divided by the number of days in the taxable year, of the amount determined under section 435 (g) (4) (E) for each day of the taxable year, bears to the average borrowed capital for the taxable year (as defined in section 439 (a)).

"(P) Payments to Encourage Exploration, Development, and Mining for Defense Purposes.-An amount paid to a taxpayer by the United States (or any agency or instrumentality thereof), whether by grant or loan, and whether or not repayable, for the encouragement of exploration, development or mining of critical and strategic minerals or metals pursuant to or in connection with any undertaking approved by the United States (or any of its agencies or instrumentalities) and for which an accounting is made or required to be made to an appropriate governmental agency, and the forgiveness or discharge of any such amount, shall be excluded in computing excess profits net income; and any expenditures (other than expenditures made after the repayment of such grant or loan) attributable to such grant or loan shall not be deductible by the taxpayer as an expense nor increase the basis of the taxpayer's property either for determining gain or loss on sale, exchange, or other disposition or for computing depletion or depreciation, but upon the repayment of any portion of any such grant or loan which has been expended in accordance with the terms thereof such deductions and such increase in basis shall to the extent of such repayment be allowed as if made at the time of such repayment;

"(Q) Income From Installment Sales, Long-Term Contracts, Etc.-For adjustment, in the case of a taxpayer making an election provided in section 455, with respect to income derived from installment sales, installment sales obligations, or long-term contracts, see section 455.

"(2) TAXABLE YEAR LESS THAN TWELVE MONTHS.—

"(A) General Rule.-If the taxable year is a period of less than twelve months the excess profits net income for such taxable year (referred to in this paragraph as the 'short taxable year') shall be placed on an annual basis by multiplying the amount thereof by the number of days in the twelve months ending with the close of the short taxable year and dividing by the number of days in the short taxable year. The tax imposed by section 430 shall be such part of the tax computed on such annual basis as the number of days in the short taxable year is of the number of days in the twelve months ending with the close of the short taxable year. "(B) Exception.-If the taxpayer establishes its adjusted excess profits net income for the period of twelve months beginning with the first day of the short taxable year, computed as if such twelve-month period were a taxable year, under the law applicable to the short taxable year, and using the credits applicable in determining the adjusted excess profits net income for such short taxable year, then the tax for the short taxable year shall be reduced to an amount which is such part of the tax computed on such adjusted

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excess profits net income so established as the excess profits net income for the short taxable year is of the excess profits net income for such twelve-month period. The taxpayer (other than a taxpayer to which the next sentence applies) shall compute the tax and file its return without the application of this subparagraph. If, prior to one year from the date of the beginning of the short taxable year, the taxpayer has disposed of substantially all its assets, in lieu of the twelve-month period provided in the preceding provisions of this subparagraph, the twelve-month period ending with the close of the short taxable year shall be used. For the purposes of this subparagraph, the excess profits net income for the short taxable year shall not be placed on an annual basis as provided in subparagraph (A), and the excess profits net income for the twelve-month period used shall in no case be considered less than the excess profits net income for the short taxable year. The benefits of this subparagraph shall not be allowed unless the taxpayer, at such time as regulations prescribed hereunder require, makes application therefor in accordance with such regulations, and such application, in case the return was filed without regard to this subparagraph, shall be considered a claim for credit or refund. The Secretary shall prescribe such regulations as he may deem necessary for the application of this subparagraph.

(C) Section 47 (c) Not Applicable. The provisions of section 47 (c) shall not apply to the tax imposed by this subchapter.

"(b) TAXABLE YEARS IN BASE PERIOD.-For the purposes of computing the average base period net income, the excess profits net income for any taxable year shall be the normal-tax net income, as defined in section 13 (a) (2) as in effect for such taxable year, increased or decreased by the following adjustments (for additional adjustments in case of certain reorganizations, see part II of this subchapter):

"(1) NET OPERATING LOSS DEDUCTION.-The net operating loss deduction provided by section 23 (s) shall not be allowed;

"(2) GAINS AND LOSSES FROM SALES OR EXCHANGES OF CAPITAL ASSETS, ETC.-There shall be excluded gains and losses from sales or exchanges of capital assets and gains and losses to which section 117 (j) is applicable;

"(3) INCOME FROM RETIREMENT OR DISCHARGE OF BONDS, ETC.There shall be excluded, in the case of any taxpayer, income derived from the retirement or discharge by the taxpayer of any bond, debenture, note, or certificate or other evidence of indebtedness, if the obligation of the taxpayer has been outstanding for more than 6 months, including, in case the issuance was at a premium, the amount includible in income for such year solely because of such retirement or discharge;

"(4) DEDUCTIONS ON ACCOUNT OF RETIREMENT OR DISCHARGE OF BONDS, ETC.-If during the taxable year the taxpayer retires or discharges any bond, debenture, note, or certificate or other evidence of indebtedness, if the obligation of the taxpayer has been outstanding for more than 6 months, the following deductions for such taxable year shall not be allowed:

"(A) The deduction allowable under section 23 (a) for expenses paid or incurred in connection with such retirement or discharge;

"(B) The deduction for losses allowable by reason of such retirement or discharge; and

"(C) In case the issuance was at a discount, the amount deductible for such year solely because of such retirement or discharge;

"(5) REPAYMENT OF PROCESSING TAX TO VENDEES.-The deduction under section 23 (a), for any taxable year, for expenses shall be decreased by an amount which bears the same ratio to the amount deductible on account of any repayment or credit by the corporation to its vendee of any amount attributable to any tax under the Agricultural Adjustment Act of 1933, as amended, as the excess of the aggregate of the amounts so deductible in the base period over the aggregate of the amounts attributable to taxes under such Act collected from its vendees which were includible in the corporation's gross income in the base period and which were not paid, bears to the aggregate of the amounts so deductible in the base period;

"(6) DIVIDENDS RECEIVED.-The credit for dividends received shall apply, without limitation (except the limitation relating to dividends in kind), to all dividends on stock of all corporations, except that no credit for dividends received shall be allowed with respect to dividends (actual or constructive) on stock of foreign personal holding companies or dividends on stock which is not a capital asset;

"(7) INSTALLMENT SALES.-In the case of a taxpayer which has made the election provided in section 455 (a), income from installment sales and from installment sales obligations shall be computed (in lieu of in the manner provided in section 44) under the accrual method without treating any portion of such income as unrealized at the close of any period and as if the taxpayer had reported such income on such accrual method for all taxable periods.

"(8) LONG-TERM CONTRACTS.-In the case of a taxpayer which has made the election provided in section 455 (b), income from long-term contracts shall be computed under the percentage of completion method and as if the taxpayer had reported such income on the percentage of completion method for all taxable periods.

"(9) JUDGMENTS, INTANGIBLE DRILLING AND DEVELOPMENT COSTS, CASUALTY LOSSES, AND OTHER ABNORMAL DEDUCTIONS.-If, for any taxable year or years within, or beginning or ending within, the base period, any class of deductions for the taxable year exceeded 115 per centum of the average amount of deductions of such class for the four previous taxable years (not including deductions arising from the same extraordinary event which gave rise to the deduction for the taxable year). the deductions of such class shall, subject to the rules provided in paragraph (10), be disallowed in an amount equal to such excess. For the purposes of this paragraph, each of the following groups of deductions shall constitute a class of deductions:

"(A) Deductions attributable to claims, awards, judgments, and decrees against the taxpayer, and interest on the foregoing;

tions

"(B) Deductions attributable to intangible drilling and development costs paid or incurred in or for the drilling of wells or the preparation of wells for the production of oil or gas, and for development costs in the case of mines; and

"(C) Deductions under section 23 (f) for losses arising from fires, storms, shipwreck, or other casualty, or from theft, or arising from the demolition, abandonment, or loss of useful value of property, not compensated for by insurance or otherwise. The class of deductions under this subparagraph for any taxable year shall not include deductions which are excludible under paragraph (2) or which would be so excludible if such paragraph were applicable with respect to such taxable year.

The classification of deductions of any class not described in subparagraphs (A) to (C), inclusive, shall be subject to regulations prescribed by the Secretary.

"(10) RULES FOR APPLICATION OF PARAGRAPH (9).—For the purpose of paragraph (9)—

"(A) If the taxpayer was not in existence for four previous taxable years, then the average amount specified in such paragraph shall be determined for the previous taxable years it was in existence and the succeeding taxable years which begin before the beginning of the taxpayer's second taxable year under this subchapter. If the number of such succeeding years is greater than the number necessary to obtain an aggregate of four taxable years, there shall be omitted so many of such succeeding years, beginning with the last, as are necessary to reduce the aggregate to four.

"(B) Deductions of any class for any taxable year shall not be disallowed under such paragraph unless the amount of deductions of such class to be disallowed for such year exceeds 5 per centum of the average excess profits net income for the taxable years within, or beginning or ending within, the base period, computed without the disallowance of any class of deductions under.such paragraph. Such average excess profits net income shall, for the purposes of this subparagraph, be computed by aggregating the excess profits net incomes of all such taxable years, dividing such aggregate by the total number of months in such years, and multiplying the quotient by 12. For the purposes of this subparagraph, the excess profits net income for any taxable year shall in no case be less than zero.

"(C) Deductions of any class shall not be disallowed under such paragraph unless the taxpayer establishes that the increase in such deductions—

"(i) is not a cause or a consequence of an increase in the gross income of the taxpayer in its base period or a decrease in the amount of some other deduction in its base period, which increase or decrease is substantial

in relation to the amount of the increase in the deductions of such class, and

"(ii) is not a consequence of a change at any time in the type, manner of operation, size, or condition of the business engaged in by the taxpayer.

"(D) The amount of deductions of any class to be disallowed under such paragraph with respect to any taxable year shall not exceed the amount by which the deductions of such class for such taxable year exceed the deductions of such class for the taxable year for which the tax under this subchapter is being computed.

"(11) TAXES PAID BY LESSEE.-If under a lease for a term of more than 20 years entered into prior to December 1, 1950, the lessee is obligated to pay any portion of the tax imposed by this chapter upon the lessor with respect to the rentals derived by such lessor from such lessee, or is obligated to reimburse the lessor for any portion of the tax imposed by this chapter upon the lessor with respect to the rentals derived by such lessor from such lessee, such payment or reimbursement of the tax imposed by this chapter shall be excluded by the lessor and a deduction therefor shall not be allowed to the lessee. For the purposes of this paragraph an agreement for lease of railroad properties entered into prior to December 1, 1950, shall be considered to be a lease including such term as the total number of years such agreement may, unless sooner terminated, be renewed or continued under the terms of the agreement, and any such renewal or continuance under such agreement shall be considered part of the lease entered into prior to December 1, 1950.

"(12) BAD DEBTS IN CASE OF BANKS.-In the case of a bank (as defined in section 104) using the reserve method of accounting for bad debts, there shall be allowed, in lieu of the amount allowable under the reserve method for bad debts, a deduction for debts which became worthless within the taxable year, in whole or in part, within the meaning of section 23 (k).

"(13) BANK ASSESSMENTS BY FEDERAL DEPOSIT INSURANCE CORPORATION.-In the case of a bank (as defined in section 104), the deduction for the assessment by the Federal Deposit Insurance Corporation shall be reduced to an amount which is such part thereof as the net assessment (after credits applicable thereto) for the taxable year for which the excess profits credit is being computed is of the gross assessment for such taxable year.

"(14) LIFE INSURANCE COMPANIES.-In the case of a life insurance company, there shall be deducted from the normal-tax net income the excess of (A) the product of (i) the figure determined and proclaimed under section 202 (b) and (ii) the excess profits net income computed without regard to this paragraph, over (B) the adjustment for certain reserves provided in section 202 (c). "(15) CREDIT FOR INCOME SUBJECT TO PRIOR EXCESS PROFITS TAX.— The credit provided'in section 26 (e) shall not be allowed. "(c) DEFICIT IN EXCESS PROFITS NET INCOME.-For the of purposes this subchapter, the deficit in excess profits net income for any taxable year shall be the excess, if any, of