remainder, if any, of the gain recognized under such paragraph (1) shall be taxed as a gain from the exchange of property.

Sec. 371. (f) Application of section.-The provisions of this section shall not apply to an exchange, expenditure, investment, distribution, or sale unless (1) the order of the Securities and Exchange Commission in obedience to which such exchange, expenditure, investment, distribution, or sale was made recites that such exchange, expenditure, investment, distribution, or sale is necessary or appropriate to effectuate the provisions of section 11 (b) of the Public Utility Holding Company Act of 1935, 49 Stat. 820 (U. S. C., title 15, sec. 79k (b)), (2) such order specifies and itemizes the stock and securities and other property which are ordered to be acquired, transferred, received, or sold upon such exchange, acquisition, expenditure, distribution, or sale, and, in the case of an investment, the investment to be made, and (3) such exchange, acquisition, expenditure, investment, distribution or sale was made in obedience to such order, and was completed within the time prescribed therefor.

Sec. 371. (g) Non-application of other provisions.-If an exchange or distribution made in obedience to an order of the Securities and Exchange Commission is within any of the provisions of this section and may also be considered to be within any of the provisions of section 112 (other than the provisions of paragraph (8) of subsection (b)), then the provisions of this section only shall apply.

Section 371, supra, originated 1938 as Sec. 371,
R. A. of 1938.

For any amendments prior to 1944, see—

Eighth Edition, p. 420,
Ninth Edition, p. 620.

Sec. 372. Basis for determining gain or loss. Sec. 372. (a) Exchanges generally.—

Sec. 372. (a) (1) Exchanges subject to the provisions of Sec. 371 (a).-If the property was acquired upon an exchange subject to the provisions of section 371 (a) or (e), the basis shall be the same as in the case of the property exchanged, decreased in the amount of any money received by the taxpayer and increased in the amount of gain or decreased in the amount of loss to the taxpayer that was recognized upon such exchange under the law applicable to the year in which the exchange was made. If the property so acquired consisted in part of the type of property permitted by section 371 (a) to be received without the recognition of gain or loss, and in part of nonexempt property, the basis provided in this subsection shall be allocated between the properties (other than money) received, and for the purpose of the allocation there shall be assigned to such nonexempt property (other than money) an amount equivalent to its fair market value at the date of the exchange. This subsection shall not apply to property acquired by a corporation by the issuance of its stock or securities as the consideration in whole or in part for the transfer of the property to it.

Sec. 372. (a) (2) Exchanges subject to the provisions of section 371 (b).-The gain not recognized upon a transfer by reason of section 371 (b) shall be applied to reduce the basis for determining gain or loss on sale or exchange of the following categories of property in the hands of the transferor immediately after the transfer, and property acquired within 24 months after such transfer by an expenditure or investment to which section 371 (b) relates on account of the acquisition of which gain is not recognized under such subsection, in the following order:

(1) Property of a character subject to the allowance for depreciation under section 23 (1);

(2) Property (not described in paragraph (1)) with respect to which a deduction for amortization is allowable under section 23 (t);

(3) Property with respect to which a deduction for depletion is allowable under section 23 (m) but not allowable under section 114 (b) (2), (3), or (4);

(4) Stock and securities of corporations not members of the system group of which the transferor is a member (other than stock or securities of a corporation of which the transferor is a subsidiary);

(5) Securities (other than stock) of corporations which are members of the system group of which the transferor is a member (other than securities of the transferor or of a corporation of which the transferor is a subsidiary);

(6) Stock of corporations which are members of the system group of which the transferor is a member (other than stock of the transferor or of a corporation of which the transferor is a subsidiary);

(7) All other remaining property of the transferor (other than stock or securities of the transferor or of a coporation of which the transferor is a subsidiary).

The manner and amount of the reduction to be applied to particular property within any of the categories described in paragraphs (1) to (7), inclusive, shall be determined under regulations prescribed by the Commissioner with the approval of the Secretary.

Sec. 372. (b) Transfers to corporations.-If, in connection with a transfer subject to the provisions of section 371 (a), (b), or (e), the property was acquired by a corporation, either as paid-in surplus or as a contribution to capital, or in consideration for stock or securities issued by the corporation receiving the property (including cases where part of the consideration for the transfer of such property to the corporation consisted of property or money in addition to such stock or securities), then the basis shall be the same as it would be in the hands of the transferor, increased in the amount of gain or decreased in the amount of loss recognized to the transferor upon such transfer under the law applicable to the year in which the transfer was made

Sec. 372. (c) Distributions of stock or securities.-If the stock or securities were received in a distribution subject to the provisions of section 371 (c), then the basis in the case of the stock in respect of which the distribution was made shall be apportioned, under rules and regulations prescribed by the Commissioner with the approval of the Secretary, between such stock and the stock or securities distributed.

Sec. 372. (d) Transfers within system group.If the property was acquired by a corporation which is a member of a system group upon a transfer or distribution described in section 371 (d) (1), then the basis shall be the same as it would be in the hands of the transferor; except that if such property is stock or securities issued by the corporation from which such stock or securities were received and they were issued (1) as the sole consideration for the property transferred to such corporation, then the basis of such stock or securities shall be either (A) the same as in the case of the property transferred therefor, or (B) the fair market value of such stock or securities at the time of their receipt, whichever is the lower; or (2) as part consideration for the property transferred to such corporation, then the basis of such stock or securities shall be either (A) an amount which bears the same ratio to the basis of the property transferred as the fair market value of such stock or securities at the time of their receipt bears to the total fair market value of the entire consideration received, or (B) the fair market value of such stock or securities at the time of their receipt, whichever is the lower.

Section 372, supra, originated 1938 as Sec. 372,
R. A. of 1938.

For any amendments prior to 1944, see

Eighth Edition, p. 422,

Ninth Edition, p. 630.

Sec. 373. Definitions.

As used in this supplement

Sec. 373. (a) The term "order of the Securities and Exchange Commission" means an order issued after May 28, 1938, by the Securities and Exchange Commission which requires, authorizes, permits, or approves transactions described in such order to effectuate the provisions of section 11 (b) of the Public Utility Holding Company Act of 1935, 49 Stat. 820 (U. S. C., title 15, sec. 79k (b)), which has become or becomes final in accordance with law.

Sec. 373. (b) The terms "registered holding company", "holding company system", and "associate company" shall have the meanings assigned to them by section 2 of the Public Utility Holding Company Act of 1935, 49 Stat. 804 (U. S. C., Supp. III, Title 15, § 79 (b), (c)).

Sec. 373. (c) The term "majority-owned subsidiary company" of a registered holding company means a corporation, stock of which, representing in the aggregate more than 50 per centum of the total combined voting power of all classes of stock of such corporation entitled to vote (not including stock which is entitled to vote only upon default or non

payment of dividends or other special circumstances) is owned wholly by such registered holding company, or partly by such registered holding company and partly by one or more majority-owned subsidiary companies thereof, or by one or more majority-owned subsidiary companies of such registered holding company.

Sec. 373. (d) The term "system group" means one or more chains of corporations connected through stock ownership with a common parent corporation if

Sec. 373. (d) (1) At least 90 per centum of each class of the stock (other than stock which is preferred as to both dividends and assets) of each of the corporations (except the common parent corporation) is owned directly by one or more of the other corporations; and

Sec. 373. (d) (2) The common parent corporation owns directly at least 90 per centum of each class of the stock (other than stock which is preferred as to both dividends and assets) of at least one of the other corporations; and

Sec. 373. (d) (3) Each of the corporations is either a registered holding company or a majorityowned subsidiary company.

Sec. 373. (e) The term "nonexempt property"

means

Sec. 373. (e) (1) Any consideration in the form of evidences of indebtedness owed by the transferor or a cancellation or assumption of debts or other liabilities of the transferor (including a continuance of encumbrances subject to which the property was transferred);

Sec. 373. (e) (2) Short-term obligations (including notes, drafts, bills of exchange, and bankers' acceptances) having a maturity at the time of issuance of not exceeding twenty-four months, exclusive of days of grace;

Sec. 373. (e) (3) Securities issued or guaranteed as to principal or interest by a government or subdivision thereof (including those issued by a corporation which is an instrumentality of a government or subdivision thereof);

Sec. 373. (e) (4) Stock or securities which were acquired from a registered holding company or an associate company of a registered holding company which acquired such stock or securities after February 28, 1938, unless such stock or securities (other than obligations described as nonexempt property in paragraph (1), (2), or (3)) were acquired in obedience to an order of the Securities and Exchange Commission or were acquired with the authorization or approval of the Securities and Exchange Commission under any section of the Public Utility Holding Company Act of 1935, 49 Stat. 820 (U. S. C., title 15, sec. 79k (b));

Sec. 373. (e) (5) Money, and the right to receive money not evidenced by a security other than an

obligation described as nonexempt property in paragraph (2) or (3).

Sec. 373. (f) The term "stock or securities" means shares of stock in any corporation, certificates of stock or interest in any corporation, notes, bonds, debentures, and evidences of indebtedness (includ

ing any evidence of an interest in or right to subscribed to or purchase any of the foregoing).

Section 373, supra, originated 1938 as Sec. 373,
R. A. of 1938.

For any amendments prior to 1944, see-
Eighth Edition, p. 422,
Ninth Edition, p. 636.

Sec. 391. Applicability of Supplement.

If a personal service corporation (as defined in section 725) is exempt under such section for any taxable year from the excess profits tax imposed by such subchapter, the provisions of this Supplement shall be applicable with respect to each shareholder of such corporation who was a shareholder in such corporation on the last day of such taxable year of the corporation.

Section 391, supra, originated 1940 as Sec. 391,
I. R. C.

For any amendments prior to 1944, see-
Ninth Edition, p. 642.

Sec. 392. Undistributed Supplement S net in

come.

For the purposes of this chapter, the term "undistributed Supplement S net income" means the Supplement S net income (as defined in section 393) minus the amount of the dividends paid during the taxable year. For the purposes of this section the amount of dividends paid shall be computed in the same manner as provided in subsections (d), (e), (f), (g), (h), and (i) of section 27 for the purpose of the basic surtax credit provided in section 27. Section 392, supra, originated 1940 as Sec. 392, I. R. C.

For any amendments prior to 1944, see-
Ninth Edition, p. 642.

Sec. 393. Supplement S net income. For the purposes of this chapter "Supplement S net income" means the net income, except that there shall be allowed as additional deductions

Sec. 393. (a) The Federal income tax payable under this chapter for the taxable year; and

Sec. 393. (b) In lieu of the deduction allowed by section 23 (q), contributions or gifts, payment of which is made within the taxable year, to or for the use of donees described in section 23 (q) for the purposes therein specified, to an amount which does not exceed 15 per centum of the corporation's net income, computed without the benefit of this subsection and section 23 (q).

For the purposes of this section, the net income shall be computed without regard to section 47 (c).

Section 393, supra, originated 1940 as Sec. 393,
I. R. C.

For any amendments prior to 1944, see-
Ninth Edition, p. 642.

Sec. 394. Corporation income taxed to shareholders.

Sec. 394. (a) General rule.-The undistributed Supplement S net income of a personal service corporation shall be included in the gross income of the shareholders in the manner and to the extent set forth in this Supplement.

Sec. 394. (b) Amount included in gross income. -Each shareholder who, on the last day of the taxable year of the corporation, was a shareholder in such corporation shall include in his gross income, as a dividend, for the taxable year in which or with which the taxable year of the corporation ends, the amount he would have received as a dividend if on such last day there had been distributed by the corporation, and received by the shareholders, an amount equal to the undistributed Supplement S net income of the corporation for its taxable year.

Sec. 394. (c) Credit for obligations of the United States and its instrumentalities.-Each such shareholder shall be allowed a credit against net income, for the purposes of the tax imposed by section 11, 13, 14, 201, 204, 207, or 362, of his proportionate share of the interest specified in section 25 (a) (1) or (2) which is included in the gross income of the corporation. For any taxable year of the corporation beginning after December 31, 1941, each such shareholder's proportionate share of such interest received by the corporation shall be his proportionate share of such interest (determined without regard to this sentence) reduced by so much of the deduction under section 23 (v) as is attributable to such share.

Sec. 394. (d) Effect on capital account of personal service corporation.-An amount equal to the undistributed Supplement S net income of the personal service corporation for its taxable year shall be considered as paid in as of the close of such taxable year as paid-in surplus or contribution to capital, and the accumulated earnings and profits as of the close of such taxable year shall be correspondingly reduced, if such amount or any portion thereof is required to be included as a dividend in the gross income of the shareholders.

as

a

Sec. 394. (e) Basis of stock in hands of shareholders.-The amount required to be included in the gross income of the shareholder under subsection (b) shall, for the purpose of adjusting the basis of his stock with respect to which the distribution would have been made (if it had been made), be treated as having been reinvested by the shareholder as a contribution to the capital of the corporation; but only to the extent to which such amount is in

cluded in his gross income in his return, increased or decreased by any adjustment of such amount in the last determination of the shareholder's tax liability, made before the expiration of seven years after the date prescribed by law for filing the return.

Sec. 394. (f) Period of limitation on assessment and collection.-For period of limitation on assessment and collection without assessment, in the case of failure to include in gross income the amount properly includible therein under subsection (b), see section 275 (d).

Section 394, supra, originated 1940 as Sec. 394,
I. R. C.

For any amendments prior to 1944, see-
Ninth Edition, p. 644.

Sec. 395. Nonresident alien individuals and foreign corporations.

In the case of a shareholder taxable under section 211 (a) or 231 (a), his distributive share of the undistributed Supplement S net income of the corporation required to be included in the gross income shall be considered as a dividend received by him from sources within the United States.

Section 395, supra, originated 1940 as Sec. 395, I. R. C.

For any amendments prior to 1944, see-
Ninth Edition, p. 646.

Sec. 396. Shareholder's tax paid by corporation.

If a personal service corporation is exempt for any taxable year under section 725 from excess profits tax, it shall, at the time of filing its return, pay to the collector an amount equal to the amount that would be required by section 143 (b) or section 144 to be deducted and withheld by the corporation if any amount required by this Supplement to be included in the gross income of the shareholder had been, on the last day of the taxable year of the corporation, paid to the shareholder in cash as a dividend. Such amount shall be collected and paid in the same manner as the amount of tax due in excess of that shown by the taxpayer upon a return in the case of a mathematical error appearing on the face of the return.

Section 396, supra, originated 1940 as Sec. 396,
I. R. C.

For any amendments prior to 1944, see-
Ninth Edition, p. 648.

Sees, 450-456

Sees, 465-470, Sees, 475-476,

Secs. 450, 451, 452, 455, 456, 465, 466, 467, 468, 469, 470, 475, and 476, I. R. C., supra, repealed by Sec. 6 (a), I. I. T. A. of 1944. Sec. 2 of said Act

makes repeal applicable to taxable years beginning after Dec. 31, 1943.

Sec. 453, I. R. C., supra, repealed by Sec. 106 (b), R. A. of 1943. Sec. 101 of said Act makes repeal applicable to taxable years beginning after Dec. 31, 1943.

Sec. 454, I. R. C., supra, repealed by Sec. 2 (a), H. R. 3381, of Oct. 28, 1943. Sec. 3 of said H. R. provides that repeal shall be applicable to taxable years beginning after Dec. 31, 1942.

For sections before repeal, see Ninth Edition, pp. 658-663.

Sec. 500. Surtax on personal holding companies.

There shall be levied, collected, and paid, for each taxable year beginning after December 31, 1938, upon the undistributed subchapter A net income of every personal holding company (in addition to the taxes imposed by chapter 1) a surtax equal to the sum of the following:

Sec. 500. (1) 75 per centum of the amount thereof not in excess of $2,000; plus

Sec. 500. (2) 85 per centum of the amount thereof in excess of $2,000.

Section 500, supra, originated 1934 as Sec. 351 (a), R. A. of 1934.

For any amendments prior to 1944, see

Eighth Edition, p. 424,
Ninth Edition, p. 664.

Sec. 501. Definition of personal holding company.

Sec. 501. (a) General rule.-For the purposes of this subchapter and chapter 1, the term "personal holding company" means any corporation if—

Sec. 501. (a) (1) Gross income requirement.At least 80 per centum of its gross income for the

taxable year is personal holding company income as defined in section 502; but if the corporation is a personal holding company with respect to any taxable year beginning after December 31, 1936, then, for each subsequent taxable year, the minimum percentage shall be 70 per centum in lieu of 80 per centum, until a taxable year during the whole of the last half of which the stock ownership required by paragraph (2) does not exist, or until the expiration of three consecutive taxable years in each of which less than 70 per centum of the gross income is personal holding company income; and

Sec. 501. (a) (2) Stock ownership requirement. -At any time during the last half of the taxable year more than 50 per centum in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals.

Sec. 501. (b) Exceptions.-The term "personal holding company" does not include

Sec. 501. (b) (1) A corporation exempt from taxation under section 101.

Sec. 501. (b) (2) A bank as defined in section 104.
Sec. 501. (b) (3) A life insurance company.
Sec. 501. (b) (4) A surety company.

Sec. 501. (b) (5) A foreign personal holding company as defined in section 331.

Sec. 501. (b) (6) A licensed personal finance company under State supervision, at least 80 per centum of the gross income of which is lawful interest received from individuals each of whose indebtedness to such company did not at any time during the taxable year exceed $300 in principal amount, if such interest is not payable in advance or compounded and is computed only on unpaid balances.

Sec. 501. (b) (7) A loan or investment corporation, a substantial part of the business of which consists of receiving funds not subject to check and evidenced by installment or fully paid certificates of indebtedness or investment, and making loans and discounts, and the loans to a person who is a shareholder in such corporation during such taxable year by or for whom 10 per centum or more in value of its outstanding stock is owned directly or indirectly (including in the case of an individual, stock owned by the members of his family as defined in section 503 (a) (2)) outstanding at any time during such year do not exceed $5,000 in principal amount.

Sec. 501. (c) Corporations making consolidated returns.-If the common parent corporation of an affiliated group of corporations making a consolidated return under the provisions of section 141 satisfies the stock ownership requirement provided in section 501 (a) (2), and the income of such affiliated group, determined as provided in section 141, satisfies the gross income requirement provided in section 501 (a) (1), such affiliated group shall be subject to the surtax imposed by this subchapter. The preceding sentence shall apply only if the com

mon parent corporation is a common parent of an affiliated group of railroad corporations which would be eligible to file consolidated returns under section 141 prior to its amendment by the Revenue Act of 1942.

Section originated 1934 as Sec. 351 (b) (1), R. A.
of 1934.

For any amendments prior to 1944, see-
Eighth Edition, p. 424,
Ninth Edition, p. 664.

Sec. 502. Personal holding company income. For the purposes of this subchapter the term "personal holding company income" means the portion of the gross income which consists of:

Sec. 502. (a) Dividends, interest (other than interest constituting rent as defined in subsection (g)), royalties (other than mineral, oil, or gas roșalties), annuities.

Sec. 502. (b) Stock and securities transactions.-Except in the case of regular dealers in stock or securities, gains from the sale or exchange of stock or securities.

Sec. 502. (c) Commodities transactions.-Gains from futures transactions in any commodity on or subject to the rules of a board of trade or commodity exchange. This subsection shall not apply to gains by a producer, processor, merchant, or handler of the commodity which arise out of bona fide hedging transactions reasonably necessary to the conduct of its business in the manner in which such business is customarily and usually conducted by others.

Sec. 502. (d) Estates and trusts.-Amounts includible in computing the net income of the corporation under Supplement E of chapter 1; and gains from the sale or other disposition of any interest in an estate or trust.

Sec. 502. (e) Personal service contracts.—(1) Amounts received under a contract under which the corporation is to furnish personal services; if some person other than the corporation has the right to designate (by name or by description) the individual who is to perform the services, or if the individual who is to perform the services is designated (by name or by description) in the contract; and (2) amounts received from the sale or other disposition of such a contract. This subsection shall apply with respect to amounts received for services under a particular contract only if at some time during the taxable year 25 per centum or more in value of the outstanding stock of the corporation is owned, directly or indirectly, by or for the individual who has performed, is to perform, or may be designated (by name or by description) as the one to perform, such services.

Sec. 502. (f) Use of corporation property by shareholder.-Amounts received as compensation (however designated and from whomsoever received) for the use of, or right to use, property of the corporation in any case where, at any time during the taxable year, 25 per centum or more in value