) TREATMENT AS NET OPERATING LOSS CARRYBACK.-Except as provided in regulations prescribed by the Secretary or his delegate, a disallowed farm operating loss carryback shall, for purposes of this title, be treated in the same manner as a net operating loss carryback.

"(d) DEINITIONS.-For purposes of this section

"(1) ADJUSTED FARM GROSS INCOME.-The term 'adjusted farm gross income' means, with respect to any taxable year, the gross income derived from the business of farming for such taxable year (including recognized gains derived from sales, exchanges, or involuntary conversions of farm property), reduced, in the case of a taxpayer other than a corporation, by an amount equal to 50 percent of the lower of

"(A) the amount (if any) by which the recognized gains on sales, exchanges, or involuntary conversions of farm property which, under section 1231(a), are treated as gains from sales or exchanges of capital assets held for more than 12 months exceed the recognized losses on sales, exchanges, or involuntary conversions of farm property which under section 1231(a) are treated as losses from sales or exchanges of capital assets held for more than 12 months, or

"(B) the amount (if any) by which the recognized gains described in section 1231 (a) exceed the recognized losses described in such section. "(2) NET FARM INCOME.-The term 'net farm income' means, with respect to any taxable year, the gross income derived from the business of farming for such taxable year (including recognized gains derived from sales, exchanges, or involuntary conversions of farm property), reduced by the sum of

"(A) the deductions allowable under this chapter (other than by subsection (c) of this section) for such taxable year which are attributable to such business, and

"(B) in the case of a taxpayer other than a corporation, an amount equal to 50 percent of the amount described in subparagraph (A) or (B) of paragraph (1), whichever is lower.

33-865 0-69-pt. 47

"(3) SPECIAL DEDUCTIONS.-The term 'special deductions' means the deduc tions allowable under this chapter which are paid or incurred in the busi ness of farming and which are attributable to

"(A) taxes,

"(B) interest,

"(C) the abandonment or theft of farm property, or losses of farm property arising from fire, storm, or other casualty,

"(D) losses and expenses directly attributable to drought, and

"(E) recognized losses from sales, exchanges, and involuntary con versions of farm property.

(4) FARM PROPERTY.-The term 'farm property' means property which is used in the business of farming and which is property used in the trade or business within the meaning of paragraph (1), (3), or (4) of section 1231 (b) (determined without regard to the period for which held).

"(5) DISALLOWED FARM OPERATING LOSS.-The term 'disallowed farm op erating loss' means, with respect to any taxable year, the amount disallowed as deductions under subsection (a) for such taxable year, reduced, in the case of a taxpayer other than a corporation, by an amount equal to 50 per cent of the amount described in subparagraph (A) or (B) of paragraph (1), whichever is lower.

"(e) SPECIAL RULES.-For purposes of this section—

"(1) BUSINESS OF FARMING.-A taxpayer shall be treated as engaged in the business of farming for any taxable year if—

"(A) any deduction is allowable under section 162 or 167 for any expense paid or incurred by the taxpayer with respect to farming, or with respect to any farm property held by the taxpayer, or

"(B) any deduction would (but for this paragraph) otherwise be allowable to the taxpayer under section 212 or 167 for any expense paid or incurred with respect to farming, or with respect to property held for the production of income which is used in farming.

For purposes of this paragraph, farming does not include the raising of timber. In the case of a taxpayer who is engaged in the business of farming for any taxable year by reason of subparagraph (B), property held for the production of income which is used in farming shall, for purposes of this chapter, be treated as property used in such business.

"(2) INCOME AND DEDUCTIONS.-The determination of whether any item of income is derived from the business of farming and whether any deduction is attributable to the business of farming shall be made under regulations prescribed by the Secretary or his delegate, but no deduction allowable under section 1202 (relating to deduction for capital gains) shall be attrib

utable to such business.

"(3) CONTROLLED GROUP OF CORPORATIONS.-If two or more corporations which

"(A) are component members of a controlled group of corporations (as defined in section 1563) on a December 31, and

"(B) have not filed a statement under subsection (b) which is ef fective for the taxable year which includes such December 31, each have deductions attributable to the business of farming (before the application of subsection (a)) in excess of its gross income derived from such business for its taxable year which includes such December 31, then, in applying subsection (a) for such taxable year, the $15,000 amount specified in paragraph (2) (B) of such subsection shall be reduced for each such corporation to an amount which bears the same ratio to $15,000 as the excess of such deductions over such gross income of such corporation bears to the ag gregate excess of such deductions over such gross income of all such corporations.

"(4) PARTNERSHIPS.-A business of farming carried on by a partnership shall be treated as carried on by the members of such partnership in propor tion to their interest in such partnership. To the extent that income and deductions attributable to a business of farming are treated under the preceding senence as income and deductions of members of a partnership, such income and deductions shall, for purposes of this chapter, not be taken into account by the partnership.

"(5) TWO OR MORE BUSINESSES.-If a taxpayer is engaged in two or more businesses of farming, such businesses shall be treated as a single business.

"(6) RELATED INTEGRATED BUSINESSES.-If a taxpayer is engaged in the business of farming and is also engaged in one or more businesses which are directly related to his business of farming and are conducted on an integrated basis with his business of farming, the taxpayer may elect to treat all such businesses as a single business engaged in the business of farming. An election under this paragraph shall be made in such manner, at such time, and subject to such conditions as the Secretary or his delegate may prescribe by regulations.

"(7) SUBCHAPTER S CORPORATIONS AND THEIR SHAREHOLDERS.——

"For a special treatment of electing small business corporations which do not file statements under subsection (b) and of the shareholders of such corporations, see section 1380.

"(f) REGULATIONS.-The Secretary or his delegate shall prescribe such regulations as may be necessary to carry out the purposes of this section."

(b) SUBCHAPTER S CORPORATIONS.-Subchapter S (relating to election of certain small business corporations as to taxable status) is amended by adding after section 1379 (as added by section 541 (a) of this Act) the following new section:

"SEC. 1380. ELECTING SMALL BUSINESS CORPORATIONS ENGAGED IN BUSINESS OF FARMING.

"(a) SEPARATE APPLICATION TO FARMING INCOME AND DEDUCTIONS.-Under regulations prescribed by the Secretary or his delegate, an electing small business corporation which is engaged in the business of farming during its taxable year (other than a corporation which has filed a statement under section 280 (b) which is effective for such taxable year), and the shareholders of such corporation, shall apply the provisions of sections 1373 through 1378, separately with respect to

"(1) income derived from the business of farming by such corporation and deductions attributable to such business, and

"(2) all other income and deductions of such corporation.

In computing the taxable income and undistributed taxable income, or net operating loss, of such corporation with respect to the business of farming, no deduction otherwise allowable under this chapter shall be disallowed to such corporation under secton 280.

"(b) SHAREHOLDERS TREATED AS ENGAGED IN BUSINESS OF FARMING, ETC.-For purposes of section 280

"(1) each shareholder of an electing small business corporation to which subsection (a) applies shall be treated as engaged in the business of farming, "(2) the undistributed taxable income of such corporation which is included in the gross income of such shareholder under section 1373 and is attributable to income and deductions referred to in subsection (a) (1). and dividends received which are attributable to such income and deductions and are distributed out of earnings and profits of the taxable year as specified in section 316(a) (2), shall be treated as income derived from the business of farming by such shareholder, and

“(3) the deduction allowable (before the application of section 280) to such shareholder under section 1374 as his portion of such corporation's net operating loss attributable to income and deductions referred to in subsection (a) (1) shall be treated as a deduction attributable to the business of farming.

"(c) SPECIAL RULES OF SECTION 280 (e) APPLICABLE. For purposes of this section, the special rules set forth in section 280 (e) shall apply."

(c) CLERICAL AND CONFORMING AMENDMENTS.-(1) The table of section for part IX of subchapter B of chapter 1 is amended by adding at the end thereof the following new item:

"Sec. 280. Limitation on deductions attributable to farming."

(2) Section 172(1) is amended by adding at the end thereof the following new paragraph:

"(3) For limitations on deductions attributable to farming and special treatment of disallowed farm operating losses, see section 280."

(3) Section 381 (c) is amended by adding at the end thereof the following new paragraph:

"(24) FARM OPERATING LOSS CARRYOVERS.-The acquiring corporation shall take into account, under regulations prescribed by the Secretary or his delegate, the disallowed farm operating loss carryovers under section 280 of the distributor or transferor corporation."

(4) The table of sections for subchapter S is amended by adding at the end thereof the following new item:

"Sec. 1380. Electing small business corporations engaged in business of farming."

(d) EFFECTIVE DATE.-The amendments made by this section shall apply to taxable years beginning after December 31, 1969, except that for purposes of applying section 280 (c) of the Internal Revenue Code of 1954 (as added by subsection (a)) with respect to disallowed farm operating losses of any taxpayer for taxable years beginning after such date

(1) such amendments shall also apply to the 3 taxable years of such taxpayer preceding the first taxable year beginning after such date, and (2) in the case of a taxpayer to whom section 1380 (b) of such Code (as added by subsection (b)) applies for any of his first 3 taxable years beginning after such date, section 1380 of such Code shall apply with respect to the electing small business corporation of which such taxpayer is a shareholder for the 3 taxable years preceding each such taxable year of such taxpayer, but only with respect to any such preceding taxable year for which the corporation was an electing small business corporation. Senator ANDERSON. Senator Cooper.

STATEMENT OF HON. JOHN SHERMAN COOPER, A U.S. SENATOR FROM THE STATE OF KENTUCKY

Senator COOPER. Yes.

Mr. Chairman and members of the committee, it is my honor today to introduce to the committee the Governor of the Commonwealth of Kentucky, the Honorable Louie B. Nunn, now serving the second year of his 4-year term. We appreciate your waiting here. He will testify on a subject which is of concern to our State.

STATEMENT OF HON. LOUIE B. NUNN, GOVERNOR OF THE STATE OF KENTUCKY; ACCOMPANIED BY GEORGE A. SMATHERS, GENERAL COUNSEL, AMERICAN HORSE COUNCIL

Mr. SMATHERS. Mr. Chairman, may I say preliminarily that we had an agreement with the chairman and the staff that the American Horse Council would have four witnesses, each one of which would testify not to exceed 10 minutes, and that we are, of course, very proud and happy to have as our first witness the distinguished Governor of Kentucky, Mr. Nunn.

Governor NUNN. Thank you Senator Cooper, Mr. Smathers, members of the committee. I appreciate this opportunity to appear before the committee, but more than that, the opportunity to listen to the various witnesses and the discussion this morning, particularly as it relates to the farm economy. As I listened, I was reminded of Mr. Butler, a farmer down in Kentucky and I think he would fall in the category of a "legitimate farmer." He had been farming for several years, when the county agent, under a State and Federal program, went out to advise him on how he could enhance his income. The agent suggested that he buy a herd of cattle and feed them out, which the farmer did.

The prepared statement of the American Horse Council submitted by former Senator Thruston Morton and George Smathers appears at p. 2792.

en

Later, at a meeting that the county agent was conducting down at the local schoolhouse, he was explaining the programs and what they had meant to the farmers. He called on Mr. Butler to explain what his herd of cattle had meant to him.

The old farmer said that when he took into consideration the feed that he had raised, the feed that he bought, and the time that it took to care for them, that he figures he broke about even.

The county agent said "that is the trouble with you farmers-you didn't take into consideration, Mr. Butler, the fact that if you hadn't had that herd of cattle, you would have had to buy fertilizer for that east 40 acres. Since you used the manure, that saved you from spending money on fertilizer, and you should consider that as profit."

Mr. Butler said that he thought the farm situation had come to a sorry plight when you had to take your profit out in manure. [Laughter.]

My purpose in appearing before this committee is to present to you facts and statistics on this proposed legislation which would materially and adversely affect the economy of my own State and that of 26 other States that are involved in horse raising and breeding.

In addition to the 27 States to which I refer, I am sure that there will be other presentations that will be made to this committee on the effect that the legislation would have on them.

Realizing the importance and the significance of the proposed legislation, and the limited time resulting from the tremendous workload of this committee, my remarks shall be very brief and pointed.

Kentucky, as you know, has achieved the position of worldwide preeminence in thoroughbred, standard bred, and saddle bred, breeding and racing horses. While these endeavors are most drastically affected by the legislation that you now must consider, they are not the only areas about which we have the greatest concern. I would only point out in passing that my State ranks 10th in the production of cattle and dairy products, and certainly we all know that in every phase of the farm economy, it is suffering. Therefore my interest is not directed toward a single purpose.

Indeed, even though I may make frequent references to my own State, this legislation is of such wide geographical and economic concern that I am sure any number of Governors could and would appear before you if time permitted.

Let me make it abundantly clear that I am not here today to ask for special favors for Kentucky or for special treatment for the Kentucky horse industry. My purpose is to outline the importance of the horse industry of the United States and to help the members of this committee to weigh carefully the consequences of the various tax changes that have been proposed.

My statement is not mere conjecture or verbiage. It is based on statistics-statistics developed by the Spindletop Research, Inc., a notfor-profit independent research institute established to stimulate the and the industrial development of Kentucky and its regions. I would point out that the Federal Government and many private enterprises have used Spindletop for research purposes.

economy

The study is entitled "Economic Importance of the Horse Industry in the United States." The study was performed as a special public