situation if the only asset of the corporation is appreciated inventory and the stockholders' basis is in excess of the basis of the inventory to the corporation? Does the differential vanish?

77. Section 331 (e) (1): Under section 165 (g) (3) a loss from the worthlessness of a stock or bond would be an ordinary loss. Under the workings of sections 331 (c) and 331 (e) (1) a capital loss would result. The two should be coordinated.

78. Section 332 (b) (1): For the purpose of determining personal holding company status, the imputed dividend should not constitute gross income.

79. Section 332 (b) (1): In the case of a corporate shareholder, it should be made clear that the 100-percent deduction is not in any way to be restricted by the amount of the net income, through section 246 (b).

80. Section 333 (c): A distribution of inventory assets should be the equivalent of realization by the distributing corporation on those assets at their fair market value. The receiving stockholder should compute gain or loss based on that value. (This proposal adopts the theory of section 751 in relation to partnerships.) The subsequent disposition of the inventory assets by the stockholder would give rise to capital or ordinary gain or loss dependent upon the status of the assets in the hands of the stockholder.

81. Section 334 (d): In the event that the recommendation in respect of section 333 (c) is not adopted, section 334 (d) should not apply to the amount allocable to stock acquired prior to the effective date of the provision by purchase from other than the corporation, nor should it apply to stock acquired by inheritance, 82. Section 336 (a) (2): If the business was in existence for less than 5 years, then the period of its existence should control. If this is not accepted then in determining the 5-year period there should be tacked on the period that a predecessor business was in existence if that business was acquired in a nontaxable transaction.

83. Section 336 (a) (2) (A): Instead of a requirement for separate books and records, it should suffice that the income of the terminated business should be determinable from the accounting records. (This correspondingly applies to sec. 353 (c) (2).)

84. Section 336 (a) (2) (C): Instead of the test of personal holding company income, the test in section 165 (g) (3) (B) should be applied. (This correspondingly applies to sections 353 (b) and 353 (c) (3).)

85. Section 336 (d) (3): Rights to income should be defined as limited to items earned but not yet includible because of the method of accounting followed by the taxpayer.

86. Section 336 (d) (4): The definition of "inventory assets" in connection with liquidations should be extended to include depletable property.

87. Section 351 (a): Under this provision it would be possible to make a nontaxable transfer of property to a controlled company for a demand note because of the way "securities" is defined in section 312 (c). Is that intended? Furthermore, there is no tie-in between sections 351 and 306 as to boot, or vice versa. 88. Section 353; Doesn't this section permit too wide a latitude for tax-free spinoffs? For example, a spinoff of tax-free investments, real estate, oil leases, etc., will not entail personal holding company income, and will therefore not come under the definition of an inactive corporation. There can be tax-free or capital-gain realization of what might otherwise appropriately be taxed as a dividend.

89. Section 353: Is it intended that the stock of a 5-year-old operating controlled subsidiary can be distributed tax free and the stockholders immediately sell that stock and realize capital gain?

90. Section 353: Is it intended that cash can be spun off through a newly created subsidiary and by waiting 10 years the dividend avoided?

91. Section 353: Doesn't this make possible the deliberate elimination of earnings and profits by investment in the stock of an active company and distributing that stock to the stockholders?

92. Section 353 (a): It is not clear whether the spinoff provision prevails over the liquidation provision of section 331 or the reorganization provision of section 359 (c), if, in the liquidation or reorganization a spinoff is also involved. Furthermore, if in connection with the liquidation, gain on the spinoff portion is recognized, it is not clear whether section 306 as to boot would be applicable.

93. Section 353 (a): The last sentence in this provision, covering distribution of stock or securities of a controlled corporation, seems to be in conflict with what is intended by the type of transaction covered in section 359 (d).

94. Section 353 (b): What happens to the basis of the stock of an inactive corporation where there is realization on that stock within 10 years after the spinoff? There should be an affirmative provision to avoid a vanishing basis.

95. Section 353 (b): It should be made clear that this provision attributing ordinary income to certain stock dispositions does not apply to outside purchasers of stock of inactive corporations.

96. Section 353 (b) (1): The time of receipt of the proceeds of sale should not control, but rather the time of sale. Otherwise a loophole is opened through a sale immediately after the spinoff with deferred payments not to commence until after the 10-year period.

97. Section 353 (b) (1) (B): The second and third subdivisions of this provision should also apply where basis is determined by reference to fair market value on the optional date instead of the date of death.

98. Section 353 (d): Is it intended that the stockholders be given an election whether to treat the distribution as taxable or nontaxable by the mere failure to file the agreement?

99. Section 354 (b): This provision relating to gain or loss on corporate acquisitions and separations, should be clarified as to whether in the case of a statutory consolidation the consideration can be other than stock. The stock limitation is now mentioned only in connection with mergers. It should also be clarified whether mergers are restricted to two companies while consolidations may involve two or more companies.

100. Section 355 (a): Only section 355 (a) (2) should be applied to property acquired after December 31, 1953. As section 355 (a) (1) now reads, property acquired in January and February of 1954 would be affected, and this is contrary to the effective date under section 391.

101. Section 355 (b): The reference to acquisition after December 31, 1953, should be eliminated. As it now reads, property acquired in January and February of 1954 would be affected, and this is contrary to the effective date under section 391.

102. Section 355 (b): The basis provision for stock acquired in corporate acquisitions and separations should be related to net assets of the corporation rather than to the gross assets in order to adjust for liabilities.

103. Section 355 (c) (1) (A): Instead of date of enactment substitute the effective date of the provision. (This correspondingly applies to sec. 355 (c) (2) (A).)

104. Section 356 (2): There should not be capital-gain status where the related asset was not a capital asset.

105. Section 357: Should this provision, relating to reincorporations, apply at all when the net effect of liquidation and reincorporation is the same as if there were a spinoff in the first instance?

106. Section 357: To prevent a loophole a reincorporation should be deemed to have taken place if the assets are acquired indirectly by the new corporation, such as by lease from the stockholders.

107. Section 357 (a): Provision should be made for either the recovery or the offset of the tax, if any, originally paid by the stockholder in connection with the liquidation. The statute of limitations should be extended for this purpose. 108. Section 359 (a): The distinction between publicly held companies and privately held companies should be eliminated and the same rules applied to both. (This correspondingly applies to all of subch. C and to sec. 532.)

109. Section 359 (b): Subdivision (2), embodying the 25-400-jercent requirement, and the sentence immediately following it should be eliminated. (This correspondingly applies to sec. 359 (c).)

110. Section 359 (b): Shouldn't there be a limitation restricting the consideration solely to stock on a corporate acquisition of stock, just as is provided in section 359 (c)?

111. Section 381: It should be made clear that nothing in this section precludes its application to an insolvency reorganization under section 371.

112. Section 381 (a): It should be made clear that the carryovers apply in a series of successions.

113. Section 381 (a) (2): Corporate separations (sec. 359 (d)) should likewise be included in respect to items covered in section 381 (c) (4) through (12) and (15) and (16) subject to regulations to be prescribed by the Secretary or his delegate.

114. Section 381 (c): In addition to listing specific items, it should be provided that for all other purposes the successor stands in the shoes of the predecessor. 115. Section 381 (c) (1) (B): Since the loss on liquidation would be only

a capital loss, the corporation should have the election to forego the capital loss and have the complete carryover.

116. Section 381 (c) (1) (B): In order to avoid a possible double benefit where the investment in the subsidiary becomes worthless, the parent company should be entitled to either the loss or to the carryover but not both.

117. Section 381 (c) (16): Eliminate the last sentence relating to stock, etc., transferred, as the transaction there covered has no bearing on the income determination of the corporation.

118. Section 382: In order to effectively close the loophole dealt with, the tax effect of a change of stockownership should be the equivalent of the purchase of the assets of the corporation at the price paid for the stock and the creation of a new corporation by the purchaser.

119. Section 382 (a): The loss of the current year in which the change of stockownership occurs should likewise be disallowed on a pro rata basis. The manner of proration should be prescribed by regulations.

120. Section 382 (a): Eliminate the parenthetical reference to a publicly held corporation.

121. Section 382 (c): The test of the ownership by the 10 persons should be the same as the test in section 382 (a) (1), namely, the fair market value of the outstanding participating stock. In any event, the concept of percentage of stock requires clarification, particularly if there are two or more classes of participating stock outstanding.

122. Section 391 (a): In order to permit consummation in an orderly manner of transactions covered by subchapter C, the effective date should be 90 days after enactment or January 1, 1955, whichever is later.

123. Section 401 (b) (1) (C): It should be made clear whether or not separation from service embraces a change of status from an employee to a partner. 124. Section 403 (b): This provision should specify that accrued compensation of 1 year that is paid before the close of the next year of the employer shall not be considered a deferred arrangement.

125. Section 421: In order to permit the qualification of plans involving stock in closely held corporations, a formula should be provided which the taxpayer may elect to use for valuation of stock. Such a formula might be based on book value or a specified number of times earnings of a fixed number of years. The formula would apply solely for the purposes of qualification, and no inference would attach to the formula wherever else value determination is required. (This same principle can be used elsewhere in the statute where value is a factor in qualifying rather than in determining gain or loss.)

126. Section 441 (e): The 52-53-week-year election should be available to any taxpayer meeting the tests of section 441 (f), and not limited to corporations. 127. Section 441 (g): A taxpayer already on a fiscal year under the 1939 code should continue on that basis. The requirement about "books" should be "books or records" since many individuals have the necessary records for fiscal-year determination of income but do not keep formal books. In any event, fiscal-year reporting should be permitted by consent of the Secretary. Section 442 may not cover this because of the categorical requirements of section 441 (g).

128. Section 443 (b) (2) (C): Eliminate the elective feature of the tax computation on the change of annual accounting period. The rule should be absolute that the tax for the short period will always be the lower of the various ways of computing it.

129. Section 446 (d): It should be made clear that a different method of accounting may be used for personal affairs from the method used in the business affairs of the same taxpayer.

130. Section 452: Certain types of liabilities may have no definite termination date; for example, coupons and tickets. These liabilities should be permitted prepaid income treatment and the classification in (a) or (b) should be based on experience.

131. Section 453 (d): This provision, dealing with dispositions of installment obligations, should not be deemed to apply to transfers such as incorporations and reorganizations in which no gain or loss is recognized and which are not covered by section 381 (c) (8).

132. Section 461 (c): The word "real" should be deleted so that application of this provision as to accrual of taxes will be to all property taxes.

133. Section 461 (c): An election similar to that in section 462 (c) for estimated expenses should be provided for accrual of real property taxes. On a mandatory basis, unintentional damage may be done to taxpayers previously required by the Government to use the lien date. If the lien date for the 1954 tax is in 1953, section 461 (c) will result in no tax deduction for 1954.

134. Section 461 (c) (1): The first line should be changed to read as follows: "Where the deduction for taxes is computed under an accrual method of accounting, ***" to cover a hybrid method of accounting under which taxes are accrued.

135. Section 461 (c) (2): Since not all taxpayers have been placed on the lien basis for deducting property taxes, the word "allowed" should be substituted for the word "allowable" in both sentences to make sure the deduction is not denied completely.

136. Section 462 (a): To avoid the impact on the revenues in the transitional year where there will be a deduction both for the actual expenses and the estimated expenses, and in order to avoid undue distortion of income, the addition to the reserve should be spread as a deduction over the transitional year and the 2 succeeding years.

137. Section 462 (a): Considering the departure that is involved from the previous rules, and pending the development of experience regarding the respective items, the application of the new rules as to the reasonable addition to reserve should be in the discretion of the Secretary or his delegate, just as has been the case heretofore with the addition to the reserve for bad debts.

138. Section 462 (d) (1): The definition of estimated expenses should be narrowed to permit the deduction of only those expenses related to the current year and prior years subsequent to election. Otherwise, as the provision now stands, it would seem that interest for all years to maturity would be currently deductible.

139. Section 462 (d) (1): The term "estimated expenses" should not be limited to "deductions" but should also include items of exclusions from gross income so as to cover costs of goods sold.

140. Section 472 (c): This condition as to financial reporting should be eliminated. It is the only part of the code that creates any interlink with financial reporting. There is no warrant for the provisions. (This also applies to sec. 472 (e) (2).)

141. Section 481: In the case of an involuntary change in accounting method, adjustments should be spread out in accordance with the principles of section 1311, etc., or over such lesser period of time as the Secretary or his delegate and the taxpayer may agree.

142. Section 482: Whenever this provision permitting the Secretary to allocate income or deductions is applied, there should be the automatic right and obligation in the other party to the transaction to pick up the effect of the adjustment and the statute of limitations should be deemed reopened for the purpose.

143. Section 510 (e): The effective date of this provision relating to employees' trusts should be the time of enactment of the code. (This correspondingly applies to secs. 511 and 512.)

144. Section 505: The effective date of sections 503, 504, and 505 should be the date of enactment of the new code. These sections deal with certain prohibited transactions, unreasonable accumulations, and allowable investments and impose such limitations, for the first time, in respect of employees' trusts. In general, the effective date of such provisions is March 1, 1954.

145. Section 505 (a): 1. The requirement for valuation of the assets of the employees' trust should be eliminated. It will magnify controversy and uncertainty in an area where a great deal can be at stake. The tests should be pivoted around the adjusted basis of the various items involved.

2. In any event the requirement for quarterly valuation is impractical. If there is to be any valuation at all, it should be only once a year at the close of the accounting period.

146. Section 505 (a): 1. The violation of this provision relating to allowable investments should not entail any more penalty than the taxability of the income from the prohibited investment.

2. In the alternative, the violation should have the same effect as engaging in a prohibited transaction by a charitable organization, namely, the denial of the exemption prospectively. Otherwise employers will face retroactive disallowance of contributions to the pension trust because of action by a trustee over whom the employer has no control.

147. Section 532 (b) (1): This provision relating to publicly held corporations, should be eliminated.

148. Section 534 (c): 30 days is not enough time for the preparation of the statement justifying an accumulation of earnings and profits. The period should be extended to at least 60 days.

149. Section 535 (b) (1): The 85-percent tax in section 309 should be allowed as a deduction in computing the tax on accumulated income.

150. Section 535 (b) (1): The same election in reference to the handling of taxes paid as distinguished from taxes accrued that is in section 545 (b) (1). should be made applicable to section 535 (b) (1).

151. Section 542 (b) (2) (A): The 3-year requirement should be the period of existence of the affiliated group if less than 3 years.

152. Section 545 (b) (1): The 85-percent tax in section 309 should be allowed as a deduction in computing the personal holding company tax.

153. Section 547: The former provision regarding consent dividends by personal holding companies should be restored and be made available to liquidated corporations as well as existing corporations.

154. Section 666 (a): Isn't there a loophole possible by an arrangement whereby a trust accumulates all of the income except the income for the last 5 years, and then distributes the accumulated income? There would be no pushback application to a situation of this sort.

155. Section 702 (c) : Clarify the use of the word "gross" where it last appears so that it will carry out the intent expressed on page A222 of the Ways and Means Committee report and will not be inconsistent with the definition in section 61 (a) (13).

156. Section 704 (b): Provision should be made for the method of profit allocation among partners where a partner is guaranteed an amount of profit. The guaranty should be treated as a reduction of the amount of profit and the remainder used in determining the proration of classified items.

157. Section 704 (e) (2): To prevent a possible loophole, the requirement for allowance of compensation for services rendered to the partnership should embrace the services of all partners and not merely the donor.

158. Section 705: It should be made clear that a partner's basis at the time of the termination of the effectiveness of the 1939 code is the measuring amount for the partner's basis at the beginning of the effectiveness of the 1954 code.

159. Section 706: Page A225 of the Ways and Means Committee report mentions annualization of the partnership income for short periods. There is no provision in the code to this effect and any such provision would be inappropriate. Correction should be made of this through appropriate reference in the Senate Finance Committee report.

160. Section 706 (b) (1): 1. A new partnership should have the right to select a fiscal year of its own choice.

2. In any event, a partnership that with permission changed from the calendar year to a fiscal year late in 1953, should be permitted to remain on such fiscal year, even though the short taxable year began on or after January 1, 1954.

161. Section 707 (b): A sale or exchange of property between a partner and a partnership should not give rise to gain or loss. It should be treated as a contribution by the partner and withdrawal of cash from the partnership or vice versa. The extent of the interest of the partner in the transaction should be immaterial.

162. Section 707 (c): To avoid bunching of income or unwarranted flexibility respect to the timing of income, this provision, dealing with "salaries" of partners, should be eliminated. In the alternative, the imputed compensation should be reportable at the same time and as part of the distributive share of the partners' profits. Furthermore, it should be made clear whether the imputed compensation is to be treated as such for purposes of the withholding tax, unemployment-compensation tax, social-security tax, pension and profit-sharing

plans, etc.

163. Section 731: The rule as to the effect of liquidation of a partner's interest should correspond to the rules applicable to the liquidation of a corporation. The partner's basis or the basis or the assets to the partnership, whichever is higher, should apply (with the partnership basis of the assets considered as their fair market value if that value is less than the partnership's basis).

164. Section 731 (a): Since, in order to determine whether distributions exceed the basis of the partner's interest, it will be necessary to include the pro rata share of the earnings, a difficult and impractical computation will arise in connection with a determination of basis during the year. To simplify matters, the approach should be the same as is followed in connection with the determination of earnings and profits of a corporation and their availability for dividend purposes, namely, the earnings for the entire year should be considered. If before the close of the year the interest of a partner terminates, then the point of measurement should be the earnings at the time of termination.

165. Section 734: The 1939 code provision as to the effect of a distribution of a partnership asset should be restored. It accorded with economic realities. The