(b) Inclusion of certain previously excluded amounts. Each United States shareholder of a controlled foreign corporation which for any prior taxable year was an export trade corporation shall include in his gross income under section 951(a) (1) (A) (ii), as an amount to which section 955 (relating to withdrawal of previously excluded subpart F income from qualified investment) applies, his pro rata share of the amount of decrease in the investments in export trade assets of such corporation for such year, but only to the extent that his pro rata share of such amount does not exceed an amount equal to

(1) his pro rata share of the sum of (A) the amounts by which the subpart F income of such corporation was reduced for all prior taxable years under subsection (a), and (B) the amounts not included in subpart F income (determined without regard to this subpart) for all prior taxable years by reason of the application of section 972, reduced by

(2) the sum of the amounts which were included in his gross income under section 951(a) (1) (A) (ii) under the provisions of this subsection for all prior taxable years.

(c) Investments in export trade assets.

(1) Amount of investments.

For purposes of this section, the amount taken into account with respect to any export trade asset shall be its adjusted basis, reduced by any liability to which the asset is subject.

(2) Increase in investments in export trade assets. For purposes of subsection (a), the amount of increase in investments in export trade assets of any controlled foreign corporation for any taxable year is the amount by which

(A) the amount of such investments at the close of the taxable year, exceeds

(B) the amount of such investments at the close of the preceding taxable year.

(3) Decrease in investments in export trade assets. For purposes of subsection (b), the amount of decrease in investments in export trade assets of any controlled foreign corporation for any taxable year is the amount by which—

(A) the amount of such investments at the close of the preceding taxable year (reduced by an amount equal to the amount of net loss sustained during the taxable year with respect to export trade assets), exceeds

(B) the amount of such investments at the close of the taxable year.

(4) Special rule.

A United States shareholder of an export trade corporation may, under regulations prescribed by the Secretary or his delegate, make the determinations under paragraphs (2) and (3) as of the close of the 75th day after the close of the years referred to in such paragraphs in lieu of on the last day of such years. A United States share

holder of an export trade corporation may, under regulations prescribed by the Secretary or nis delegate, make the determinations under paragraphs (2) and (3) with respect to export trade assets described in section 971(c)(3) as of the

close of the years following the years referred to in such paragraphs, or as of the close of such longer period of time as such regulations may permit, in lieu of on the last day of such years and in lieu of on the day prescribed in the preceding sentence. Any election under this paragraph made with respect to any taxable year shall apply to such year and to all succeeding taxable years unless the Secretary or his delegate consents to the revocation of such election.

(Added Pub. L. 87-834, § 12(a), Oct. 16, 1962, 76 Stat. 1027.)

EFFECTIVE DATE

Section applicable with respect to taxable years of foreign corporations beginning after Dec. 31, 1962, and to taxable years of United States shareholders within which or with which such taxable years of such foreign corporations end, see section 12(c) of Pub. L. 87-834, set out as a note under section 951 of this title.

§ 971. Definitions.

(a) Export trade corporations.

For purposes of this subpart, the term "export trade corporation" means

(1) In general.

A controlled foreign corporation (as defined in section 957) which satisfies the following conditions:

(A) 90 percent or more of the gross income of such corporation for the 3-year period immediately preceding the close of the taxable year (or such part of such period subsequent to the effective date of this subpart during which the corporation was in existence) was derived from sources without the United States, and

(B) 75 percent or more of the gross income of such corporation for such period constituted gross income in respect of which such corporation derived export trade income.

(2) Special rule.

If 50 percent or more of the gross income of a controlled foreign corporation in the period specified in subsection (a) (1) (A) is gross income in respect of which such corporation derived export trade income in respect of agricultural products grown in the United States, it may qualify as an export trade corporation although it does not meet the requirements of subsection (a) (1) (B).

(b) Export trade income.

For the purposes of this subpart, the term "export trade income" means net income from

(1) the sale to an unrelated person for use, consumption, or disposition outside the United States of export property (as defined in subsection (e)), or from commissions, fees, compensation, or other income from the performance of commercial, industrial, financial, technical, scientific, managerial, engineering, architectural, skilled, or other services in respect to such sales or in respect of the installation or maintenance of such export property;

(2) commissions, fees, compensation, or other income from commercial, industrial, financial, technical, scientific, managerial, engineering, architectural, skilled, or other services performed

in connection with the use by an unrelated person outside the United States of patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and other like property acquired or developed and owned by the manufacturer, producer, grower, or extractor of export property in respect of which the export trade corporation earns export trade income under paragraph (1);

(3) commissions, fees, rentals, or other compensation or income attributable to the use of export property by an unrelated person or attributable to the use of export property in the rendition of technical, scientific, or engineering services to an unrelated person; and

(4) interest from export trade assets described in subsection (c) (4).

For purposes of paragraph (3), if a controlled foreign corporation receives income from an unrelated person attributable to the use of export property in the rendition of services to such unrelated person together with income attributable to the rendition of other services to such unrelated person, including personal services, the amount of such aggregate income which shall be considered to be attributable to the use of the export property shall (if such amount cannot be established by reference to transactions between unrelated persons) be that part of such aggregate income which the cost of the export property consumed in the rendition of such services (including a reasonable allowance for depreciation) bears to the total cost and expenses attributable to such aggregate income.

(c) Export trade assets.

For purposes of this subpart, the term "export trade assets" means

(1) working capital reasonably necessary for the production of export trade income,

(2) inventory of export property held for use, consumption, or disposition outside the United States,

(3) facilities located outside the United States for the storage, handling, transportation, packaging, or servicing of export property, and

(4) evidences of indebtedness executed by persons, other than related persons, in connection with payment for purchases of export property for use, consumption, or disposition outside the United States, or in connection with the payment for services described in subsections (b) (2) and (3). (d) Export promotion expenses.

For purposes of this subpart, the term "export promotion expenses" means the following expenses paid or incurred in the receipt or production of export trade income

(1) a reasonable allowance for salaries or other compensation for personal services actually rendered for such purpose,

(2) rentals or other payments for the use of property actually used for such purpose,

(3) a reasonable allowance for the exhaustion, wear and tear, or obsolescence of property actually used for such purpose, and

(4) any other ordinary and necessary expenses of the corporation to the extent reasonably allo

§ 972. Consolidation of group of export trade corporations.

For purposes of this subpart and subpart F of this part, a United States shareholder of a controlled foreign corporation which is an export trade corporation may, under regulations prescribed by the Secretary or his delegate, treat as a single controlled foreign corporation—

(1) such controlled foreign corporation,

(2) all controlled foreign corporations which are export trade corporations and 80 percent or more of the total combined voting power of all classes of stock entitled to vote of which is owned by such controlled foreign corporation; and

(3) all controlled foreign corporations which are export trade corporations and 80 percent or more of the total combined voting power of all classes of stock entitled to vote of which is owned by controlled foreign corporations described in paragraph (2).

(Added Pub. L. 87-834, § 12(a), Oct. 16, 1962, 76 Stat. 1031.)

AMENDMENTS

1962-Pub. L. 87-403, § 1(b), Feb. 2, 1962, 76 Stat. 5, added the heading of Part IX.

1956 Act May 9, 1956, ch. 240, § 10 (b), 70 Stat. 146, added Part VIII.

PART I-DETERMINATION OF AMOUNT OF AND RECOGNITION OF GAIN OR LOSS

Sec.

1001. Determination of amount of and recognition of gain or loss.

1002. Recognition of gain or loss.

§ 1001. Determination of amount of and recognition of gain or loss.

(a) Computation of gain or loss.

The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the adjusted basis provided in section 1011 for determining gain, and the loss shall be the excess of the adjusted basis provided in such section for determining loss over the amount realized.

(b) Amount realized.

The amount realized from the sale or other disposition of property shall be the sum of any money received plus the fair market value of the property (other than money) received. In determining the amount realized

(1) there shall not be taken into account any amount received as reimbursement for real property taxes which are treated under section 164 (d) as imposed on the purchaser, and

(2) there shall be taken into account amounts representing real property taxes which are treated under section 164 (d) as imposed on the taxpayer if such taxes are to be paid by the purchaser.

(c) Recognition of gain or loss.

In the case of a sale or exchange of property, the extent to which the gain or loss determined under this section shall be recognized for purposes of this subtitle shall be determined under section 1002.

(d) Installment sales.

Nothing in this section shall be construed to prevent (in the case of property sold under contract providing for payment in installments) the taxation of that portion of any installment payment representing gain or profit in the year in which such payment is received. (Aug. 16, 1954, ch. 736, 68A Stat. 295.)

CROSS REFERENCES

Gain or loss to shareholders in corporate liquidations, see section 331 of this title.

Installment method of accounting, see section 453 of this title.

Recognition of gain or loss on transfer of obsolete vessels under Merchant Marine Act, section 1101 et seq. of Title 46, see section 1160 (e) of Title 46, Shipping.

§ 1002. Recognition of gain or loss.

Except as otherwise provided in this subtitle, on the sale or exchange of property the entire amount of the gain or loss, determined under section 1001, shall be recognized. (Aug. 16, 1954, ch. 736, 68A Stat. 295.)

CROSS REFERENCES

Gain or loss to shareholders in corporate liquidations, see section 331 of this title.

Liquidation of certain foreign personal holding companies, see section 342 of this title.

Sec.

PART II.-BASIS RULES OF GENERAL APPLICATION

1011. Adjusted basis for determining gain or loss. 1012. Basis of property-cost.

1013. Basis of property included in inventory. 1014. Basis of property acquired from a decedent. 1015. Basis of property acquired by gifts and transfers in trust.

1016. Adjustments to basis.

1017. Discharge of indebtedness.

1018. Adjustment of capital structure before September

22, 1938.

1019. Property on which lessee has made improvements. 1020. Election in respect of depreciation, etc., allowed before 1952.

1021. Sale of annuities.

1022. Increase in basis with respect to certain foreign personal holding company stock or securities. 1023. Cross references.

AMENDMENTS

1964-Pub. L. 88-272, title II, § 225 (j) (3), Feb. 26, 1964, 78 Stat. 93, added item 1022, and redesignated former item 1022 as 1023.

CROSS REFERENCES

Basis of transferee partner's interest, see section 742 of this title.

§ 1011. Adjusted basis for determining gain or loss. The adjusted basis for determining the gain or loss from the sale or other disposition of property, whenever acquired, shall be the basis (determined under section 1012 or other applicable sections of this subchapter and subchapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses)), adjusted as provided in section 1016. (Aug. 16, 1954, ch. 736, 68A Stat. 296.)

CROSS REFERENCES

Bad debt deduction determined by reference to adjusted basis provided in this section, see section 166 of this title. Basis for determining gain or loss on new vessel acquired in exchange for obsolete vessel under Merchant Marine Act, section 1101 et seq. of Title 46, see section 1160 (e) of Title 46, Shipping.

Computation of gain or loss by reference to adjusted basis provided in this section, see section 1001 of this title. Cost depletion basis as the adjusted basis provided in this section, see section 612 of this title.

Depreciation basis as the adjusted basis provided in this section, see section 167 of this title.

Loss deduction determined by reference to adjusted basis provided in this section, see section 165 of this title. § 1012. Basis of property-cost.

The basis of property shall be the cost of such property, except as otherwise provided in this subchapter and subchapters C (relating to corporate distributions and adjustments), K (relating to partners and partnerships), and P (relating to capital gains and losses). The cost of real property shall not include any amount in respect of real property taxes which are treated under section 164 (d) as imposed on the taxpayer. (Aug. 16, 1954, ch. 736, 68A Stat. 296.)

CROSS REFERENCES Involuntary conversions, see section 1033 of this title. § 1013. Basis of property included in inventory. If the property should have been included in the last inventory, the basis shall be the last inventory value thereof. (Aug. 16, 1954, ch. 736, 68A Stat.

296.)

CROSS REFERENCES Capital assets as not including property includible in inventory if on hand at close of taxable year, see section 1221 of this title.

Character of gain or loss on disposition by distributee partner of inventory items, see section 735 of this title. General rules for inventories, see section 471 of this

title.

Inventory carryovers, see section 381 of this title.
LIFO inventories-

Generally, see section 472 of this title.

Involuntary liquidation, see section 1321 of this title. Property includible within inventories as not property used in trade or business, see section 1231 of this title. Taxability of corporation on distribution of inventories, see section 311 of this title.

§ 1014. Basis of property acquired from a decedent.

(a) In general.

Except as otherwise provided in this section, the basis of property in the hands of a person acquiring the property from a decedent or to whom the property passed from a decedent shall, if not sold, exchanged, or otherwise disposed of before the decedent's death by such person, be the fair market value of the property at the date of the decedent's death, or, in the case of an election under either section 2032 or section 811 (j) of the Internal Revenue Code of 1939 where the decedent died after October 21, 1942, its value at the applicable valuation date prescribed by those sections.

(b) Property acquired from the decedent.

For purposes of subsection (a), the following property shall be considered to have been acquired from or to have passed from the decedent:

(1) Property acquired by bequest, devise, or inheritance, or by the decedent's estate from the decedent;

(2) Property transferred by the decedent during his lifetime in trust to pay the income for life to or on the order or direction of the decedent, with the right reserved to the decedent at all times before his death to revoke the trust;

(3) In the case of decedents dying after December 31, 1951, property transferred by the decedent during his lifetime in trust to pay the income for life to or on the order or direction of the decedent with the right reserved to the decedent at all times before his death to make any change in the enjoyment thereof through the exercise of a power to alter, amend, or terminate the trust;

(4) Property passing without full and adequate consideration under a general power of appointment exercised by the decedent by will;

(5) In the case of decedents dying after August 26, 1937, property acquired by bequest, devise, or inheritance or by the decedent's estate from the decedent, if the property consists of stock or securities of a foreign corporation, which with respect to its taxable year next preceding the date of the decedent's death was, under the law applicable to such year, a foreign personal holding company. In such case, the basis shall be the fair market value of such property at the date of the decedent's death or the basis in the hands of the decedent, whichever is lower;

(6) In the case of decedents dying after December 31, 1947, property which represents the

surviving spouse's one-half share of community property held by the decedent and the surviving spouse under the community property laws of any State, Territory, or possession of the United States or any foreign country, if at least onehalf of the whole of the community interest in such property was includible in determining the value of the decedent's gross estate under chapter 11 of subtitle B (section 2001 and following, relating to estate tax) or section 811 of the In. ternal Revenue Code of 1939;

(7) In the case of decedents dying after October 21, 1942, and on or before December 31, 1947, such part of any property, representing the surviving spouse's one-half share of property held by a decedent and the surviving spouse under the community property laws of any State, Territory, or possession of the United States or any foreign country, as was included in determining the value of the gross estate of the decedent, if a tax under chapter 3 of the Internal Revenue Code of 1939 was payable on the transfer of the net estate of the decedent. In such case, nothing in this paragraph shall reduce the basis below that which would exist if the Revenue Act of 1948 had not been enacted;

(8) In the case of decedents dying after December 31, 1950, and before January 1, 1954, property which represents the survivor's interest in a joint and survivor's annuity if the value of any part of such interest was required to be included in determining the value of decedent's gross estate under section 811 of the Internal Revenue Code of 1939;

(9) In the case of decedents dying after December 31, 1953, property acquired from the decedent by reason of death, form of ownership, or other conditions (including property acquired through the exercise or non-exercise of a power of appointment), if by reason thereof the property is required to be included in determining the value of the decedent's gross estate under chapter 11 of subtitle B or under the Internal Revenue Code of 1939. In such case, if the property is acquired before the death of the decedent, the basis shall be the amount determined under subsection (a) reduced by the amount allowed to the taxpayer as deductions in computing taxable income under this subtitle or prior income tax laws for exhaustion, wear and tear, obsolescence, amortization, and depletion on such property before the death of the decedent. Such basis shall be applicable to the property commencing on the death of the decedent. This paragraph shall not apply to

(A) annuities described in section 72;

(B) property to which paragraph (5) would apply if the property had been acquired by bequest; and

(C) property described in any other paragraph of this subsection.

(c) Property representing income in respect of a decedent.

This section shall not apply to property which constitutes a right to receive an item of income in respect of a decedent under section 691. (Aug. 16,

1954, ch. 736, 68A Stat. 296; Feb. 11, 1958, Pub. L. 85-320, § 2, 72 Stat. 5.)

AMENDMENTS

1958 Subsec. (d). Pub. L. 85-320 repealed subsec. (d), which made section inapplicable to restricted stock options described in section 421 which the employee has not exercised at death.

EFFECTIVE DATE OF 1958 AMENDMENT

Repeal of subsec. (d) of this section applicable with respect to taxable years ending after Dec. 31, 1956, but only in the case of employees dying after such date, see section 3 of Pub. L. 85–320, set out as a note under section 421 of this title.

CROSS REFERENCES

Definition of purchase for purpose of determining basis of property received in liquidation of subsidiary as excluding a determination of basis under this section, see section 334 of this title.

§ 1015. Basis of property acquired by gifts and transfers in trust.

(a) Gifts after December 31, 1920.

If the property was acquired by gift after December 31, 1920, the basis shall be the same as it would be in the hands of the donor or the last preceding owner by whom it was not acquired by gift, except that if such basis (adjusted for the period before the date of the gift as provided in section 1016) is greater than the fair market value of the property at the time of the gift, then for the purpose of determining loss the basis shall be such fair market value. If the facts necessary to determine the basis in the hands of the donor or the last preceding owner are unknown to the donee, the Secretary or his delegate shall, if possible, obtain such facts from such donor or last preceding owner, or any other person cognizant thereof. If the Secretary or his delegate finds it impossible to obtain such facts, the basis in the hands of such donor or last preceding owner shall be the fair market value of such property as found by the Secretary or his delegate as of the date or approximate date at which, according to the best information that the Secretary or his delegate is able to obtain, such property was acquired by such donor or last preceding owner. (b) Transfer in trust after December 31, 1920.

If the property was acquired after December 31, 1920, by a transfer in trust (other than by a transfer in trust by a gift, bequest, or devise), the basis shall be the same as it would be in the hands of the grantor increased in the amount of gain or decreased in the amount of loss recognized to the grantor on such transfer under the law applicable to the year in which the transfer was made.

(c) Gift or transfer in trust before January 1, 1921. If the property was acquired by gift or transfer in trust on or before December 31, 1920, the basis shall be the fair market value of such property at the time of such acquisition.

(d) Increased basis for gift tax paid.

(1) In general.

If

(A) the property is acquired by gift on or after the date of the enactment of the Technical Amendments Act of 1958, the basis shall be the basis determined under subsection (a), increased (but not above the fair market value

of the property at the time of the gift) by the amount of gift tax paid with respect to such gift, or

(B) the property was acquired by gift before the date of the enactment of the Technical Amendments Act of 1958 and has not been sold, exchanged, or otherwise disposed of before such date, the basis of the property shall be increased on such date by the amount of gift tax paid with respect to such gift, but such increase shall not exceed an amount equal to the amount by which the fair market value of the property at the time of the gift exceeded the basis of the property in the hands of the donor at the time of the gift.

(2) Amount of tax paid with respect to gift.

For purposes of paragraph (1), the amount of gift tax paid with respect to any gift is an amount which bears the same ratio to the amount of gift tax paid under chapter 12 with respect to all gifts made by the donor for the calendar year in which such gift is made as the amount of such gift bears to the taxable gifts (as defined in section 2503 (a) but computed without the deduction allowed by section 2521) made by the donor during such calendar year. For purposes of the preceding sentence, the amount of any gift shall be the amount included with respect to such gift in determining (for the purposes of section 2503 (a)) the total amount of gifts made during the calendar year, reduced by the amount of any deduction allowed with respect to such gift under section 2522 (relating to charitable deduction) or under section 2523 (relating to marital deduction).

(3) Gifts treated as made one-half by each spouse. For purposes of paragraph (1), where the donor and his spouse elected, under section 2513 to have the gift considered as made one-half by each, the amount of gift tax paid with respect to such gift under chapter 12 shall be the sum of the amounts of tax paid with respect to each half of such gift (computed in the manner provided in paragraph (2)).

(4) Treatment as adjustment to basis.

For purposes of section 1016 (b), an increase in basis under paragraph (1) shall be treated as an adjustment under section 1016 (a).

(5) Application to gifts before 1955.

With respect to any property acquired by gift before 1955, references in this subsection to any provision of this title shall be deemed to refer to the corresponding provision of the Internal Revenue Code of 1939 or prior revenue laws which was effective for the year in which such gift was made.

(Aug. 16, 1954, ch. 736, 68A Stat. 298; Sept. 2, 1958, Pub. L. 85-866, title I, § 43 (a), 72 Stat. 1640.)

REFERENCES IN TEXT

Date of the enactment of the Technical Amendments Act of 1958, referred to in subsec. (d) (1) (A), (B), was Sept. 2, 1958.

AMENDMENTS

1958-Subsec. (d). Pub. L. 85-866 added subsec. (d).