PART IV—SPECIAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES
Editorial Notes
Amendments
2018—
2004—
2000—
1999—
1997—
1993—
1990—
1988—
1986—
1984—
1982—
1981—
1978—
1976—
1969—
1964—
1962—
1958—
1 So in original. Does not conform to section catchline.
§1231. Property used in the trade or business and involuntary conversions
(a) General rule
(1) Gains exceed losses
If—
(A) the section 1231 gains for any taxable year, exceed
(B) the section 1231 losses for such taxable year,
such gains and losses shall be treated as long-term capital gains or long-term capital losses, as the case may be.
(2) Gains do not exceed losses
If—
(A) the section 1231 gains for any taxable year, do not exceed
(B) the section 1231 losses for such taxable year,
such gains and losses shall not be treated as gains and losses from sales or exchanges of capital assets.
(3) Section 1231 gains and losses
For purposes of this subsection—
(A) Section 1231 gain
The term "section 1231 gain" means—
(i) any recognized gain on the sale or exchange of property used in the trade or business, and
(ii) any recognized gain from the compulsory or involuntary conversion (as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) into other property or money of—
(I) property used in the trade or business, or
(II) any capital asset which is held for more than 1 year and is held in connection with a trade or business or a transaction entered into for profit.
(B) Section 1231 loss
The term "section 1231 loss" means any recognized loss from a sale or exchange or conversion described in subparagraph (A).
(4) Special rules
For purposes of this subsection—
(A) In determining under this subsection whether gains exceed losses—
(i) the section 1231 gains shall be included only if and to the extent taken into account in computing gross income, and
(ii) the section 1231 losses shall be included only if and to the extent taken into account in computing taxable income, except that section 1211 shall not apply.
(B) Losses (including losses not compensated for by insurance or otherwise) on the destruction, in whole or in part, theft or seizure, or requisition or condemnation of—
(i) property used in the trade or business, or
(ii) capital assets which are held for more than 1 year and are held in connection with a trade or business or a transaction entered into for profit,
shall be treated as losses from a compulsory or involuntary conversion.
(C) In the case of any involuntary conversion (subject to the provisions of this subsection but for this sentence) arising from fire, storm, shipwreck, or other casualty, or from theft, of any—
(i) property used in the trade or business, or
(ii) any capital asset which is held for more than 1 year and is held in connection with a trade or business or a transaction entered into for profit,
this subsection shall not apply to such conversion (whether resulting in gain or loss) if during the taxable year the recognized losses from such conversions exceed the recognized gains from such conversions.
(b) Definition of property used in the trade or business
For purposes of this section—
(1) General rule
The term "property used in the trade or business" means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, held for more than 1 year, and real property used in the trade or business, held for more than 1 year, which is not—
(A) property of a kind which would properly be includible in the inventory of the taxpayer if on hand at the close of the taxable year,
(B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business,
(C) a patent, invention, model or design (whether or not patented), a secret formula or process, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by a taxpayer described in paragraph (3) of section 1221(a), or
(D) a publication of the United States Government (including the Congressional Record) which is received from the United States Government, or any agency thereof, other than by purchase at the price at which it is offered for sale to the public, and which is held by a taxpayer described in paragraph (5) of section 1221(a).
(2) Timber, coal, or domestic iron ore
Such term includes timber, coal, and iron ore with respect to which section 631 applies.
(3) Livestock
Such term includes—
(A) cattle and horses, regardless of age, held by the taxpayer for draft, breeding, dairy, or sporting purposes, and held by him for 24 months or more from the date of acquisition, and
(B) other livestock, regardless of age, held by the taxpayer for draft, breeding, dairy, or sporting purposes, and held by him for 12 months or more from the date of acquisition.
Such term does not include poultry.
(4) Unharvested crop
In the case of an unharvested crop on land used in the trade or business and held for more than 1 year, if the crop and the land are sold or exchanged (or compulsorily or involuntarily converted) at the same time and to the same person, the crop shall be considered as "property used in the trade or business."
(c) Recapture of net ordinary losses
(1) In general
The net section 1231 gain for any taxable year shall be treated as ordinary income to the extent such gain does not exceed the non-recaptured net section 1231 losses.
(2) Non-recaptured net section 1231 losses
For purposes of this subsection, the term "non-recaptured net section 1231 losses" means the excess of—
(A) the aggregate amount of the net section 1231 losses for the 5 most recent preceding taxable years, over
(B) the portion of such losses taken into account under paragraph (1) for such preceding taxable years.
(3) Net section 1231 gain
For purposes of this subsection, the term "net section 1231 gain" means the excess of—
(A) the section 1231 gains, over
(B) the section 1231 losses.
(4) Net section 1231 loss
For purposes of this subsection, the term "net section 1231 loss" means the excess of—
(A) the section 1231 losses, over
(B) the section 1231 gains.
(5) Special rules
For purposes of determining the amount of the net section 1231 gain or loss for any taxable year, the rules of paragraph (4) of subsection (a) shall apply.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
2017—Subsec. (b)(1)(C).
2014—Subsec. (c)(2)(A).
1999—Subsec. (b)(1)(C), (D).
1984—Subsec. (a).
"(1) in determining under this subsection whether gains exceed losses, the gains described therein shall be included only if and to the extent taken into account in computing gross income and the losses described therein shall be included only if and to the extent taken into account in computing taxable income, except that section 1211 shall not apply; and
"(2) losses (including losses not compensated for by insurance or otherwise) upon the destruction, in whole or in part, theft or seizure, or requisition or condemnation of (A) property used in the trade or business or (B) capital assets held for more than 1 year shall be considered losses from a compulsory or involuntary conversion.
In the case of any involuntary conversion (subject to the provisions of this subsection but for this sentence) arising from fire, storm, shipwreck, or other casualty, or from theft, of any property used in the trade or business or of any capital asset held for more than 1 year, this subsection shall not apply to such conversion (whether resulting in gain or loss) if during the taxable year the recognized losses from such conversions exceed the recognized gains from such conversions."
Subsec. (b)(1), (4).
Subsec. (c).
1981—Subsec. (b)(1)(D).
1978—Subsec. (b)(1)(D).
1976—Subsecs. (a), (b)(1), (4).
1969—Subsec. (a).
Subsec. (b)(1)(C).
Subsec. (b)(3).
1964—Subsec. (b)(2).
1958—Subsec. (a).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Amendment by
Effective Date of 2014 Amendment
Amendment by
Effective Date of 1999 Amendment
Amendment by
Effective Date of 1984 Amendment
Amendment by section 711(c)(2)(A)(iii) of
Amendment by section 1001(b)(15) of
Effective Date of 1981 Amendment
Amendment by
Effective Date of 1978 Amendment
Effective Date of 1976 Amendment
Effective Date of 1969 Amendment
Amendment by section 514(b)(2) of
Amendment by section 516(b) of
Effective Date of 1964 Amendment
Amendment by
Effective Date of 1958 Amendment
[§§1232 to 1232B. Repealed. Pub. L. 98–369, div. A, title I, §42(a)(1), July 18, 1984, 98 Stat. 556 ]
Section 1232, acts Aug. 16, 1954, ch. 736,
Section 1232A, added
Section 1232B, added
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
Repeal applicable to taxable years ending after July 18, 1984, see section 44 of
§1233. Gains and losses from short sales
(a) Capital assets
For purposes of this subtitle, gain or loss from the short sale of property shall be considered as gain or loss from the sale or exchange of a capital asset to the extent that the property, including a commodity future, used to close the short sale constitutes a capital asset in the hands of the taxpayer.
(b) Short-term gains and holding periods
If gain or loss from a short sale is considered as gain or loss from the sale or exchange of a capital asset under subsection (a) and if on the date of such short sale substantially identical property has been held by the taxpayer for not more than 1 year (determined without regard to the effect, under paragraph (2) of this subsection, of such short sale on the holding period), or if substantially identical property is acquired by the taxpayer after such short sale and on or before the date of the closing thereof—
(1) any gain on the closing of such short sale shall be considered as a gain on the sale or exchange of a capital asset held for not more than 1 year (notwithstanding the period of time any property used to close such short sale has been held); and
(2) the holding period of such substantially identical property shall be considered to begin (notwithstanding section 1223, relating to the holding period of property) on the date of the closing of the short sale, or on the date of a sale, gift, or other disposition of such property, whichever date occurs first. This paragraph shall apply to such substantially identical property in the order of the dates of the acquisition of such property, but only to so much of such property as does not exceed the quantity sold short.
For purposes of this subsection, the acquisition of an option to sell property at a fixed price shall be considered as a short sale, and the exercise or failure to exercise such option shall be considered as a closing of such short sale.
(c) Certain options to sell
Subsection (b) shall not include an option to sell property at a fixed price acquired on the same day on which the property identified as intended to be used in exercising such option is acquired and which, if exercised, is exercised through the sale of the property so identified. If the option is not exercised, the cost of the option shall be added to the basis of the property with which the option is identified. This subsection shall apply only to options acquired after August 16, 1954.
(d) Long-term losses
If on the date of such short sale substantially identical property has been held by the taxpayer for more than 1 year, any loss on the closing of such short sale shall be considered as a loss on the sale or exchange of a capital asset held for more than 1 year (notwithstanding the period of time any property used to close such short sale has been held, and notwithstanding section 1234).
(e) Rules for application of section
(1) Subsection (b)(1) or (d) shall not apply to the gain or loss, respectively, on any quantity of property used to close such short sale which is in excess of the quantity of the substantially identical property referred to in the applicable subsection.
(2) For purposes of subsections (b) and (d)—
(A) the term "property" includes only stocks and securities (including stocks and securities dealt with on a "when issued" basis), and commodity futures, which are capital assets in the hands of the taxpayer, but does not include any position to which section 1092(b) applies;
(B) in the case of futures transactions in any commodity on or subject to the rules of a board of trade or commodity exchange, a commodity future requiring delivery in 1 calendar month shall not be considered as property substantially identical to another commodity future requiring delivery in a different calendar month;
(C) in the case of a short sale of property by an individual, the term "taxpayer", in the application of this subsection and subsections (b) and (d), shall be read as "taxpayer or his spouse"; but an individual who is legally separated from the taxpayer under a decree of divorce or of separate maintenance shall not be considered as the spouse of the taxpayer;
(D) a securities futures contract (as defined in section 1234B) to acquire substantially identical property shall be treated as substantially identical property; and
(E) entering into a securities futures contract (as so defined) to sell shall be considered to be a short sale, and the settlement of such contract shall be considered to be the closing of such short sale.
(3) Where the taxpayer enters into 2 commodity futures transactions on the same day, one requiring delivery by him in one market and the other requiring delivery to him of the same (or substantially identical) commodity in the same calendar month in a different market, and the taxpayer subsequently closes both such transactions on the same day, subsections (b) and (d) shall have no application to so much of the commodity involved in either such transaction as does not exceed in quantity the commodity involved in the other.
(4)(A) In the case of a taxpayer who is a dealer in securities (within the meaning of section 1236)—
(i) if, on the date of a short sale of stock, substantially identical property which is a capital asset in the hands of the taxpayer has been held for not more than 1 year, and
(ii) if such short sale is closed more than 20 days after the date on which it was made,
subsection (b)(2) shall apply in respect of the holding period of such substantially identical property.
(B) For purposes of subparagraph (A)—
(i) the last sentence of subsection (b) applies; and
(ii) the term "stock" means any share or certificate of stock in a corporation, any bond or other evidence of indebtedness which is convertible into any such share or certificate, or any evidence of an interest in, or right to subscribe to or purchase, any of the foregoing.
(f) Arbitrage operations in securities
In the case of a short sale which had been entered into as an arbitrage operation, to which sale the rule of subsection (b)(2) would apply except as otherwise provided in this subsection—
(1) subsection (b)(2) shall apply first to substantially identical assets acquired for arbitrage operations held at the close of business on the day such sale is made, and only to the extent that the quantity sold short exceeds the substantially identical assets acquired for arbitrage operations held at the close of business on the day such sale is made, shall the holding period of any other such identical assets held by the taxpayer be affected;
(2) in the event that assets acquired for arbitrage operations are disposed of in such manner as to create a net short position in assets acquired for arbitrage operations, such net short position shall be deemed to constitute a short sale made on that day;
(3) for the purpose of paragraphs (1) and (2) of this subsection the taxpayer will be deemed as of the close of any business day to hold property which he is or will be entitled to receive or acquire by virtue of any other asset acquired for arbitrage operations or by virtue of any contract he has entered into in an arbitrage operation; and
(4) for the purpose of this subsection arbitrage operations are transactions involving the purchase and sale of assets for the purpose of profiting from a current difference between the price of the asset purchased and the price of the asset sold, and in which the asset purchased, if not identical to the asset sold, is such that by virtue thereof the taxpayer is, or will be, entitled to acquire assets identical to the assets sold. Such operations must be clearly identified by the taxpayer in his records as arbitrage operations on the day of the transaction or as soon thereafter as may be practicable. Assets acquired for arbitrage operations will include stocks and securities and the right to acquire stocks and securities.
(g) Hedging transactions
This section shall not apply in the case of a hedging transaction in commodity futures.
(h) Short sales of property which becomes substantially worthless
(1) In general
If—
(A) the taxpayer enters into a short sale of property, and
(B) such property becomes substantially worthless,
the taxpayer shall recognize gain in the same manner as if the short sale were closed when the property becomes substantially worthless. To the extent provided in regulations prescribed by the Secretary, the preceding sentence also shall apply with respect to any option with respect to property, any offsetting notional principal contract with respect to property, any futures or forward contract to deliver any property, and any other similar transaction.
(2) Statute of limitations
If property becomes substantially worthless during a taxable year and any short sale of such property remains open at the time such property becomes substantially worthless, then—
(A) the statutory period for the assessment of any deficiency attributable to any part of the gain on such transaction shall not expire before the earlier of—
(i) the date which is 3 years after the date the Secretary is notified by the taxpayer (in such manner as the Secretary may by regulations prescribe) of the substantial worthlessness of such property, or
(ii) the date which is 6 years after the date the return for such taxable year is filed, and
(B) such deficiency may be assessed before the date applicable under subparagraph (A) notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
2002—Subsec. (e)(2)(E).
2000—Subsec. (e)(2)(D).
1997—Subsec. (h).
1984—Subsecs. (b), (d), (e)(4)(A)(i).
1981—Subsec. (e)(2)(A).
1976—Subsec. (b).
Subsec. (c).
Subsecs. (d), (e)(4)(A)(i).
1958—Subsec. (a).
Subsec. (e)(4).
Subsec. (g).
1955—Subsec. (f). Act Aug. 12, 1955, added subsec. (f).
Statutory Notes and Related Subsidiaries
Effective Date of 2002 Amendment
Amendment by
Effective Date of 1997 Amendment
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1981 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by section 1901(a)(137) of
Effective Date of 1958 Amendment
Amendment by section 52(b) of
Effective Date of 1955 Amendment
Act Aug. 12, 1955, ch. 871, §2,
§1234. Options to buy or sell
(a) Treatment of gain or loss in the case of the purchaser
(1) General rule
Gain or loss attributable to the sale or exchange of, or loss attributable to failure to exercise, an option to buy or sell property shall be considered gain or loss from the sale or exchange of property which has the same character as the property to which the option relates has in the hands of the taxpayer (or would have in the hands of the taxpayer if acquired by him).
(2) Special rule for loss attributable to failure to exercise option
For purposes of paragraph (1), if loss is attributable to failure to exercise an option, the option shall be deemed to have been sold or exchanged on the day it expired.
(3) Nonapplication of subsection
This subsection shall not apply to—
(A) an option which constitutes property described in paragraph (1) of section 1221(a);
(B) in the case of gain attributable to the sale or exchange of an option, any income derived in connection with such option which, without regard to this subsection, is treated as other than gain from the sale or exchange of a capital asset; and
(C) a loss attributable to failure to exercise an option described in section 1233(c).
(b) Treatment of grantor of option in the case of stock, securities, or commodities
(1) General rule
In the case of the grantor of the option, gain or loss from any closing transaction with respect to, and gain on lapse of, an option in property shall be treated as a gain or loss from the sale or exchange of a capital asset held not more than 1 year.
(2) Definitions
For purposes of this subsection—
(A) Closing transaction
The term "closing transaction" means any termination of the taxpayer's obligation under an option in property other than through the exercise or lapse of the option.
(B) Property
The term "property" means stocks and securities (including stocks and securities dealt with on a "when issued" basis), commodities, and commodity futures.
(3) Nonapplication of subsection
This subsection shall not apply to any option granted in the ordinary course of the taxpayer's trade or business of granting options.
(c) Treatment of options on section 1256 contracts and cash settlement options
(1) Section 1256 contracts
Gain or loss shall be recognized on the exercise of an option on a section 1256 contract (within the meaning of section 1256(b)).
(2) Treatment of cash settlement options
(A) In general
For purposes of subsections (a) and (b), a cash settlement option shall be treated as an option to buy or sell property.
(B) Cash settlement option
For purposes of subparagraph (A), the term "cash settlement option" means any option which on exercise settles in (or could be settled in) cash or property other than the underlying property.
(Aug. 16, 1954, ch. 376,
Editorial Notes
Amendments
1999—Subsec. (a)(3)(A).
1984—Subsec. (b)(1).
Subsec. (c).
1976—Subsec. (a).
Subsec. (b).
Subsec. (b)(1).
Subsec. (c).
Subsec. (d).
1966—Subsecs. (c), (d).
1958—
Statutory Notes and Related Subsidiaries
Effective Date of 1999 Amendment
Amendment by
Effective Date of 1984 Amendment
Amendment by section 1001(b)(18) of
Effective Date of 1976 Amendment
Effective Date of 1966 Amendment
Effective Date of 1958 Amendment
Amendment by
§1234A. Gains or losses from certain terminations
Gain or loss attributable to the cancellation, lapse, expiration, or other termination of—
(1) a right or obligation (other than a securities futures contract, as defined in section 1234B) with respect to property which is (or on acquisition would be) a capital asset in the hands of the taxpayer, or
(2) a section 1256 contract (as defined in section 1256) not described in paragraph (1) which is a capital asset in the hands of the taxpayer,
shall be treated as gain or loss from the sale of a capital asset. The preceding sentence shall not apply to the retirement of any debt instrument (whether or not through a trust or other participation arrangement).
(Added
Editorial Notes
Amendments
2002—Pars. (1) to (3).
2000—Par. (1).
Par. (3).
1997—Par. (1).
1984—
Par. (2).
1983—
Statutory Notes and Related Subsidiaries
Effective Date of 2002 Amendment
Amendment by
Effective Date of 1997 Amendment
Effective Date of 1984 Amendment
Amendment by section 102(e)(4) of
Effective Date of 1983 Amendment
Amendment by
Effective Date
Section applicable to property acquired and positions established by the taxpayer after June 23, 1981, in taxable years ending after such date, and applicable when so elected with respect to property held on June 23, 1981, see section 508 of
§1234B. Gains or losses from securities futures contracts
(a) Treatment of gain or loss
(1) In general
Gain or loss attributable to the sale, exchange, or termination of a securities futures contract shall be considered gain or loss from the sale or exchange of property which has the same character as the property to which the contract relates has in the hands of the taxpayer (or would have in the hands of the taxpayer if acquired by the taxpayer).
(2) Nonapplication of subsection
This subsection shall not apply to—
(A) a contract which constitutes property described in paragraph (1) or (7) of section 1221(a), and
(B) any income derived in connection with a contract which, without regard to this subsection, is treated as other than gain from the sale or exchange of a capital asset.
(b) Short-term gains and losses
Except as provided in the regulations under section 1092(b) or this section, or in section 1233, if gain or loss on the sale, exchange, or termination of a securities futures contract to sell property is considered as gain or loss from the sale or exchange of a capital asset, such gain or loss shall be treated as short-term capital gain or loss.
(c) Securities futures contract
For purposes of this section, the term "securities futures contract" means any security future (as defined in section 3(a)(55)(A) of the Securities Exchange Act of 1934, as in effect on the date of the enactment of this section). The Secretary may prescribe regulations regarding the status of contracts the values of which are determined directly or indirectly by reference to any index which becomes (or ceases to be) a narrow-based security index (as defined for purposes of section 1256(g)(6)).
(d) Contracts not treated as commodity futures contracts
For purposes of this title, a securities futures contract shall not be treated as a commodity futures contract.
(e) Regulations
The Secretary shall prescribe such regulations as may be appropriate to provide for the proper treatment of securities futures contracts under this title.
(f) Cross reference
For special rules relating to dealer securities futures contracts, see section 1256.
(Added
Editorial Notes
References in Text
Section 3(a)(55)(A) of the Securities Exchange Act of 1934, referred to in subsec. (c), is classified to
The date of the enactment of this section, referred to in subsec. (c), is the date of enactment of
Codification
Amendments
2004—Subsec. (c).
2002—Subsec. (a)(1).
Subsec. (b).
Subsec. (f).
Statutory Notes and Related Subsidiaries
Effective Date of 2004 Amendment
Effective Date of 2002 Amendment
Amendment by
§1235. Sale or exchange of patents
(a) General
A transfer (other than by gift, inheritance, or devise) of property consisting of all substantial rights to a patent, or an undivided interest therein which includes a part of all such rights, by any holder shall be considered the sale or exchange of a capital asset held for more than 1 year, regardless of whether or not payments in consideration of such transfer are—
(1) payable periodically over a period generally coterminous with the transferee's use of the patent, or
(2) contingent on the productivity, use, or disposition of the property transferred.
(b) "Holder" defined
For purposes of this section, the term "holder" means—
(1) any individual whose efforts created such property, or
(2) any other individual who has acquired his interest in such property in exchange for consideration in money or money's worth paid to such creator prior to actual reduction to practice of the invention covered by the patent, if such individual is neither—
(A) the employer of such creator, nor
(B) related to such creator (within the meaning of subsection (c)).
(c) Related persons
Subsection (a) shall not apply to any transfer, directly or indirectly, between persons specified within any one of the paragraphs of section 267(b) or persons described in section 707(b); except that, in applying section 267(b) and (c) and section 707(b) for purposes of this section—
(1) the phrase "25 percent or more" shall be substituted for the phrase "more than 50 percent" each place it appears in section 267(b) or 707(b), and
(2) paragraph (4) of section 267(c) shall be treated as providing that the family of an individual shall include only his spouse, ancestors, and lineal descendants.
(d) Cross reference
For special rule relating to nonresident aliens, see section 871(a).
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
2014—Subsec. (b)(2)(B).
Subsecs. (c) to (e).
1998—Subsec. (a).
1984—Subsec. (a).
Subsec. (d).
1976—Subsec. (a).
1958—Subsec. (d).
Statutory Notes and Related Subsidiaries
Effective Date of 2014 Amendment
Amendment by
Effective Date of 1998 Amendment
Amendment by section 5001 of
Amendment by section 6000(d)(4) of
Effective Date of 1984 Amendment
Amendment by section 174(b)(5)(C) of
Amendment by section 1001(b)(19) of
Effective Date of 1976 Amendment
Effective Date of 1958 Amendment
§1236. Dealers in securities
(a) Capital gains
Gain by a dealer in securities from the sale or exchange of any security shall in no event be considered as gain from the sale or exchange of a capital asset unless—
(1) the security was, before the close of the day on which it was acquired (or such earlier time as the Secretary may prescribe by regulations), clearly identified in the dealer's records as a security held for investment; and
(2) the security was not, at any time after the close of such day (or such earlier time), held by such dealer primarily for sale to customers in the ordinary course of his trade or business.
(b) Ordinary losses
Loss by a dealer in securities from the sale or exchange of any security shall, except as otherwise provided in section 582(c), (relating to bond, etc., losses of banks), in no event be considered as ordinary loss if at any time the security was clearly identified in the dealer's records as a security held for investment.
(c) Definition of security
For purposes of this section, the term "security" means any share of stock in any corporation, certificate of stock or interest in any corporation, note, bond, debenture, or evidence of indebtedness, or any evidence of an interest in or right to subscribe to or purchase any of the foregoing.
(d) Special rule for floor specialists
(1) In general
In the case of a floor specialist (but only with respect to acquisitions, in connection with his duties on an exchange, of stock in which the specialist is registered with the exchange), subsection (a) shall be applied—
(A) by inserting "the 7th business day following" before "the day" the first place it appears in paragraph (1) and by inserting "7th business" before "day" in paragraph (2), and
(B) by striking the parenthetical phrase in paragraph (1).
(2) Floor specialist
The term "floor specialist" means a person who is—
(A) a member of a national securities exchange,
(B) is registered as a specialist with the exchange, and
(C) meets the requirements for specialists established by the Securities and Exchange Commission.
(e) Special rule for options
For purposes of subsection (a), any security acquired by a dealer pursuant to an option held by such dealer may be treated as held for investment only if the dealer, before the close of the day on which the option was acquired, clearly identified the option on his records as held for investment. For purposes of the preceding sentence, the term "option" includes the right to subscribe to or purchase any security.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
2014—Subsec. (b).
1984—Subsec. (a)(1).
Subsec. (a)(2).
1983—Subsec. (e).
1981—Subsec. (a).
Subsec. (d).
1976—Subsec. (b).
Statutory Notes and Related Subsidiaries
Effective Date of 2014 Amendment
Amendment by
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1983 Amendment
Effective Date of 1981 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by
§1237. Real property subdivided for sale
(a) General
Any lot or parcel which is part of a tract of real property in the hands of a taxpayer other than a C corporation shall not be deemed to be held primarily for sale to customers in the ordinary course of trade or business at the time of sale solely because of the taxpayer having subdivided such tract for purposes of sale or because of any activity incident to such subdivision or sale, if—
(1) such tract, or any lot or parcel thereof, had not previously been held by such taxpayer primarily for sale to customers in the ordinary course of trade or business (unless such tract at such previous time would have been covered by this section) and, in the same taxable year in which the sale occurs, such taxpayer does not so hold any other real property; and
(2) no substantial improvement that substantially enhances the value of the lot or parcel sold is made by the taxpayer on such tract while held by the taxpayer or is made pursuant to a contract of sale entered into between the taxpayer and the buyer. For purposes of this paragraph, an improvement shall be deemed to be made by the taxpayer if such improvement was made by—
(A) the taxpayer or members of his family (as defined in section 267(c)(4)), by a corporation controlled by the taxpayer, an S corporation which included the taxpayer as a shareholder, or by a partnership which included the taxpayer as a partner; or
(B) a lessee, but only if the improvement constitutes income to the taxpayer; or
(C) Federal, State, or local government, or political subdivision thereof, but only if the improvement constitutes an addition to basis for the taxpayer; and
(3) such lot or parcel, except in the case of real property acquired by inheritance or devise, is held by the taxpayer for a period of 5 years.
(b) Special rules for application of section
(1) Gains
If more than 5 lots or parcels contained in the same tract of real property are sold or exchanged, gain from any sale or exchange (which occurs in or after the taxable year in which the sixth lot or parcel is sold or exchanged) of any lot or parcel which comes within the provisions of paragraphs (1), (2) and (3) of subsection (a) of this section shall be deemed to be gain from the sale of property held primarily for sale to customers in the ordinary course of the trade or business to the extent of 5 percent of the selling price.
(2) Expenditures of sale
For the purpose of computing gain under paragraph (1) of this subsection, expenditures incurred in connection with the sale or exchange of any lot or parcel shall neither be allowed as a deduction in computing taxable income, nor treated as reducing the amount realized on such sale or exchange; but so much of such expenditures as does not exceed the portion of gain deemed under paragraph (1) of this subsection to be gain from the sale of property held primarily for sale to customers in the ordinary course of trade or business shall be so allowed as a deduction, and the remainder, if any, shall be treated as reducing the amount realized on such sale or exchange.
(3) Necessary improvements
No improvement shall be deemed a substantial improvement for purposes of subsection (a) if the lot or parcel is held by the taxpayer for a period of 10 years and if—
(A) such improvement is the building or installation of water, sewer, or drainage facilities or roads (if such improvement would except for this paragraph constitute a substantial improvement);
(B) it is shown to the satisfaction of the Secretary that the lot or parcel, the value of which was substantially enhanced by such improvement, would not have been marketable at the prevailing local price for similar building sites without such improvement; and
(C) the taxpayer elects, in accordance with regulations prescribed by the Secretary, to make no adjustment to basis of the lot or parcel, or of any other property owned by the taxpayer, on account of the expenditures for such improvements. Such election shall not make any item deductible which would not otherwise be deductible.
(c) Tract defined
For purposes of this section, the term "tract of real property" means a single piece of real property, except that 2 or more pieces of real property shall be considered a tract if at any time they were contiguous in the hands of the taxpayer or if they would be contiguous except for the interposition of a road, street, railroad, stream, or similar property. If, following the sale or exchange of any lot or parcel from a tract of real property, no further sales or exchanges of any other lots or parcels from the remainder of such tract are made for a period of 5 years, such remainder shall be deemed a tract.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1996—Subsec. (a).
Subsec. (a)(2)(A).
1976—Subsec. (b)(3)(B), (C).
Subsec. (d).
1971—Subsec. (a).
Subsec. (b).
1958—Subsec. (a)(1).
1956—Subsec. (a). Act Apr. 27, 1956, §1, substituted "(including corporations only if no shareholder directly or indirectly holds real property for sale to customers in the ordinary course of trade or business and only in the case of property described in the last sentence of subsection (b)(3))" for "other than a corporation".
Subsec. (b)(3). Act Apr. 27, 1956, §2, substituted "water, sewer, or drainage facilities" for "water or sewer facilities" in subpar. (A), and inserted provision at end that requirements of subpars. (B) and (C) do not apply to certain specified property.
Statutory Notes and Related Subsidiaries
Effective Date of 1996 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by section 1901(a)(138) of
Effective Date of 1971 Amendment
Effective Date of 1958 Amendment
Amendment by
Effective Date of 1956 Amendment
Act Apr. 27, 1956, ch. 214, §3,
Sales or Exchanges by Corporations of Real Property Held More Than 25 Years
"(1) no shareholder of the corporation directly or indirectly holds real property primarily for sale to customers in the ordinary course of trade or business; and
"(2)(A) such lot or parcel is a part of real property (i) held for more than twenty-five years at the time of sale or exchange, and (ii) acquired before January 1, 1934, by the corporation as a result of the foreclosure of a lien (or liens) thereon which secured the payment of indebtedness held by one or more creditors who transferred one or more foreclosure bids to the corporation in exchange for all its stock (with or without other consideration), or
"(B)(i) such lot or parcel is a part of additional real property acquired before January 1, 1957, by the corporation in the near vicinity of any real property to which subparagraph (A) applies, or
"(ii) such lot or parcel is wholly or to some extent a part of any minor acquisition made after December 31, 1956, by the corporation to adjust boundaries, to fill gaps in previously acquired property, to facilitate the installation of streets, utilities, and other public facilities, or to facilitate the sale of adjacent property, or
"(iii) such lot or parcel is wholly or to some extent a part of a reacquisition by the corporation after December 31, 1956, of property previously owned by the corporation;
but only if at least 80 percent (as measured by area) of the real property sold or exchanged by the corporation within the taxable year is property described in subparagraph (A); and
"(3) there were no acquisitions of real property by the corporation after December 31, 1956, other than—
"(A) acquisitions described in paragraph (2)(B)(ii) and reacquisitions described in paragraph (2)(B)(iii), or
"(B) acquisitions of real property used in a trade or business of the corporation or held for investment by the corporation; and
"(4) the corporation did not after December 31, 1957, sell or exchange (except in condemnation or under threat of condemnation) any residential lot or parcel on which, at the time of the sale or exchange, there existed any substantial improvements (other than improvements in existence at the time the land was acquired by the corporation) except subdivision, clearing, grubbing, and grading, building or installation of water, sewer, and drainage facilities, construction of roads, streets, and sidewalks, and installation of utilities."
In any case in which a corporation referred to in paragraphs (1), (2), (3), and (4) is a member of an affiliated group as defined in section 1504(a) of the Internal Revenue Code of 1986, such affiliated group shall, for purposes of such paragraphs, be treated as a single corporation.
"(b)(1) Gain from any sale or exchange described in subsection (a) shall be deemed, for purposes of such Code, to be gain from the sale of property held primarily for sale to customers in the ordinary course of trade or business to the extent of 5 percent of the selling price.
"(2) For the purpose of computing gain under paragraph (1), expenditures incurred in connection with the sale or exchange of any lot or parcel shall neither be allowed as a deduction in computing taxable income, nor treated as reducing the amount realized on such sale or exchange; but so much of such expenditures as does not exceed the portion of gain deemed under paragraph (1) to be gain from the sale of property held primarily for sale to customers in the ordinary course of trade or business shall be so allowed as a deduction, and the remainder, if any, shall be treated as reducing the amount realized on such sale or exchange.
"(c) The provisions of subsections (a) and (b) shall apply to taxable years beginning after December 31, 1957, and before January 1, 1984."
[§1238. Repealed. Pub. L. 101–508, title XI, §11801(a)(35), Nov. 5, 1990, 104 Stat. 1388–521 ]
Section, acts Aug. 16, 1954, ch. 736,
Statutory Notes and Related Subsidiaries
Savings Provision
For provisions that nothing in repeal by
§1239. Gain from sale of depreciable property between certain related taxpayers
(a) Treatment of gain as ordinary income
In the case of a sale or exchange of property, directly or indirectly, between related persons, any gain recognized to the transferor shall be treated as ordinary income if such property is, in the hands of the transferee, of a character which is subject to the allowance for depreciation provided in section 167.
(b) Related persons
For purposes of subsection (a), the term "related persons" means—
(1) a person and all entities which are controlled entities with respect to such person,
(2) a taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless such beneficiary's interest in the trust is a remote contingent interest (within the meaning of section 318(a)(3)(B)(i)), and
(3) except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of such estate.
(c) Controlled entity defined
(1) General rule
For purposes of this section, the term "controlled entity" means, with respect to any person—
(A) a corporation more than 50 percent of the value of the outstanding stock of which is owned (directly or indirectly) by or for such person,
(B) a partnership more than 50 percent of the capital interest or profits interest in which is owned (directly or indirectly) by or for such person, and
(C) any entity which is a related person to such person under paragraph (3), (10), (11), or (12) of section 267(b).
(2) Constructive ownership
For purposes of this section, ownership shall be determined in accordance with rules similar to the rules under section 267(c) (other than paragraph (3) thereof).
(d) Employer and related employee association
For purposes of subsection (a), the term "related person" also includes—
(1) an employer and any person related to the employer (within the meaning of subsection (b)), and
(2) a welfare benefit fund (within the meaning of section 419(e)) which is controlled directly or indirectly by persons referred to in paragraph (1).
(e) Patent applications treated as depreciable property
For purposes of this section, a patent application shall be treated as property which, in the hands of the transferee, is of a character which is subject to the allowance for depreciation provided in section 167.
(Aug. 16, 1954, ch. 736,
Editorial Notes
Amendments
1997—Subsec. (b)(3).
1986—Subsec. (b)(1).
Subsec. (c).
"(A) the members of an individual's family shall consist only of such individual and such individual's spouse,
"(B) paragraph (2)(C) of section 318(a) shall be applied without regard to the 50-percent limitation contained therein, and
"(C) paragraph (3) of section 318(a) shall not apply."
1984—Subsec. (b).
Subsec. (d).
Subsec. (e).
1983—Subsec. (b).
Subsec. (c)(1).
Subsec. (c)(2).
1980—Subsec. (b)(1).
Subsec. (b)(2).
Subsec. (b)(3).
Subsec. (c).
1978—Subsec. (a).
1976—
Subsec. (a).
Subsec. (b).
Subsec. (c).
1958—Subsec. (c).
Statutory Notes and Related Subsidiaries
Effective Date of 1997 Amendment
Amendment by
Effective Date of 1986 Amendment
"(1)
"(2)
Effective Date of 1984 Amendment
Amendment by section 421(b)(6) of
Effective Date of 1983 Amendment
Amendment by
Effective Date of 1978 Amendment
Effective Date of 1976 Amendment
[§1240. Repealed. Pub. L. 94–455, title XIX, §1901(a)(139), Oct. 4, 1976, 90 Stat. 1787 ]
Section, act Aug. 16, 1954, ch. 736,
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
Repeal applicable with respect to taxable years beginning after Dec. 31, 1976, see section 1901(d) of
§1241. Cancellation of lease or distributor's agreement
Amounts received by a lessee for the cancellation of a lease, or by a distributor of goods for the cancellation of a distributor's agreement (if the distributor has a substantial capital investment in the distributorship), shall be considered as amounts received in exchange for such lease or agreement.
(Aug. 16, 1954, ch. 736,
§1242. Losses on small business investment company stock
If—
(1) a loss is on stock in a small business investment company operating under the Small Business Investment Act of 1958, and
(2) such loss would (but for this section) be a loss from the sale or exchange of a capital asset,
then such loss shall be treated as an ordinary loss. For purposes of section 172 (relating to the net operating loss deduction) any amount of loss treated by reason of this section as an ordinary loss shall be treated as attributable to a trade or business of the taxpayer.
(Added
Editorial Notes
References in Text
The Small Business Investment Act of 1958, referred to in cl. (1), is
Amendments
1976—
Statutory Notes and Related Subsidiaries
Effective Date of 1976 Amendment
Amendment by
Effective Date
Section applicable with respect to taxable years beginning after Sept. 2, 1958, see section 57(d) of
§1243. Loss of small business investment company
In the case of a small business investment company operating under the Small Business Investment Act of 1958, if—
(1) a loss is on stock received pursuant to the conversion privilege of convertible debentures acquired pursuant to section 304 of the Small Business Investment Act of 1958, and
(2) such loss would (but for this section) be a loss from the sale or exchange of a capital asset,
then such loss shall be treated as an ordinary loss.
(Added
Editorial Notes
References in Text
The Small Business Investment Act of 1958, referred to in text, is
Amendments
1976—
1969—Par. (1).
Statutory Notes and Related Subsidiaries
Effective Date of 1976 Amendment
Amendment by
Effective Date of 1969 Amendment
Amendment by
Effective Date
Section applicable with respect to taxable years beginning after Sept. 2, 1958, see section 57(d) of
§1244. Losses on small business stock
(a) General rule
In the case of an individual, a loss on section 1244 stock issued to such individual or to a partnership which would (but for this section) be treated as a loss from the sale or exchange of a capital asset shall, to the extent provided in this section, be treated as an ordinary loss.
(b) Maximum amount for any taxable year
For any taxable year the aggregate amount treated by the taxpayer by reason of this section as an ordinary loss shall not exceed—
(1) $50,000, or
(2) $100,000, in the case of a husband and wife filing a joint return for such year under section 6013.
(c) Section 1244 stock defined
(1) In general
For purposes of this section, the term "section 1244 stock" means stock in a domestic corporation if—
(A) at the time such stock is issued, such corporation was a small business corporation,
(B) such stock was issued by such corporation for money or other property (other than stock and securities), and
(C) such corporation, during the period of its 5 most recent taxable years ending before the date the loss on such stock was sustained, derived more than 50 percent of its aggregate gross receipts from sources other than royalties, rents, dividends, interests, annuities, and sales or exchanges of stocks or securities.
(2) Rules for application of paragraph (1)(C)
(A) Period taken into account with respect to new corporations
For purposes of paragraph (1)(C), if the corporation has not been in existence for 5 taxable years ending before the date the loss on the stock was sustained, there shall be substituted for such 5-year period—
(i) the period of the corporation's taxable years ending before such date, or
(ii) if the corporation has not been in existence for 1 taxable year ending before such date, the period such corporation has been in existence before such date.
(B) Gross receipts from sales of securities
For purposes of paragraph (1)(C), gross receipts from the sales or exchanges of stock or securities shall be taken into account only to the extent of gains therefrom.
(C) Nonapplication where deductions exceed gross income
Paragraph (1)(C) shall not apply with respect to any corporation if, for the period taken into account for purposes of paragraph (1)(C), the amount of the deductions allowed by this chapter (other than by sections 172, 243, and 245) exceeds the amount of gross income.
(3) Small business corporation defined
(A) In general
For purposes of this section, a corporation shall be treated as a small business corporation if the aggregate amount of money and other property received by the corporation for stock, as a contribution to capital, and as paid-in surplus, does not exceed $1,000,000. The determination under the preceding sentence shall be made as of the time of the issuance of the stock in question but shall include amounts received for such stock and for all stock theretofore issued.
(B) Amount taken into account with respect to property
For purposes of subparagraph (A), the amount taken into account with respect to any property other than money shall be the amount equal to the adjusted basis to the corporation of such property for determining gain, reduced by any liability to which the property was subject or which was assumed by the corporation. The determination under the preceding sentence shall be made as of the time the property was received by the corporation.
(d) Special rules
(1) Limitations on amount of ordinary loss
(A) Contributions of property having basis in excess of value
If—
(i) section 1244 stock was issued in exchange for property,
(ii) the basis of such stock in the hands of the taxpayer is determined by reference to the basis in his hands of such property, and
(iii) the adjusted basis (for determining loss) of such property immediately before the exchange exceeded its fair market value at such time,
then in computing the amount of the loss on such stock for purposes of this section the basis of such stock shall be reduced by an amount equal to the excess described in clause (iii).
(B) Increases in basis
In computing the amount of the loss on stock for purposes of this section, any increase in the basis of such stock (through contributions to the capital of the corporation, or otherwise) shall be treated as allocable to stock which is not section 1244 stock.
(2) Recapitalizations, changes in name, etc.
To the extent provided in regulations prescribed by the Secretary, stock in a corporation, the basis of which (in the hands of a taxpayer) is determined in whole or in part by reference to the basis in his hands of stock in such corporation which meets the requirements of subsection (c)(1) (other than subparagraph (C) thereof), or which is received in a reorganization described in section 368(a)(1)(F) in exchange for stock which meets such requirements, shall be treated as meeting such requirements. For purposes of paragraphs (1)(C) and (3)(A) of subsection (c), a successor corporation in a reorganization described in section 368(a)(1)(F) shall be treated as the same corporation as its predecessor.
(3) Relationship to net operating loss deduction
For purposes of section 172 (relating to the net operating loss deduction), any amount of loss treated by reason of this section as an ordinary loss shall be treated as attributable to a trade or business of the taxpayer.
(4) Individual defined
For purposes of this section, the term "individual" does not include a trust or estate.
(e) Regulations
The Secretary shall prescribe such regulations as may be necessary to carry out the purposes of this section.
(Added
Editorial Notes
Amendments
2014—Subsec. (c)(2)(C).
1984—Subsecs. (c)(1), (d)(2).
1978—Subsec. (b).
Subsec. (c).
Subsec. (d)(2).
1976—Subsecs. (a), (b).
Subsec. (c)(1)(E).
Subsec. (d)(2).
Subsec. (d)(3).
Statutory Notes and Related Subsidiaries
Effective Date of 2014 Amendment
Amendment by
Except as otherwise provided in section 221(a) of
Effective Date of 1984 Amendment
Effective Date of 1978 Amendment
"(1)
"(2)
"(3)
Effective Date of 1976 Amendment
Amendment by section 1901(b)(1)(W), (3)(G) of
§1245. Gain from dispositions of certain depreciable property
(a) General rule
(1) Ordinary income
Except as otherwise provided in this section, if section 1245 property is disposed of the amount by which the lower of—
(A) the recomputed basis of the property, or
(B)(i) in the case of a sale, exchange, or involuntary conversion, the amount realized, or
(ii) in the case of any other disposition, the fair market value of such property,
exceeds the adjusted basis of such property shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.
(2) Recomputed basis
For purposes of this section—
(A) In general
The term "recomputed basis" means, with respect to any property, its adjusted basis recomputed by adding thereto all adjustments reflected in such adjusted basis on account of deductions (whether in respect of the same or other property) allowed or allowable to the taxpayer or to any other person for depreciation or amortization.
(B) Taxpayer may establish amount allowed
For purposes of subparagraph (A), if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed for depreciation or amortization for any period was less than the amount allowable, the amount added for such period shall be the amount allowed.
(C) Certain deductions treated as amortization
Any deduction allowable under section 179, 179B, 179C, 179D, 179E, 181, 190, 193, or 194 shall be treated as if it were a deduction allowable for amortization.
(3) Section 1245 property
For purposes of this section, the term "section 1245 property" means any property which is or has been property of a character subject to the allowance for depreciation provided in section 167 and is either—
(A) personal property,
(B) other property (not including a building or its structural components) but only if such other property is tangible and has an adjusted basis in which there are reflected adjustments described in paragraph (2) for a period in which such property (or other property)—
(i) was used as an integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services,
(ii) constituted a research facility used in connection with any of the activities referred to in clause (i), or
(iii) constituted a facility used in connection with any of the activities referred to in clause (i) for the bulk storage of fungible commodities (including commodities in a liquid or gaseous state),
(C) so much of any real property (other than any property described in subparagraph (B)) which has an adjusted basis in which there are reflected adjustments for amortization under section 169, 179, 179B, 179C, 179D, 179E, 188 (as in effect before its repeal by the Revenue Reconciliation Act of 1990), 190, 193, or 194 1
(D) a single purpose agricultural or horticultural structure (as defined in section 168(i)(13)),
(E) a storage facility (not including a building or its structural components) used in connection with the distribution of petroleum or any primary product of petroleum, or
(F) any railroad grading or tunnel bore (as defined in section 168(e)(4)).
(b) Exceptions and limitations
(1) Gifts
Subsection (a) shall not apply to a disposition by gift.
(2) Transfers at death
Except as provided in section 691 (relating to income in respect of a decedent), subsection (a) shall not apply to a transfer at death.
(3) Certain tax-free transactions
If the basis of property in the hands of a transferee is determined by reference to its basis in the hands of the transferor by reason of the application of section 332, 351, 361, 721, or 731, then the amount of gain taken into account by the transferor under subsection (a)(1) shall not exceed the amount of gain recognized to the transferor on the transfer of such property (determined without regard to this section). Except as provided in paragraph (6), this paragraph shall not apply to a disposition to an organization (other than a cooperative described in section 521) which is exempt from the tax imposed by this chapter.
(4) Like kind exchanges; involuntary conversions, etc.
If property is disposed of and gain (determined without regard to this section) is not recognized in whole or in part under section 1031 or 1033, then the amount of gain taken into account by the transferor under subsection (a)(1) shall not exceed the sum of—
(A) the amount of gain recognized on such disposition (determined without regard to this section), plus
(B) the fair market value of property acquired which is not section 1245 property and which is not taken into account under subparagraph (A).
(5) Property distributed by a partnership to a partner
(A) In general
For purposes of this section, the basis of section 1245 property distributed by a partnership to a partner shall be deemed to be determined by reference to the adjusted basis of such property to the partnership.
(B) Adjustments added back
In the case of any property described in subparagraph (A), for purposes of computing the recomputed basis of such property the amount of the adjustments added back for periods before the distribution by the partnership shall be—
(i) the amount of the gain to which subsection (a) would have applied if such property had been sold by the partnership immediately before the distribution at its fair market value at such time, reduced by
(ii) the amount of such gain to which section 751(b) applied.
(6) Transfers to tax-exempt organization where property will be used in unrelated business
(A) In general
The second sentence of paragraph (3) shall not apply to a disposition of section 1245 property to an organization described in section 511(a)(2) or 511(b)(2) if, immediately after such disposition, such organization uses such property in an unrelated trade or business (as defined in section 513).
(B) Later change in use
If any property with respect to the disposition of which gain is not recognized by reason of subparagraph (A) ceases to be used in an unrelated trade or business of the organization acquiring such property, such organization shall be treated for purposes of this section as having disposed of such property on the date of such cessation.
(7) Timber property
In determining, under subsection (a)(2), the recomputed basis of property with respect to which a deduction under section 194 was allowed for any taxable year, the taxpayer shall not take into account adjustments under section 194 to the extent such adjustments are attributable to the amortizable basis of the taxpayer acquired before the 10th taxable year preceding the taxable year in which gain with respect to the property is recognized.
(8) Disposition of amortizable section 197 intangibles
(A) In general
If a taxpayer disposes of more than 1 amortizable section 197 intangible (as defined in section 197(c)) in a transaction or a series of related transactions, all such amortizable 197 intangibles shall be treated as 1 section 1245 property for purposes of this section.
(B) Exception
Subparagraph (A) shall not apply to any amortizable section 197 intangible (as so defined) with respect to which the adjusted basis exceeds the fair market value.
(c) Adjustments to basis
The Secretary shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect gain recognized under subsection (a).
(d) Application of section
This section shall apply notwithstanding any other provision of this subtitle.
(Added
Editorial Notes
References in Text
The Revenue Reconciliation Act of 1990, referred to in subsec. (a)(3)(C), is title XI of
Amendments
2018—Subsec. (a)(3)(C).
2014—Subsec. (a)(2)(C), (3)(C).
2006—Subsec. (a)(2)(C), (3)(C).
2005—Subsec. (a)(2)(C).
Subsec. (a)(3)(C).
Subsec. (b)(3).
Subsec. (b)(5) to (8).
Subsec. (b)(9).
2004—Subsec. (a)(2)(C), (3)(C).
Subsec. (a)(4).
1997—Subsec. (a)(2)(C), (3)(C).
1996—Subsec. (a)(3).
1995—Subsec. (b)(5).
1993—Subsec. (a)(2)(C).
Subsec. (a)(3).
1990—Subsec. (a)(3).
Subsec. (a)(3)(C).
Subsec. (a)(3)(D).
Subsec. (b)(3).
1989—Subsec. (a)(2)(C).
Subsec. (a)(3).
1988—Subsec. (a)(3)(F).
1986—Subsec. (a)(1).
Subsec. (a)(2).
Subsec. (a)(3).
Subsec. (a)(5), (6).
1985—Subsec. (a)(5)(A) to (C).
1984—Subsec. (a)(5)(A) to (C).
Subsec. (d)(5)(D).
1983—Subsec. (a)(3)(F).
1981—Subsec. (a)(1).
Subsec. (a)(2).
Subsec. (a)(3)(D).
Subsec. (a)(3)(E), (F).
Subsec. (a)(5).
Subsec. (a)(6).
1980—Subsec. (a)(2).
Subsec. (a)(3)(D).
Subsec. (b)(8).
1978—Subsec. (a)(2).
Subsec. (a)(3)(D).
Subsec. (a)(4)(B).
Subsec. (a)(4)(C).
1976—Subsec. (a)(1).
Subsec. (a)(2)(D).
Subsec. (a)(2) foll. (D).
Subsec. (a)(3)(D).
Subsec. (a)(4).
Subsec. (b)(5).
Subsec. (b)(7)(B).
Subsec. (c).
1975—Subsec. (b)(3), (7).
1971—Subsec. (a)(2).
Subsec. (a)(3)(B)(ii), (iii).
Subsec. (a)(3)(D).
1969—Subsec. (a)(2).
Subsec. (a)(3).
1964—Subsec. (a)(2), (3)(C).
Statutory Notes and Related Subsidiaries
Effective Date of 2014 Amendment
Amendment by
Effective Date of 2006 Amendment
Amendment by
Effective Date of 2005 Amendment
Amendment by section 402(a)(6) of
Amendments by section 403(e)(2), (i)(2) of
Amendment by section 1323(b)(1) of
Amendment by section 1331(b)(2) of
Effective Date of 2004 Amendment
Amendment by section 338(b)(5) of
Amendment by section 886(b)(2) of
Effective Date of 1997 Amendment
Amendment by
Effective Date of 1996 Amendment
Amendment by
Effective Date of 1995 Amendment
Amendment by
Effective Date of 1993 Amendment
Amendment by
Effective Date of 1990 Amendment
Amendment by section 11813(b)(21) of
Effective Date of 1989 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by
Amendment by
Effective Date of 1985 Amendment
Amendment by
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1983 Amendment
Amendment by
Effective Date of 1981 Amendment
Amendment by sections 201(b), 202(b), and 204(a)–(d) of
Amendment by section 212(d)(2)(F) of
Effective Date of 1980 Amendment
Amendment by
Amendment by
Effective Date of 1978 Amendment
Amendment by section 701(f)(3)(A), (B) of
Effective Date of 1976 Amendment
Amendment by section 1901(a)(140), (b)(3)(K), (11)(D) of
Amendment by section 1951(c)(2)(C) of
Amendment by section 2122(b)(3) of
Amendment by section 2124(a)(2) of
Effective Date of 1975 Amendment
Amendment by
Effective Date of 1971 Amendment
Amendment by section 104(a)(2) of
Amendment by section 303(c)(1), (2) of
Effective Date of 1969 Amendment
Amendment by section 704(b)(4) of
Effective Date of 1964 Amendment
Amendment by
Effective Date
Savings Provision
For provisions that nothing in amendment by
For provisions that nothing in amendment by sections 11801 and 11813 of
1 So in original. Probably should be followed by a comma.
[§§1246, 1247. Repealed. Pub. L. 108–357, title IV, §413(a)(2), (3), Oct. 22, 2004, 118 Stat. 1506 ]
Section 1246, added
Section 1247, added
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
Repeal applicable to taxable years of foreign corporations beginning after Dec. 31, 2004, and to taxable years of United States shareholders with or within which such taxable years of foreign corporations end, see section 413(d)(1) of
§1248. Gain from certain sales or exchanges of stock in certain foreign corporations
(a) General rule
If—
(1) a United States person sells or exchanges stock in a foreign corporation, and
(2) such person owns, within the meaning of section 958(a), or is considered as owning by applying the rules of ownership of section 958(b), 10 percent or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation at any time during the 5-year period ending on the date of the sale or exchange when such foreign corporation was a controlled foreign corporation (as defined in section 957),
then the gain recognized on the sale or exchange of such stock shall be included in the gross income of such person as a dividend, to the extent of the earnings and profits of the foreign corporation attributable (under regulations prescribed by the Secretary) to such stock which were accumulated in taxable years of such foreign corporation beginning after December 31, 1962, and during the period or periods the stock sold or exchanged was held by such person while such foreign corporation was a controlled foreign corporation. For purposes of this section, a United States person shall be treated as having sold or exchanged any stock if, under any provision of this subtitle, such person is treated as realizing gain from the sale or exchange of such stock.
(b) Limitation on tax applicable to individuals
In the case of an individual, if the stock sold or exchanged is a capital asset (within the meaning of section 1221) and has been held for more than 1 year, the tax attributable to an amount included in gross income as a dividend under subsection (a) shall not be greater than a tax equal to the sum of—
(1) a pro rata share of the excess of—
(A) the taxes that would have been paid by the foreign corporation with respect to its income had it been taxed under this chapter as a domestic corporation (but without allowance for deduction of, or credit for, taxes described in subparagraph (B)), for the period or periods the stock sold or exchanged was held by the United States person in taxable years beginning after December 31, 1962, while the foreign corporation was a controlled foreign corporation, adjusted for distributions and amounts previously included in gross income of a United States shareholder under section 951, over
(B) the income, war profits, or excess profits taxes paid by the foreign corporation with respect to such income; and
(2) an amount equal to the tax that would result by including in gross income, as gain from the sale or exchange of a capital asset held for more than 1 year, an amount equal to the excess of (A) the amount included in gross income as a dividend under subsection (a), over (B) the amount determined under paragraph (1).
(c) Determination of earnings and profits
(1) In general
Except as provided in section 312(k)(4), for purposes of this section, the earnings and profits of any foreign corporation for any taxable year shall be determined according to rules substantially similar to those applicable to domestic corporations, under regulations prescribed by the Secretary.
(2) Earnings and profits of subsidiaries of foreign corporations
If—
(A) subsection (a) or (f) applies to a sale, exchange, or distribution by a United States person of stock of a foreign corporation and, by reason of the ownership of the stock sold or exchanged, such person owned within the meaning of section 958(a)(2) stock of any other foreign corporation; and
(B) such person owned, within the meaning of section 958(a), or was considered as owning by applying the rules of ownership of section 958(b), 10 percent or more of the total combined voting power of all classes of stock entitled to vote of such other foreign corporation at any time during the 5-year period ending on the date of the sale or exchange when such other foreign corporation was a controlled foreign corporation (as defined in section 957),
then, for purposes of this section, the earnings and profits of the foreign corporation the stock of which is sold or exchanged which are attributable to the stock sold or exchanged shall be deemed to include the earnings and profits of such other foreign corporation which—
(C) are attributable (under regulations prescribed by the Secretary) to the stock of such other foreign corporation which such person owned within the meaning of section 958(a)(2) (by reason of his ownership within the meaning of section 958(a)(1)(A) of the stock sold or exchanged) on the date of such sale or exchange (or on the date of any sale or exchange of the stock of such other foreign corporation occurring during the 5-year period ending on the date of the sale or exchange of the stock of such foreign corporation, to the extent not otherwise taken into account under this section but not in excess of the fair market value of the stock of such other foreign corporation sold or exchanged over the basis of such stock (for determining gain) in the hands of the transferor); and
(D) were accumulated in taxable years of such other corporation beginning after December 31, 1962, and during the period or periods—
(i) such other corporation was a controlled foreign corporation, and
(ii) such person owned within the meaning of section 958(a) the stock of such other foreign corporation.
(d) Exclusions from earnings and profits
For purposes of this section, the following amounts shall be excluded, with respect to any United States person, from the earnings and profits of a foreign corporation:
(1) Amounts included in gross income under section 951
Earnings and profits of the foreign corporation attributable to any amount previously included in the gross income of such person under section 951, with respect to the stock sold or exchanged, but only to the extent the inclusion of such amount did not result in an exclusion of an amount from gross income under section 959.
[(2) Repealed. Pub. L. 100–647, title I, §1006(e)(14)(A), Nov. 10, 1988, 102 Stat. 3402 ]
(3) Less developed country corporations under prior law
Earnings and profits of a foreign corporation which were accumulated during any taxable year beginning before January 1, 1976, while such corporation was a less developed country corporation under section 902(d) as in effect before the enactment of the Tax Reduction Act of 1975.
(4) United States income
Any item includible in gross income of the foreign corporation under this chapter—
(A) for any taxable year beginning before January 1, 1967, as income derived from sources within the United States of a foreign corporation engaged in trade or business within the United States, or
(B) for any taxable year beginning after December 31, 1966, as income effectively connected with the conduct by such corporation of a trade or business within the United States.
This paragraph shall not apply with respect to any item which is exempt from taxation (or is subject to a reduced rate of tax) pursuant to a treaty obligation of the United States.
(5) Foreign trade income
Earnings and profits of the foreign corporation attributable to foreign trade income of a FSC (as defined in section 922) other than foreign trade income which—
(A) is section 923(a)(2) non-exempt income (within the meaning of section 927(d)(6)), or
(B) would not (but for section 923(a)(4)) be treated as exempt foreign trade income.
For purposes of the preceding sentence, the terms "foreign trade income" and "exempt foreign trade income" have the respective meanings given such terms by section 923. Any reference in this paragraph to section 922, 923, or 927 shall be treated as a reference to such section as in effect before its repeal by the FSC Repeal and Extraterritorial Income Exclusion Act of 2000.
(6) Amounts included in gross income under section 1293
Earnings and profits of the foreign corporation attributable to any amount previously included in the gross income of such person under section 1293 with respect to the stock sold or exchanged, but only to the extent the inclusion of such amount did not result in an exclusion of an amount under section 1293(c).
(e) Sales or exchanges of stock in certain domestic corporations
Except as provided in regulations prescribed by the Secretary, if—
(1) a United States person sells or exchanges stock of a domestic corporation, and
(2) such domestic corporation was formed or availed of principally for the holding, directly or indirectly, of stock of one or more foreign corporations,
such sale or exchange shall, for purposes of this section, be treated as a sale or exchange of the stock of the foreign corporation or corporations held by the domestic corporation.
(f) Certain nonrecognition transactions
Except as provided in regulations prescribed by the Secretary—
(1) In general
If—
(A) a domestic corporation satisfies the stock ownership requirements of subsection (a)(2) with respect to a foreign corporation, and
(B) such domestic corporation distributes stock of such foreign corporation in a distribution to which section 311(a), 337, 355(c)(1), or 361(c)(1) applies,
then, notwithstanding any other provision of this subtitle, an amount equal to the excess of the fair market value of such stock over its adjusted basis in the hands of the domestic corporation shall be included in the gross income of the domestic corporation as a dividend to the extent of the earnings and profits of the foreign corporation attributable (under regulations prescribed by the Secretary) to such stock which were accumulated in taxable years of such foreign corporation beginning after December 31, 1962, and during the period or periods the stock was held by such domestic corporation while such foreign corporation was a controlled foreign corporation. For purposes of subsections (c)(2), (d), and (h), a distribution of stock to which this subsection applies shall be treated as a sale of stock to which subsection (a) applies.
(2) Exception for certain distributions
In the case of any distribution of stock of a foreign corporation, paragraph (1) shall not apply if such distribution is to a domestic corporation—
(A) which is treated under this section as holding such stock for the period for which the stock was held by the distributing corporation, and
(B) which, immediately after the distribution, satisfies the stock ownership requirements of subsection (a)(2) with respect to such foreign corporation.
(3) Application to cases described in subsection (e)
To the extent that earnings and profits are taken into account under this subsection, they shall be excluded and not taken into account for purposes of subsection (e).
(g) Exceptions
This section shall not apply to—
(1) distributions to which section 303 (relating to distributions in redemption of stock to pay death taxes) applies; or
(2) any amount to the extent that such amount is, under any other provision of this title, treated as—
(A) a dividend (other than an amount treated as a dividend under subsection (f)),
(B) ordinary income, or
(C) gain from the sale of an asset held for not more than 1 year.
(h) Taxpayer to establish earnings and profits
Unless the taxpayer establishes the amount of the earnings and profits of the foreign corporation to be taken into account under subsection (a) or (f), all gain from the sale or exchange shall be considered a dividend under subsection (a) or (f), and unless the taxpayer establishes the amount of foreign taxes to be taken into account under subsection (b), the limitation of such subsection shall not apply.
(i) Treatment of certain indirect transfers
(1) In general
If any shareholder of a 10-percent corporate shareholder of a foreign corporation exchanges stock of the 10-percent corporate shareholder for stock of the foreign corporation, such 10-percent corporate shareholder shall recognize gain in the same manner as if the stock of the foreign corporation received in such exchange had been—
(A) issued to the 10-percent corporate shareholder, and
(B) then distributed by the 10-percent corporate shareholder to such shareholder in redemption or liquidation (whichever is appropriate).
The amount of gain recognized by such 10-percent corporate shareholder under the preceding sentence shall not exceed the amount treated as a dividend under this section.
(2) 10-percent corporate shareholder defined
For purposes of this subsection, the term "10-percent corporate shareholder" means any domestic corporation which, as of the day before the exchange referred to in paragraph (1), satisfies the stock ownership requirements of subsection (a)(2) with respect to the foreign corporation.
(j) Coordination with dividends received deduction
In the case of the sale or exchange by a domestic corporation of stock in a foreign corporation held for 1 year or more, any amount received by the domestic corporation which is treated as a dividend by reason of this section shall be treated as a dividend for purposes of applying section 245A.
(k) Cross reference
For provision excluding amounts previously taxed under this section from gross income when subsequently distributed, see section 959(e).
(Added
Editorial Notes
References in Text
Section 902(d) as in effect before the enactment of the Tax Reduction Act of 1975, referred to in subsec. (d)(3), means
The FSC Repeal and Extraterritorial Income Exclusion Act of 2000, referred to in subsec. (d)(5), is
Amendments
2017—Subsecs. (j), (k).
2007—Subsec. (d)(5).
2004—Subsec. (d)(5) to (7).
1996—Subsec. (a).
Subsec. (a)(1).
Subsec. (e)(1).
Subsec. (f)(1)(B).
Subsec. (i)(1).
"(A) issued to the 10-percent corporate shareholder, and
"(B) then distributed by the 10-percent corporate shareholder to such shareholder in redemption or liquidation (whichever is appropriate)."
1988—Subsec. (d)(2).
Subsec. (d)(7).
Subsec. (f).
Subsec. (f)(1).
Subsec. (f)(1)(B).
Subsec. (f)(3), (4).
1986—Subsec. (d)(6).
Subsec. (e).
Subsec. (f).
Subsec. (g).
Subsec. (i)(1)(B).
1984—Subsec. (b).
Subsec. (c)(2)(D).
Subsec. (d)(6).
Subsec. (g)(3)(C).
Subsec. (i).
Subsec. (j).
1983—Subsec. (c)(1).
1976—Subsec. (a).
Subsec. (b).
Subsec. (c)(1).
Subsec. (c)(2)(A).
Subsec. (c)(2)(C).
Subsec. (d)(2).
Subsec. (d)(3).
Subsec. (e).
Subsec. (f).
Subsec. (g).
Subsec. (g)(3)(C).
Subsec. (h).
1969—Subsec. (c)(1).
1966—Subsec. (d)(4).
Statutory Notes and Related Subsidiaries
Effective Date of 2017 Amendment
Effective Date of 2004 Amendment
Amendment by
Effective Date of 1996 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 631(d)(2) of
Amendment by sections 1810(i)(1) and 1876(a)(2) of
Effective Date of 1984 Amendment
Amendment by section 133(b)(2), (c) of
Amendment by section 801(d)(6) of
Amendment by section 1001(b)(22) of
Effective Date of 1983 Amendment
Amendment by
Effective Date of 1976 Amendment
For effective date of amendment by section 1042 of
Amendment by section 1901(b)(3)(H), (32)(B)(iii) of
Effective Date of 1966 Amendment
Amendment by
Effective Date
Plan Amendments Not Required Until January 1, 1989
For provisions directing that if any amendments made by subtitle A or subtitle C of title XI [§§1101–1147 and 1171–1177] or title XVIII [§§1800–1899A] of
Transitional Rule
"(A) on or before such date, the taxpayer adopts a plan of reorganization to which section 356 [of the Internal Revenue Code of 1986] applies, and
"(B) such plan or reorganization is implemented and distributions pursuant to such plan are completed on or before the date of enactment of this Act [Oct. 22, 1986]."
§1249. Gain from certain sales or exchanges of patents, etc., to foreign corporations
(a) General rule
Gain from the sale or exchange of a patent, an invention, model, or design (whether or not patented), a copyright, a secret formula or process, or any other similar property right to any foreign corporation by any United States person (as defined in section 7701(a)(30)) which controls such foreign corporation shall, if such gain would (but for the provisions of this subsection) be gain from the sale or exchange of a capital asset or of property described in section 1231, be considered as ordinary income.
(b) Control
For purposes of subsection (a), control means, with respect to any foreign corporation, the ownership, directly or indirectly, of stock possessing more than 50 percent of the total combined voting power of all classes of stock entitled to vote. For purposes of this subsection, the rules for determining ownership of stock prescribed by section 958 shall apply.
(Added
Editorial Notes
Amendments
2014—Subsec. (a).
1976—Subsec. (a).
1966—Subsec. (a).
Statutory Notes and Related Subsidiaries
Effective Date of 2014 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by
Effective Date of 1966 Amendment
Amendment by
Effective Date
§1250. Gain from dispositions of certain depreciable realty
(a) General rule
Except as otherwise provided in this section—
(1) Additional depreciation after December 31, 1975
(A) In general
If section 1250 property is disposed of after December 31, 1975, then the applicable percentage of the lower of—
(i) that portion of the additional depreciation (as defined in subsection (b)(1) or (4)) attributable to periods after December 31, 1975, in respect of the property, or
(ii) the excess of the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value of such property (in the case of any other disposition), over the adjusted basis of such property,
shall be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.
(B) Applicable percentage
For purposes of subparagraph (A), the term "applicable percentage" means—
(i) in the case of section 1250 property with respect to which a mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of State or local laws and with respect to which the owner is subject to the restrictions described in section 1039(b)(1)(B) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months;
(ii) in the case of dwelling units which, on the average, were held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under the provisions of State or local law authorizing similar levels of subsidy for lower-income families, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months;
(iii) in the case of section 1250 property with respect to which a depreciation deduction for rehabilitation expenditures was allowed under section 167(k), 100 percent minus 1 percentage point for each full month in excess of 100 full months after the date on which such property was placed in service;
(iv) in the case of section 1250 property with respect to which a loan is made or insured under title V of the Housing Act of 1949, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months; and
(v) in the case of all other section 1250 property, 100 percent.
In the case of a building (or a portion of a building devoted to dwelling units), if, on the average, 85 percent or more of the dwelling units contained in such building (or portion thereof) are units described in clause (ii), such building (or portion thereof) shall be treated as property described in clause (ii). Clauses (i), (ii), and (iv) shall not apply with respect to the additional depreciation described in subsection (b)(4) which was allowed under section 167(k).
(2) Additional depreciation after December 31, 1969, and before January 1, 1976
(A) In general
If section 1250 property is disposed of after December 31, 1969, and the amount determined under paragraph (1)(A)(ii) exceeds the amount determined under paragraph (1)(A)(i), then the applicable percentage of the lower of—
(i) that portion of the additional depreciation attributable to periods after December 31, 1969, and before January 1, 1976, in respect of the property, or
(ii) the excess of the amount determined under paragraph (1)(A)(ii) over the amount determined under paragraph (1)(A)(i),
shall also be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.
(B) Applicable percentage
For purposes of subparagraph (A), the term "applicable percentage" means—
(i) in the case of section 1250 property disposed of pursuant to a written contract which was, on July 24, 1969, and at all times thereafter, binding on the owner of the property, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 20 full months;
(ii) in the case of section 1250 property with respect to which a mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of State or local laws, and with respect to which the owner is subject to the restrictions described in section 1039(b)(1)(B) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 20 full months;
(iii) in the case of residential rental property (as defined in section 167(j)(2)(B)) other than that covered by clauses (i) and (ii), 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months;
(iv) in the case of section 1250 property with respect to which a depreciation deduction for rehabilitation expenditures was allowed under section 167(k), 100 percent minus 1 percentage point for each full month in excess of 100 full months after the date on which such property was placed in service; and
(v) in the case of all other section 1250 property, 100 percent.
Clauses (i), (ii), and (iii) shall not apply with respect to the additional depreciation described in subsection (b)(4).
(3) Additional depreciation before January 1, 1970
(A) In general
If section 1250 property is disposed of after December 31, 1963, and the amount determined under paragraph (1)(A)(ii) exceeds the sum of the amounts determined under paragraphs (1)(A)(i) and (2)(A)(i), then the applicable percentage of the lower of—
(i) that portion of the additional depreciation attributable to periods before January 1, 1970, in respect of the property, or
(ii) the excess of the amount determined under paragraph (1)(A)(ii) over the sum of the amounts determined under paragraphs (1)(A)(i) and (2)(A)(i),
shall also be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.
(B) Applicable percentage
For purposes of subparagraph (A), the term "applicable percentage" means 100 percent minus 1 percentage point for each full month the property was held after the date on which the property was held for 20 full months.
(4) Special rule
For purposes of this subsection, any reference to section 167(k) or 167(j)(2)(B) shall be treated as a reference to such section as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990.
(5) Cross reference
For reduction in the case of corporations on capital gain treatment under this section, see section 291(a)(1).
(b) Additional depreciation defined
For purposes of this section—
(1) In general
The term "additional depreciation" means, in the case of any property, the depreciation adjustments in respect of such property; except that, in the case of property held more than one year, it means such adjustments only to the extent that they exceed the amount of the depreciation adjustments which would have resulted if such adjustments had been determined for each taxable year under the straight line method of adjustment.
(2) Property held by lessee
In the case of a lessee, in determining the depreciation adjustments which would have resulted in respect of any building erected (or other improvement made) on the leased property, or in respect of any cost of acquiring the lease, the lease period shall be treated as including all renewal periods. For purposes of the preceding sentence—
(A) the term "renewal period" means any period for which the lease may be renewed, extended, or continued pursuant to an option exercisable by the lessee, but
(B) the inclusion of renewal periods shall not extend the period taken into account by more than 2/3 of the period on the basis of which the depreciation adjustments were allowed.
(3) Depreciation adjustments
The term "depreciation adjustments" means, in respect of any property, all adjustments attributable to periods after December 31, 1963, reflected in the adjusted basis of such property on account of deductions (whether in respect of the same or other property) allowed or allowable to the taxpayer or to any other person for exhaustion, wear and tear, obsolescence, or amortization (other than amortization under section 168 (as in effect before its repeal by the Tax Reform Act of 1976), 169, 185 (as in effect before its repeal by the Tax Reform Act of 1986), 188 (as in effect before its repeal by the Revenue Reconciliation Act of 1990), 190, or 193). For purposes of the preceding sentence, if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed as a deduction for any period was less than the amount allowable, the amount taken into account for such period shall be the amount allowed.
(4) Additional depreciation attributable to rehabilitation expenditures
The term "additional depreciation" also means, in the case of section 1250 property with respect to which a depreciation or amortization deduction for rehabilitation expenditures was allowed under section 167(k) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) or 191 (as in effect before its repeal by the Economic Recovery Tax Act of 1981), the depreciation or amortization adjustments allowed under such section to the extent attributable to such property, except that, in the case of such property held for more than one year after the rehabilitation expenditures so allowed were incurred, it means such adjustments only to the extent that they exceed the amount of the depreciation adjustments which would have resulted if such adjustments had been determined under the straight line method of adjustment without regard to the useful life permitted under section 167(k) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990) or 191 (as in effect before its repeal by the Economic Recovery Tax Act of 1981).
(5) Method of computing straight line adjustments
For purposes of paragraph (1), the depreciation adjustments which would have resulted for any taxable year under the straight line method shall be determined—
(A) in the case of property to which section 168 applies, by determining the adjustments which would have resulted for such year if the taxpayer had elected the straight line method for such year using the recovery period applicable to such property, and
(B) in the case any property to which section 168 does not apply, if a useful life (or salvage value) was used in determining the amount allowable as a deduction for any taxable year, by using such life (or value).
(c) Section 1250 property
For purposes of this section, the term "section 1250 property" means any real property (other than section 1245 property, as defined in section 1245(a)(3)) which is or has been property of a character subject to the allowance for depreciation provided in section 167.
(d) Exceptions and limitations
(1) Gifts
Subsection (a) shall not apply to a disposition by gift.
(2) Transfers at death
Except as provided in section 691 (relating to income in respect of a decedent), subsection (a) shall not apply to a transfer at death.
(3) Certain tax-free transactions
If the basis of property in the hands of a transferee is determined by reference to its basis in the hands of the transferor by reason of the application of section 332, 351, 361, 721, or 731, then the amount of gain taken into account by the transferor under subsection (a) shall not exceed the amount of gain recognized to the transferor on the transfer of such property (determined without regard to this section). Except as provided in paragraph (6), this paragraph shall not apply to a disposition to an organization (other than a cooperative described in section 521) which is exempt from the tax imposed by this chapter.
(4) Like kind exchanges; involuntary conversions, etc.
(A) Recognition limit
If property is disposed of and gain (determined without regard to this section) is not recognized in whole or in part under section 1031 or 1033, then the amount of gain taken into account by the transferor under subsection (a) shall not exceed the greater of the following:
(i) the amount of gain recognized on the disposition (determined without regard to this section), increased as provided in subparagraph (B), or
(ii) the amount determined under subparagraph (C).
(B) Increase for certain stock
With respect to any transaction, the increase provided by this subparagraph is the amount equal to the fair market value of any stock purchased in a corporation which (but for this paragraph) would result in nonrecognition of gain under section 1033(a)(2)(A).
(C) Adjustment where insufficient section 1250 property is acquired
With respect to any transaction, the amount determined under this subparagraph shall be the excess of—
(i) the amount of gain which would (but for this paragraph) be taken into account under subsection (a), over
(ii) the fair market value (or cost in the case of a transaction described in section 1033(a)(2)) of the section 1250 property acquired in the transaction.
(D) Basis of property acquired
In the case of property purchased by the taxpayer in a transaction described in section 1033(a)(2), in applying section 1033(b)(2), such sentence 1 shall be applied—
(i) first solely to section 1250 properties and to the amount of gain not taken into account under subsection (a) by reason of this paragraph, and
(ii) then to all purchased properties to which such sentence applies and to the remaining gain not recognized on the transaction as if the cost of the section 1250 properties were the basis of such properties computed under clause (i).
In the case of property acquired in any other transaction to which this paragraph applies, rules consistent with the preceding sentence shall be applied under regulations prescribed by the Secretary.
(E) Additional depreciation with respect to property disposed of
In the case of any transaction described in section 1031 or 1033, the additional depreciation in respect of the section 1250 property acquired which is attributable to the section 1250 property disposed of shall be an amount equal to the amount of the gain which was not taken into account under subsection (a) by reason of the application of this paragraph.
(5) Property distributed by a partnership to a partner
(A) In general
For purposes of this section, the basis of section 1250 property distributed by a partnership to a partner shall be deemed to be determined by reference to the adjusted basis of such property to the partnership.
(B) Additional depreciation
In respect of any property described in subparagraph (A), the additional depreciation attributable to periods before the distribution by the partnership shall be—
(i) the amount of the gain to which subsection (a) would have applied if such property had been sold by the partnership immediately before the distribution at its fair market value at such time and the applicable percentage for the property had been 100 percent, reduced by
(ii) if section 751(b) applied to any part of such gain, the amount of such gain to which section 751(b) would have applied if the applicable percentage for the property had been 100 percent.
(6) Transfers to tax-exempt organization where property will be used in unrelated business
(A) In general
The second sentence of paragraph (3) shall not apply to a disposition of section 1250 property to an organization described in section 511(a)(2) or 511(b)(2) if, immediately after such disposition, such organization uses such property in an unrelated trade or business (as defined in section 513).
(B) Later change in use
If any property with respect to the disposition of which gain is not recognized by reason of subparagraph (A) ceases to be used in an unrelated trade or business of the organization acquiring such property, such organization shall be treated for purposes of this section as having disposed of such property on the date of such cessation.
(7) Foreclosure dispositions
If any section 1250 property is disposed of by the taxpayer pursuant to a bid for such property at foreclosure or by operation of an agreement or of process of law after there was a default on indebtedness which such property secured, the applicable percentage referred to in paragraph (1)(B), (2)(B), or (3)(B) of subsection (a), as the case may be, shall be determined as if the taxpayer ceased to hold such property on the date of the beginning of the proceedings pursuant to which the disposition occurred, or, in the event there are no proceedings, such percentage shall be determined as if the taxpayer ceased to hold such property on the date, determined under regulations prescribed by the Secretary, on which such operation of an agreement or process of law, pursuant to which the disposition occurred, began.
(e) Holding period
For purposes of determining the applicable percentage under this section, the provisions of section 1223 shall not apply, and the holding period of section 1250 property shall be determined under the following rules:
(1) Beginning of holding period
The holding period of section 1250 property shall be deemed to begin—
(A) in the case of property acquired by the taxpayer, on the day after the date of acquisition, or
(B) in the case of property constructed, reconstructed, or erected by the taxpayer, on the first day of the month during which the property is placed in service.
(2) Property with transferred basis
If the basis of property acquired in a transaction described in paragraph (1), (2), or (3) of subsection (d) is determined by reference to its basis in the hands of the transferor, then the holding period of the property in the hands of the transferee shall include the holding period of the property in the hands of the transferor.
(f) Special rules for property which is substantially improved
(1) Amount treated as ordinary income
If, in the case of a disposition of section 1250 property, the property is treated as consisting of more than one element by reason of paragraph (3), then the amount taken into account under subsection (a) in respect of such section 1250 property as ordinary income shall be the sum of the amounts determined under paragraph (2).
(2) Ordinary income attributable to an element
For purposes of paragraph (1), the amount taken into account for any element shall be the sum of a series of amounts determined for the periods set forth in subsection (a), with the amount for any such period being determined by multiplying—
(A) the amount which bears the same ratio to the lower of the amounts specified in clause (i) or (ii) of subsection (a)(1)(A), in clause (i) or (ii) of subsection (a)(2)(A), or in clause (i) or (ii) of subsection (a)(3)(A), as the case may be, for the section 1250 property as the additional depreciation for such element attributable to such period bears to the sum of the additional depreciation for all elements attributable to such period, by
(B) the applicable percentage for such element for such period.
For purposes of this paragraph, determinations with respect to any element shall be made as if it were a separate property.
(3) Property consisting of more than one element
In applying this subsection in the case of any section 1250 property, there shall be treated as a separate element—
(A) each separate improvement,
(B) if, before completion of section 1250 property, units thereof (as distinguished from improvements) were placed in service, each such unit of section 1250 property, and
(C) the remaining property which is not taken into account under subparagraphs (A) and (B).
(4) Property which is substantially improved
For purposes of this subsection—
(A) In general
The term "separate improvement" means each improvement added during the 36–month period ending on the last day of any taxable year to the capital account for the property, but only if the sum of the amounts added to such account during such period exceeds the greatest of—
(i) 25 percent of the adjusted basis of the property,
(ii) 10 percent of the adjusted basis of the property, determined without regard to the adjustments provided in paragraphs (2) and (3) of section 1016(a), or
(iii) $5,000.
For purposes of clauses (i) and (ii), the adjusted basis of the property shall be determined as of the beginning of the first day of such 36–month period, or of the holding period of the property (within the meaning of subsection (e)), whichever is the later.
(B) Exception
Improvements in any taxable year shall be taken into account for purposes of subparagraph (A) only if the sum of the amounts added to the capital account for the property for such taxable year exceeds the greater of—
(i) $2,000, or
(ii) one percent of the adjusted basis referred to in subparagraph (A)(ii), determined, however, as of the beginning of such taxable year.
For purposes of this section, if the amount added to the capital account for any separate improvement does not exceed the greater of clause (i) or (ii), such improvement shall be treated as placed in service on the first day, of a calendar month, which is closest to the middle of the taxable year.
(C) Improvement
The term "improvement" means, in the case of any section 1250 property, any addition to capital account for such property after the initial acquisition or after completion of the property.
(g) Adjustments to basis
The Secretary shall prescribe such regulations as he may deem necessary to provide for adjustments to the basis of property to reflect gain recognized under subsection (a).
(h) Application of section
This section shall apply notwithstanding any other provision of this subtitle.
(Added
Editorial Notes
References in Text
Sections 221 and 236 of the National Housing Act, referred to in subsec. (a)(1)(B)(i), (2)(B)(ii), are classified to sections 1715l and 1715z–1, respectively, of Title 12, Banks and Banking.
The date of the enactment of the Revenue Reconciliation Act of 1990, referred to in subsecs. (a)(1)(B)(i), (2)(B)(ii), (4) and (b)(4), is the date of enactment of
Section 8 of the United States Housing Act of 1937, referred to in subsec. (a)(1)(B)(ii), is classified to
The Housing Act of 1949, referred to in subsec. (a)(1)(B)(iv), is act July 15, 1949, ch. 338,
The Tax Reform Act of 1976, referred to in subsec. (b)(3), is
The Tax Reform Act of 1986, referred to in subsec. (b)(3), is
The Revenue Reconciliation Act of 1990, referred to in subsec. (b)(3), is title XI of
The Economic Recovery Tax Act of 1981, referred to in subsec. (b)(4), is
Such sentence, referred to in subsec. (d)(4)(D), probably should be a reference to
Amendments
2018—Subsec. (d)(3).
2005—Subsec. (b)(3).
Subsec. (d)(5) to (8).
Subsec. (e)(2).
1998—Subsec. (d)(4)(D).
1997—Subsec. (d)(7) to (10).
"(A) property to the extent used by the taxpayer as his principal residence (within the meaning of section 1034, relating to rollover of gain on sale of principal residence), and
"(B) property in respect of which the taxpayer meets the age and ownership requirements of section 121 (relating to one-time exclusion of gain from sale of principal residence by individual who has attained age 55) but only to the extent that he meets the use requirements of such section in respect of such property."
Subsec. (e)(3).
1996—Subsec. (e)(4).
"(4)
1995—Subsec. (d)(5).
1990—Subsec. (a)(1)(B)(i), (2)(B)(ii).
Subsec. (a)(4), (5).
Subsec. (b)(3).
Subsec. (b)(4).
Subsec. (d)(3).
Subsec. (d)(8).
Subsecs. (g) to (i).
1989—Subsec. (b)(5)(A).
Subsec. (b)(5)(B).
1988—Subsec. (d)(11).
1986—Subsec. (b)(3).
1984—Subsec. (a)(4).
1983—Subsec. (b)(1).
Subsec. (b)(5).
1981—Subsec. (b)(4).
Subsec. (d)(11).
1980—Subsec. (a)(1)(B).
Subsec. (b)(3).
1978—Subsec. (b)(3).
Subsec. (b)(4).
Subsec. (d)(7)(A).
Subsec. (d)(7)(B).
1976—Subsec. (a).
(1) Added par. (1).
(2) Redesignated as pars. (2) and (3) existing pars. (1) and (2).
(3) Made the following changes in par. (2): inserted in heading ", and before January 1, 1976"; designated introductory text as subpar. "(A) In general"; inserted therein "and the amount determined under paragraph (1)(A)(ii) exceeds the amount determined under paragraph (1)(A)(i), then"; redesignated as cl. (i) existing subpar. (A); substituted therein "attributable to periods after December 31, 1969, and before January 1, 1976" for "(as defined in subsection (b)(1) or (4) attributable to periods after December 31, 1969"; substituted cl. (ii) and concluding text for subpar. (B) and concluding text which read:
"(B) the excess of—
"(i) the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value of such property (in the case of any other disposition), over
"(ii) the adjusted basis of such property,
shall be treated as gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231. Such gain shall be recognized notwithstanding any other provision of this subtitle."; redesignated as subpar. (B) existing subpar. (C); substituted therein introductory "subparagraph (A)" for "paragraph (1)"; and deleted from cl. (ii) "constructed, reconstructed, or acquired by the taxpayer before January 1, 1976," after "section 1250 property" and "is" before "financed", and substituted "1" for "one".
(4) Made the following changes in par. (3): substituted in subpar. (A) "determined under paragraph (1)(A)(ii) exceeds the sum of the amounts determined under paragraphs (1)(A)(i) and (2)(A)(i)" for "determined under paragraph (1)(B) exceeds the amount determined under paragraph (1)(A)"; and substituted subpar. (A)(ii) and concluding text for par. (2)(A)(ii), and concluding text which read:
"(ii) the excess of the amount determined under paragraph (1)(B) over the amount determined under paragraph (1)(A),
shall also be treated as gain from the sale or exchange of property which is neither a capital asset nor property described in section 1231. Such gain shall be recognized notwithstanding any other provisions of this subtitle."
Subsec. (b)(3).
Subsec. (d)(4)(B).
Subsec. (d)(4)(C).
Subsec. (d)(4)(D).
Subsec. (d)(5), (8)(F)(ii).
Subsec. (d)(10).
Subsec. (f)(1).
Subsec. (f)(2).
Subsec. (g)(1).
Subsec. (g)(2).
"(A) the amount which bears the same ratio to the lower of the additional depreciation or the gain recognized for the section 1250 property disposed of as the additional depreciation for such element bears to the sum of the additional depreciation for all elements disposed of, by
"(B) the applicable percentage for such element.
For purposes of this paragraph, determinations with respect to any element shall be made as if it were a separate property."
Subsec. (h).
1975—Subsec. (a)(1)(C)(ii).
Subsec. (d)(3), (9).
1971—Subsec. (b)(3).
1969—Subsec. (a).
Subsec. (b)(4).
Subsec. (b)(3).
Subsec. (d).
Subsec. (e)(4).
Subsec. (f)(1).
Subsec. (f)(2).
Subsecs. (g) to (i).
Statutory Notes and Related Subsidiaries
Effective Date of 2005 Amendment
Amendments by
Amendment by
Effective Date of 1997 Amendment
Amendment by
Effective Date of 1996 Amendment
Amendment by
Effective Date of 1995 Amendment
Amendment by
Effective Date of 1990 Amendment
Amendment by section 11812(b)(11), (12) of
Effective Date of 1989 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1983 Amendment
Amendment by
Effective Date of 1981 Amendment
Amendment by section 204(e) of
Amendment by section 212(d)(2)(F) of
Effective Date of 1980 Amendments
Amendment by
Amendment by
Effective Date of 1978 Amendment
Amendment by section 404(c)(7) of
Amendment by section 405(c)(4) of
Amendment by section 701(f)(3)(C), (E) of
Effective Date of 1976 Amendment
Amendment by section 1901(b)(3)(K), (31)(A), (B), (E) of
Amendment by section 1951(c)(2)(C) of
Amendment by section 2122(b)(4) of
Amendment by section 2124(a)(3)(D) of
Effective Date of 1975 Amendments
"(1)
"(2)
Amendment by
Effective Date of 1971 Amendment
Amendment by
Effective Date of 1969 Amendment
Amendment by section 521(b), (c), (e) of
Amendment by section 704(b)(5) of
Effective Date
Savings Provision
For provisions that nothing in amendment by
1 See References in Text note below.
[§1251. Repealed. Pub. L. 98–369, div. A, title IV, §492(a), July 18, 1984, 98 Stat. 853 ]
Section, added
Statutory Notes and Related Subsidiaries
Effective Date of Repeal
Repeal applicable to taxable years beginning after Dec. 31, 1983, see section 492(d) of
§1252. Gain from disposition of farm land
(a) General rule
(1) Ordinary income
Except as otherwise provided in this section, if farm land which the taxpayer has held for less than 10 years is disposed of, the lower of—
(A) the applicable percentage of the aggregate of the deductions allowed under section 175 (relating to soil and water conservation expenditures) for expenditures made by the taxpayer with respect to the farm land or
(B) the excess of—
(i) the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value of the farm land (in the case of any other disposition), over
(ii) the adjusted basis of such land,
shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.
(2) Farm land
For purposes of this section, the term "farm land" means any land with respect to which deductions have been allowed under section 175 (relating to soil and water conservation expenditures).
(3) Applicable percentage
For purposes of this section—
| If the farm land is disposed of— | The applicable percentage is— |
|---|---|
| Within 5 years after the date it was acquired | 100 percent. |
| Within the sixth year after it was acquired | 80 percent. |
| Within the seventh year after it was acquired | 60 percent. |
| Within the eighth year after it was acquired | 40 percent. |
| Within the ninth year after it was acquired | 20 percent. |
| 10 years or more years after it was acquired | 0 percent. |
(b) Special rules
Under regulations prescribed by the Secretary, rules similar to the rules of section 1245 shall be applied for purposes of this section.
(Added
Editorial Notes
Amendments
2018—Subsec. (a)(1).
Subsec. (a)(1)(A).
Subsec. (a)(2).
2014—Subsec. (a)(1).
Subsec. (a)(1)(A).
1986—Subsec. (a)(1)(A).
1984—Subsec. (a)(1).
1976—Subsec. (a)(1).
Subsec. (b).
Statutory Notes and Related Subsidiaries
Effective Date of 2014 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by
Effective Date of 1984 Amendment
Amendment by
Effective Date of 1976 Amendment
Amendment by section 1901(b)(3)(K) of
Effective Date
Savings Provision
For provisions that nothing in amendment by
§1253. Transfers of franchises, trademarks, and trade names
(a) General rule
A transfer of a franchise, trademark, or trade name shall not be treated as a sale or exchange of a capital asset if the transferor retains any significant power, right, or continuing interest with respect to the subject matter of the franchise, trademark, or trade name.
(b) Definitions
For purposes of this section—
(1) Franchise
The term "franchise" includes an agreement which gives one of the parties to the agreement the right to distribute, sell, or provide goods, services, or facilities, within a specified area.
(2) Significant power, right, or continuing interest
The term "significant power, right, or continuing interest" includes, but is not limited to, the following rights with respect to the interest transferred:
(A) A right to disapprove any assignment of such interest, or any part thereof.
(B) A right to terminate at will.
(C) A right to prescribe the standards of quality of products used or sold, or of services furnished, and of the equipment and facilities used to promote such products or services.
(D) A right to require that the transferee sell or advertise only products or services of the transferor.
(E) A right to require that the transferee purchase substantially all of his supplies and equipment from the transferor.
(F) A right to payments contingent on the productivity, use, or disposition of the subject matter of the interest transferred, if such payments constitute a substantial element under the transfer agreement.
(3) Transfer
The term "transfer" includes the renewal of a franchise, trademark, or trade name.
(c) Treatment of contingent payments by transferor
Amounts received or accrued on account of a transfer, sale, or other disposition of a franchise, trademark, or trade name which are contingent on the productivity, use, or disposition of the franchise, trademark, or trade name transferred shall be treated as amounts received or accrued from the sale or other disposition of property which is not a capital asset.
(d) Treatment of payments by transferee
(1) Contingent serial payments
(A) In general
Any amount described in subparagraph (B) which is paid or incurred during the taxable year on account of a transfer, sale, or other disposition of a franchise, trademark, or trade name shall be allowed as a deduction under section 162(a) (relating to trade or business expenses).
(B) Amounts to which paragraph applies
An amount is described in this subparagraph if it—
(i) is contingent on the productivity, use, or disposition of the franchise, trademark, or trade name, and
(ii) is paid as part of a series of payments—
(I) which are payable not less frequently than annually throughout the entire term of the transfer agreement, and
(II) which are substantially equal in amount (or payable under a fixed formula).
(2) Other payments
Any amount paid or incurred on account of a transfer, sale, or other disposition of a franchise, trademark, or trade name to which paragraph (1) does not apply shall be treated as an amount chargeable to capital account.
(3) Renewals, etc.
For purposes of determining the term of a transfer agreement under this section, there shall be taken into account all renewal options (and any other period for which the parties reasonably expect the agreement to be renewed).
(Added
Editorial Notes
Amendments
2004—Subsec. (e).
1996—Subsec. (d)(4).
1993—Subsec. (d)(2) to (5).
1990—Subsec. (d)(4).
1989—Subsec. (d)(1).
Subsec. (d)(2).
Subsec. (d)(3) to (5).
1976—Subsec. (d)(2)(C).
Statutory Notes and Related Subsidiaries
Effective Date of 2004 Amendment
Amendment by
Effective Date of 1993 Amendment
Amendment by
Effective Date of 1990 Amendment
Amendment by
Effective Date of 1989 Amendment
Amendment by
Effective Date
Section applicable to transfers after Dec. 31, 1969, except that subsec. (d)(1) shall, at the election of the taxpayer (made at such time and in such manner as the Secretary or his delegate may by regulations prescribe), apply to transfers before Jan. 1, 1970, but only with respect to payments made in taxable years ending after Dec. 31, 1969, and beginning before Jan. 1, 1980, see section 516(d)(3) of
§1254. Gain from disposition of interest in oil, gas, geothermal, or other mineral properties
(a) General rule
(1) Ordinary income
If any section 1254 property is disposed of, the lesser of—
(A) the aggregate amount of—
(i) expenditures which have been deducted by the taxpayer or any person under section 263, 616, or 617 with respect to such property and which, but for such deduction, would have been included in the adjusted basis of such property, and
(ii) the deductions for depletion under section 611 which reduced the adjusted basis of such property, or
(B) the excess of—
(i) in the case of—
(I) a sale, exchange, or involuntary conversion, the amount realized, or
(II) in the case of any other disposition, the fair market value of such property, over
(ii) the adjusted basis of such property,
shall be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.
(2) Disposition of portion of property
For purposes of paragraph (1)—
(A) In the case of the disposition of a portion of section 1254 property (other than an undivided interest), the entire amount of the aggregate expenditures or deductions described in paragraph (1)(A) with respect to such property shall be treated as allocable to such portion to the extent of the amount of the gain to which paragraph (1) applies.
(B) In the case of the disposition of an undivided interest in a section 1254 property (or a portion thereof), a proportionate part of the expenditures or deductions described in paragraph (1)(A) with respect to such property shall be treated as allocable to such undivided interest to the extent of the amount of the gain to which paragraph (1) applies.
This paragraph shall not apply to any expenditures to the extent the taxpayer establishes to the satisfaction of the Secretary that such expenditures do not relate to the portion (or interest therein) disposed of.
(3) Section 1254 property
The term "section 1254 property" means any property (within the meaning of section 614) if—
(A) any expenditures described in paragraph (1)(A) are properly chargeable to such property, or
(B) the adjusted basis of such property includes adjustments for deductions for depletion under section 611.
(4) Adjustment for amounts included in gross income under section 617(b)(1)(A)
The amount of the expenditures referred to in paragraph (1)(A)(i) shall be properly adjusted for amounts included in gross income under section 617(b)(1)(A).
(b) Special rules under regulations
Under regulations prescribed by the Secretary—
(1) rules similar to the rule of subsection (g) of section 617 and to the rules of subsections (b) and (c) of section 1245 shall be applied for purposes of this section; and
(2) in the case of the sale or exchange of stock in an S corporation, rules similar to the rules of section 751 shall be applied to that portion of the excess of the amount realized over the adjusted basis of the stock which is attributable to expenditures referred to in subsection (a)(1)(A) of this section.
(Added
Editorial Notes
Amendments
1988—Subsec. (a)(4).
1986—
1982—Subsec. (b)(2).
1978—
Subsec. (a)(1), (2).
Subsec. (a)(3).
Statutory Notes and Related Subsidiaries
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
"(1)
"(2)
Effective Date of 1982 Amendment
Amendment by
Effective Date of 1978 Amendment
Amendment by
Effective Date
§1255. Gain from disposition of section 126 property
(a) General rule
(1) Ordinary income
Except as otherwise provided in this section, if section 126 property is disposed of, the lower of—
(A) the applicable percentage of the aggregate payments, with respect to such property, excluded from gross income under section 126, or
(B) the excess of—
(i) the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value of such section 126 property (in the case of any other disposition), over
(ii) the adjusted basis of such property,
shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle, except that this section shall not apply to the extent such gain is recognized as ordinary income under any other provision of this part.
(2) Section 126 property
For purposes of this section, "section 126 property" means any property acquired, improved, or otherwise modified by the application of payments excluded from gross income under section 126.
(3) Applicable percentage
For purposes of this section, if section 126 property is disposed of less than 10 years after the date of receipt of payments excluded from gross income under section 126, the applicable percentage is 100 percent. If section 126 property is disposed of more than 10 years after such date, the applicable percentage is 100 percent reduced (but not below zero) by 10 percent for each year or part thereof in excess of 10 years such property was held after the date of receipt of the payments.
(b) Special rules
Under regulations prescribed by the Secretary—
(1) rules similar to the rules applicable under section 1245 shall be applied for purposes of this section, and
(2) for purposes of sections 170(e) and 751(c), amounts treated as ordinary income under this section shall be treated in the same manner as amounts treated as ordinary income under section 1245.
(Added
Editorial Notes
Amendments
2018—Subsec. (b)(2).
2003—Subsec. (b)(2).
1988—Subsec. (b)(2).
1986—Subsec. (b)(2).
1980—Subsec. (a)(1)(B).
Subsec. (b)(2).
Statutory Notes and Related Subsidiaries
Effective Date of 2003 Amendment
Amendment by
Effective Date of 1988 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by section 511(d)(2)(A) of
Amendment by section 631(e)(14) of
Effective Date of 1980 Amendments
For effective date of amendment by
Amendment by
Effective Date
Section effective with respect to grants made under the programs after Sept. 30, 1979, see section 543(d) of
§1256. Section 1256 contracts marked to market
(a) General rule
For purposes of this subtitle—
(1) each section 1256 contract held by the taxpayer at the close of the taxable year shall be treated as sold for its fair market value on the last business day of such taxable year (and any gain or loss shall be taken into account for the taxable year),
(2) proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account by reason of paragraph (1),
(3) any gain or loss with respect to a section 1256 contract shall be treated as—
(A) short-term capital gain or loss, to the extent of 40 percent of such gain or loss, and
(B) long-term capital gain or loss, to the extent of 60 percent of such gain or loss, and
(4) if all the offsetting positions making up any straddle consist of section 1256 contracts to which this section applies (and such straddle is not part of a larger straddle), sections 1092 and 263(g) shall not apply with respect to such straddle.
(b) Section 1256 contract defined
(1) In general
For purposes of this section, the term "section 1256 contract" means—
(A) any regulated futures contract,
(B) any foreign currency contract,
(C) any nonequity option,
(D) any dealer equity option, and
(E) any dealer securities futures contract.
(2) Exceptions
The term "section 1256 contract" shall not include—
(A) any securities futures contract or option on such a contract unless such contract or option is a dealer securities futures contract, or
(B) any interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement.
(c) Terminations, etc.
(1) In general
The rules of paragraphs (1), (2), and (3) of subsection (a) shall also apply to the termination (or transfer) during the taxable year of the taxpayer's obligation (or rights) with respect to a section 1256 contract by offsetting, by taking or making delivery, by exercise or being exercised, by assignment or being assigned, by lapse, or otherwise.
(2) Special rule where taxpayer takes delivery on or exercises part of straddle
If—
(A) 2 or more section 1256 contracts are part of a straddle (as defined in section 1092(c)), and
(B) the taxpayer takes delivery under or exercises any of such contracts,
then, for purposes of this section, each of the other such contracts shall be treated as terminated on the day on which the taxpayer took delivery.
(3) Fair market value taken into account
For purposes of this subsection, fair market value at the time of the termination (or transfer) shall be taken into account.
(d) Elections with respect to mixed straddles
(1) Election
The taxpayer may elect to have this section not to apply to all section 1256 contracts which are part of a mixed straddle.
(2) Time and manner
An election under paragraph (1) shall be made at such time and in such manner as the Secretary may by regulations prescribe.
(3) Election revocable only with consent
An election under paragraph (1) shall apply to the taxpayer's taxable year for which made and to all subsequent taxable years, unless the Secretary consents to a revocation of such election.
(4) Mixed straddle
For purposes of this subsection, the term "mixed straddle" means any straddle (as defined in section 1092(c))—
(A) at least 1 (but not all) of the positions of which are section 1256 contracts, and
(B) with respect to which each position forming part of such straddle is clearly identified, before the close of the day on which the first section 1256 contract forming part of the straddle is acquired (or such earlier time as the Secretary may prescribe by regulations), as being part of such straddle.
(e) Mark to market not to apply to hedging transactions
(1) Section not to apply
Subsection (a) shall not apply in the case of a hedging transaction.
(2) Definition of hedging transaction
For purposes of this subsection, the term "hedging transaction" means any hedging transaction (as defined in section 1221(b)(2)(A)) if, before the close of the day on which such transaction was entered into (or such earlier time as the Secretary may prescribe by regulations), the taxpayer clearly identifies such transaction as being a hedging transaction.
(3) Special rule for syndicates
(A) In general
Notwithstanding paragraph (2), the term "hedging transaction" shall not include any transaction entered into by or for a syndicate.
(B) Syndicate defined
For purposes of subparagraph (A), the term "syndicate" means any partnership or other entity (other than a corporation which is not an S corporation) if more than 35 percent of the losses of such entity during the taxable year are allocable to limited partners or limited entrepreneurs (within the meaning of section 461(k)(4)).
(C) Holdings attributable to active management
For purposes of subparagraph (B), an interest in an entity shall not be treated as held by a limited partner or a limited entrepreneur (within the meaning of section 461(k)(4))—
(i) for any period if during such period such interest is held by an individual who actively participates at all times during such period in the management of such entity,
(ii) for any period if during such period such interest is held by the spouse, children, grandchildren, and parents of an individual who actively participates at all times during such period in the management of such entity,
(iii) if such interest is held by an individual who actively participated in the management of such entity for a period of not less than 5 years,
(iv) if such interest is held by the estate of an individual who actively participated in the management of such entity or is held by the estate of an individual if with respect to such individual such interest was at any time described in clause (ii), or
(v) if the Secretary determines (by regulations or otherwise) that such interest should be treated as held by an individual who actively participates in the management of such entity, and that such entity and such interest are not used (or to be used) for tax–avoidance purposes.
For purposes of this subparagraph, a legally adopted child of an individual shall be treated as a child of such individual by blood.
(4) Limitation on losses from hedging transactions
(A) In general
(i) Limitation
Any hedging loss for a taxable year which is allocable to any limited partner or limited entrepreneur (within the meaning of paragraph (3)) shall be allowed only to the extent of the taxable income of such limited partner or entrepreneur for such taxable year attributable to the trade or business in which the hedging transactions were entered into. For purposes of the preceding sentence, taxable income shall be determined by not taking into account items attributable to hedging transactions.
(ii) Carryover of disallowed loss
Any hedging loss disallowed under clause (i) shall be treated as a deduction attributable to a hedging transaction allowable in the first succeeding taxable year.
(B) Exception where economic loss
Subparagraph (A)(i) shall not apply to any hedging loss to the extent that such loss exceeds the aggregate unrecognized gains from hedging transactions as of the close of the taxable year attributable to the trade or business in which the hedging transactions were entered into.
(C) Exception for certain hedging transactions
In the case of any hedging transaction relating to property other than stock or securities, this paragraph shall apply only in the case of a taxpayer described in section 465(a)(1).
(D) Hedging loss
The term "hedging loss" means the excess of—
(i) the deductions allowable under this chapter for the taxable year attributable to hedging transactions (determined without regard to subparagraph (A)(i)), over
(ii) income received or accrued by the taxpayer during such taxable year from such transactions.
(E) Unrecognized gain
The term "unrecognized gain" has the meaning given to such term by section 1092(a)(3).
(f) Special rules
(1) Denial of capital gains treatment for property identified as part of a hedging transaction
For purposes of this title, gain from any property shall in no event be considered as gain from the sale or exchange of a capital asset if such property was at any time personal property (as defined in section 1092(d)(1)) identified under subsection (e)(2) by the taxpayer as being part of a hedging transaction.
(2) Subsection (a)(3) not to apply to ordinary income property
Paragraph (3) of subsection (a) shall not apply to any gain or loss which, but for such paragraph, would be ordinary income or loss.
(3) Capital gain treatment for traders in section 1256 contracts
(A) In general
For purposes of this title, gain or loss from trading of section 1256 contracts shall be treated as gain or loss from the sale or exchange of a capital asset.
(B) Exception for certain hedging transactions
Subparagraph (A) shall not apply to any section 1256 contract to the extent such contract is held for purposes of hedging property if any loss with respect to such property in the hands of the taxpayer would be ordinary loss.
(C) Treatment of underlying property
For purposes of determining whether gain or loss with respect to any property is ordinary income or loss, the fact that the taxpayer is actively engaged in dealing in or trading section 1256 contracts related to such property shall not be taken into account.
(4) Special rule for dealer equity options and dealer securities futures contracts of limited partners or limited entrepreneurs
In the case of any gain or loss with respect to dealer equity options, or dealer securities futures contracts, which are allocable to limited partners or limited entrepreneurs (within the meaning of subsection (e)(3))—
(A) paragraph (3) of subsection (a) shall not apply to any such gain or loss, and
(B) all such gains or losses shall be treated as short-term capital gains or losses, as the case may be.
(5) Special rule related to losses
Section 1091 (relating to loss from wash sales of stock or securities) shall not apply to any loss taken into account by reason of paragraph (1) of subsection (a).
(g) Definitions
For purposes of this section—
(1) Regulated futures contracts defined
The term "regulated futures contract" means a contract—
(A) with respect to which the amount required to be deposited and the amount which may be withdrawn depends on a system of marking to market, and
(B) which is traded on or subject to the rules of a qualified board or exchange.
(2) Foreign currency contract defined
(A) Foreign currency contract
The term "foreign currency contract" means a contract—
(i) which requires delivery of, or the settlement of which depends on the value of, a foreign currency which is a currency in which positions are also traded through regulated futures contracts,
(ii) which is traded in the interbank market, and
(iii) which is entered into at arm's length at a price determined by reference to the price in the interbank market.
(B) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of subparagraph (A), including regulations excluding from the application of subparagraph (A) any contract (or type of contract) if its application thereto would be inconsistent with such purposes.
(3) Nonequity option
The term "nonequity option" means any listed option which is not an equity option.
(4) Dealer equity option
The term "dealer equity option" means, with respect to an options dealer, any listed option which—
(A) is an equity option,
(B) is purchased or granted by such options dealer in the normal course of his activity of dealing in options, and
(C) is listed on the qualified board or exchange on which such options dealer is registered.
(5) Listed option
The term "listed option" means any option (other than a right to acquire stock from the issuer) which is traded on (or subject to the rules of) a qualified board or exchange.
(6) Equity option
The term "equity option" means any option—
(A) to buy or sell stock, or
(B) the value of which is determined directly or indirectly by reference to any stock or any narrow-based security index (as defined in section 3(a)(55) of the Securities Exchange Act of 1934, as in effect on the date of the enactment of this paragraph).
The term "equity option" includes such an option on a group of stocks only if such group meets the requirements for a narrow-based security index (as so defined). The Secretary may prescribe regulations regarding the status of options the values of which are determined directly or indirectly by reference to any index which becomes (or ceases to be) a narrow-based security index (as so defined).
(7) Qualified board or exchange
The term "qualified board or exchange" means—
(A) a national securities exchange which is registered with the Securities and Exchange Commission,
(B) a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission, or
(C) any other exchange, board of trade, or other market which the Secretary determines has rules adequate to carry out the purposes of this section.
(8) Options dealer
(A) In general
The term "options dealer" means any person registered with an appropriate national securities exchange as a market maker or specialist in listed options.
(B) Persons trading in other markets
In any case in which the Secretary makes a determination under subparagraph (C) of paragraph (7), the term "options dealer" also includes any person whom the Secretary determines performs functions similar to the persons described in subparagraph (A). Such determinations shall be made to the extent appropriate to carry out the purposes of this section.
(9) Dealer securities futures contract
(A) In general
The term "dealer securities futures contract" means, with respect to any dealer, any securities futures contract, and any option on such a contract, which—
(i) is entered into by such dealer (or, in the case of an option, is purchased or granted by such dealer) in the normal course of his activity of dealing in such contracts or options, as the case may be, and
(ii) is traded on a qualified board or exchange.
(B) Dealer
For purposes of subparagraph (A), a person shall be treated as a dealer in securities futures contracts or options on such contracts if the Secretary determines that such person performs, with respect to such contracts or options, as the case may be, functions similar to the functions performed by persons described in paragraph (8)(A). Such determination shall be made to the extent appropriate to carry out the purposes of this section.
(C) Securities futures contract
The term "securities futures contract" has the meaning given to such term by section 1234B.
(Added
Editorial Notes
References in Text
Section 3(a)(55) of the Securities Exchange Act of 1934, referred to in subsec. (g)(6)(B), is classified to
The date of the enactment of this paragraph, referred to in subsec. (g)(6)(B), probably means the date of enactment of
Amendments
2018—Subsec. (e)(3)(B), (C).
2010—Subsec. (b).
2005—Subsec. (f)(1).
2004—Subsec. (g)(6).
2002—Subsec. (f)(5).
2000—Subsec. (b).
Subsec. (f)(4).
Subsec. (g)(6).
"(A)
"(i) to buy or sell stock, or
"(ii) the value of which is determined directly or indirectly by reference to any stock (or group of stocks) or stock index.
"(B)
"(i) there is in effect a designation by the Commodities Futures Trading Commission of a contract market for a contract based on such group of stocks or index, or
"(ii) the Secretary determines that such option meets the requirements of law for such a designation."
Subsec. (g)(9).
1999—Subsec. (e)(2).
"(A) such transaction is entered into by the taxpayer in the normal course of the taxpayer's trade or business primarily—
"(i) to reduce risk of price change or currency fluctuations with respect to property which is held or to be held by the taxpayer, or
"(ii) to reduce risk of interest rate or price changes or currency fluctuations with respect to borrowings made or to be made, or obligations incurred or to be incurred, by the taxpayer,
"(B) the gain or loss on such transactions is treated as ordinary income or loss, and
"(C) before the close of the day on which such transaction was entered into (or such earlier time as the Secretary may prescribe by regulations), the taxpayer clearly identifies such transaction as being a hedging transaction."
1986—Subsec. (e)(4), (5).
1984—
Subsec. (a)(1), (3), (4).
Subsec. (b).
Subsec. (c)(1).
Subsec. (c)(2).
Subsec. (c)(2)(A).
Subsec. (c)(2)(B).
Subsec. (d)(1), (4)(A).
Subsec. (d)(4)(B).
Subsec. (e)(2)(C).
Subsec. (e)(5).
Subsec. (f)(3), (4).
Subsec. (g).
Subsec. (g)(1)(A).
1983—Subsec. (b).
Subsec. (c).
Subsec. (d)(4)(B).
Subsec. (e)(3)(C)(v).
Subsec. (g).
1982—Subsec. (e)(3)(B).
Statutory Notes and Related Subsidiaries
Effective Date of 2010 Amendment
Amendment by
Effective Date of 2004 Amendment
Amendment by
Effective Date of 2002 Amendment
Effective Date of 1999 Amendment
Amendment by
Effective Date of 1986 Amendment
Amendment by
Effective Date of 1984 Amendment
"(f)
"(1)
"(2)
"(3)
"(4)
"(g)
"(1) the amendments made by this section [amending this section,
"(2) in lieu of an election under paragraph (1), the amendments made by this section shall apply to all section 1256 contracts held by the taxpayer at any time during the taxable year of the taxpayer which includes the date of the enactment of this Act.
"(h)
"(1)
"(A) the taxpayer may pay part or all the tax for the taxable year referred to in subsection (g)(2) in 2 or more (but not exceeding 5) equal installments, and
"(B) the maximum amount of tax which may be paid in installments under this subsection shall be the excess of—
"(i) the tax for such taxable year determined by taking into account subsection (g)(2), over
"(ii) the tax for such taxable year determined by taking into account subsection (g)(2) and by treating—
"(I) all section 1256 contracts which are stock options, and
"(II) any stock which was a part of a straddle including any such stock options,
as having been acquired for a purchase price equal to their fair market value on the last business day of the preceding taxable year. Stock options and stock shall be taken into account under subparagraph (B)(ii) only if such options or stock were held on the last day of the preceding taxable year and only if income on such options or stock would have been ordinary income if such options or stock were sold at a gain on such last day.
"(2)
"(A) If an election is made under this subsection, the first installment under paragraph (1) shall be paid on or before the due date for filing the return for the taxable year described in paragraph (1), and each succeeding installment shall be paid on or before the date which is 1 year after the date prescribed for payment of the preceding installment.
"(B) If a bankruptcy case or insolvency proceeding involving the taxpayer is commenced before the final installment is paid, the total amount of any unpaid installments shall be treated as due and payable on the day preceding the day on which such case or proceeding is commenced.
"(3)
"(4)
"(A) the amount determined under paragraph (1)(B) and the number of installments elected by the taxpayer,
"(B) the property described in paragraph (1)(B)(ii), and the date on which such property was acquired,
"(C) the fair market value of the property described in paragraph (1)(B)(ii) on the last business day of the taxable year preceding the taxable year described in paragraph (1), and
"(D) such other information for purposes of carrying out the provisions of this subsection as may be required by such regulations.
"(5)
"(i)
"(1)
"(2)
"(j)
Amendment by section 107(c), (d) of
Amendment by section 722(a)(2) of
Effective Date of 1983 Amendment
Amendment by
"(i)
"(ii)
"(I)
"(II)
"(III)
"(IV)
"(V)
"(VI)
"(iii)
Effective Date of 1982 Amendment
Amendment by
Effective Date
Section (other than subsec. (e)(2)(C)) applicable to property acquired and positions established by the taxpayer after June 23, 1981, in taxable years ending after such date, subsec. (e)(2)(C) of this section applicable to property acquired and positions established by the taxpayer after Dec. 31, 1981, in taxable years ending after such date, and section applicable when so elected with respect to property held on June 23, 1981, see section 508 of
Deadline for Determination
Election for Extension of Time for Payment and Application of This Section for the Taxable Year Including June 23, 1981
"(a)
"(1)
"(2)
"(A) the provisions of section 1256 of the Internal Revenue Code of 1986 [formerly I.R.C. 1954] (other than section 1256(e)(2)(C)) shall apply to regulated futures contracts held by the taxpayer at any time during such taxable year, and
"(B) for purposes of determining the rate of tax applicable to gains and losses from regulated futures contracts held at any time during such year, such gains and losses shall be treated as gain or loss from a sale or exchange occurring in a taxable year beginning in 1982.
"(3)
"(A) the taxpayer may pay part or all of the tax for such year in two or more (but not exceeding five) equal installments;
"(B) the maximum amount of tax which may be paid in installments under this section shall be the excess of—
"(i) the tax for such year, determined by taking into account paragraph (2), over
"(ii) the tax for such year, determined by taking into account paragraph (2) and by treating all regulated futures contracts which were held by the taxpayer on the first day of the taxable year described in paragraph (1), and which were acquired before the first day of such taxable year, as having been acquired for a purchase price equal to their fair market value on the last business day of the preceding taxable year.
"(4)
"(A) If an election is made under this subsection, the first installment under subsection (a)(3)(A) shall be paid on or before the due date for filing the return for the taxable year described in paragraph (1), and each succeeding installment shall be paid on or before the date which is one year after the date prescribed for payment of the preceding installment.
"(B) If a bankruptcy case or insolvency proceeding involving the taxpayer is commenced before the final installment is paid, the total amount of any unpaid installments shall be treated as due and payable on the day preceding the day on which such case or proceeding is commenced.
"(5)
"(b)
"(1) the amount determined under subsection (a)(3)(B) and the number of installments elected by the taxpayer,
"(2) each regulated futures contract held by the taxpayer on the first day of the taxable year described in subsection (a)(1), and the date such contract was acquired,
"(3) the fair market value on the last business day of the preceding taxable year for each regulated futures contract described in paragraph (2), and
"(4) such other information for purposes of carrying out the provisions of this section as may be required by such regulations."
§1257. Disposition of converted wetlands or highly erodible croplands
(a) Gain treated as ordinary income
Any gain on the disposition of converted wetland or highly erodible cropland shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle, except that this section shall not apply to the extent such gain is recognized as ordinary income under any other provision of this part.
(b) Loss treated as long-term capital loss
Any loss recognized on the disposition of converted wetland or highly erodible cropland shall be treated as a long-term capital loss.
(c) Definitions
For purposes of this section—
(1) Converted wetland
The term "converted wetland" means any converted wetland (as defined in section 1201(a)(7) of the Food Security Act of 1985 (
(A) by the person whose activities resulted in such land being converted wetland, or
(B) by any other person who at any time used such land for farming purposes.
(2) Highly erodible cropland
The term "highly erodible cropland" means any highly erodible cropland (as defined in section 1201(a)(10) of the Food Security Act of 1985 (
(3) Treatment of successors
If any land is converted wetland or highly erodible cropland in the hands of any person, such land shall be treated as converted wetland or highly erodible cropland in the hands of any other person whose adjusted basis in such land is determined (in whole or in part) by reference to the adjusted basis of such land in the hands of such person.
(d) Special rules
Under regulations prescribed by the Secretary, rules similar to the rules applicable under section 1245 shall apply for purposes of subsection (a). For purposes of sections 170(e) and 751(c), amounts treated as ordinary income under subsection (a) shall be treated in the same manner as amounts treated as ordinary income under section 1245.
(Added
Editorial Notes
Amendments
2018—Subsec. (c)(1).
Subsec. (c)(2).
2003—Subsec. (d).
Statutory Notes and Related Subsidiaries
Effective Date of 2003 Amendment
Amendment by
Effective Date
§1258. Recharacterization of gain from certain financial transactions
(a) General rule
In the case of any gain—
(1) which (but for this section) would be treated as gain from the sale or exchange of a capital asset, and
(2) which is recognized on the disposition or other termination of any position which was held as part of a conversion transaction,
such gain (to the extent such gain does not exceed the applicable imputed income amount) shall be treated as ordinary income.
(b) Applicable imputed income amount
For purposes of subsection (a), the term "applicable imputed income amount" means, with respect to any disposition or other termination referred to in subsection (a), an amount equal to—
(1) the amount of interest which would have accrued on the taxpayer's net investment in the conversion transaction for the period ending on the date of such disposition or other termination (or, if earlier, the date on which the requirements of subsection (c) ceased to be satisfied) at a rate equal to 120 percent of the applicable rate, reduced by
(2) the amount treated as ordinary income under subsection (a) with respect to any prior disposition or other termination of a position which was held as a part of such transaction.
The Secretary shall by regulations provide for such reductions in the applicable imputed income amount as may be appropriate by reason of amounts capitalized under section 263(g), ordinary income received, or otherwise.
(c) Conversion transaction
For purposes of this section, the term "conversion transaction" means any transaction—
(1) substantially all of the taxpayer's expected return from which is attributable to the time value of the taxpayer's net investment in such transaction, and
(2) which is—
(A) the holding of any property (whether or not actively traded), and the entering into a contract to sell such property (or substantially identical property) at a price determined in accordance with such contract, but only if such property was acquired and such contract was entered into on a substantially contemporaneous basis,
(B) an applicable straddle,
(C) any other transaction which is marketed or sold as producing capital gains from a transaction described in paragraph (1), or
(D) any other transaction specified in regulations prescribed by the Secretary.
(d) Definitions and special rules
For purposes of this section—
(1) Applicable straddle
The term "applicable straddle" means any straddle (within the meaning of section 1092(c)).
(2) Applicable rate
The term "applicable rate" means—
(A) the applicable Federal rate determined under section 1274(d) (compounded semiannually) as if the conversion transaction were a debt instrument, or
(B) if the term of the conversion transaction is indefinite, the Federal short-term rates in effect under section 6621(b) during the period of the conversion transaction (compounded daily).
(3) Treatment of built-in losses
(A) In general
If any position with a built-in loss becomes part of a conversion transaction—
(i) for purposes of applying this subtitle to such position for periods after such position becomes part of such transaction, such position shall be taken into account at its fair market value as of the time it became part of such transaction, except that
(ii) upon the disposition or other termination of such position in a transaction in which gain or loss is recognized, such built-in loss shall be recognized and shall have a character determined without regard to this section.
(B) Built-in loss
For purposes of subparagraph (A), the term "built-in loss" means the loss (if any) which would have been realized if the position had been disposed of or otherwise terminated at its fair market value as of the time such position became part of the conversion transaction.
(4) Position taken into account at fair market value
In determining the taxpayer's net investment in any conversion transaction, there shall be included the fair market value of any position which becomes part of such transaction (determined as of the time such position became part of such transaction).
(5) Special rule for options dealers and commodities traders
(A) In general
Subsection (a) shall not apply to transactions—
(i) of an options dealer in the normal course of the dealer's trade or business of dealing in options, or
(ii) of a commodities trader in the normal course of the trader's trade or business of trading section 1256 contracts.
(B) Definitions
For purposes of this paragraph—
(i) Options dealer
The term "options dealer" has the meaning given such term by section 1256(g)(8).
(ii) Commodities trader
The term "commodities trader" means any person who is a member (or, except as otherwise provided in regulations, is entitled to trade as a member) of a domestic board of trade which is designated as a contract market by the Commodity Futures Trading Commission.
(C) Limited partners and limited entrepreneurs
In the case of any gain from a transaction recognized by an entity which is allocable to a limited partner or limited entrepreneur (within the meaning of section 461(k)(4)), subparagraph (A) shall not apply if—
(i) substantially all of the limited partner's (or limited entrepreneur's) expected return from the entity is attributable to the time value of the partner's (or entrepreneur's) net investment in such entity,
(ii) the transaction (or the interest in the entity) was marketed or sold as producing capital gains treatment from a transaction described in subsection (c)(1), or
(iii) the transaction (or the interest in the entity) is a transaction (or interest) specified in regulations prescribed by the Secretary.
(Added
Editorial Notes
Amendments
2018—Subsec. (d)(5)(C).
2004—Subsec. (d)(1).
Statutory Notes and Related Subsidiaries
Effective Date of 2004 Amendment
Amendment by
Effective Date
§1259. Constructive sales treatment for appreciated financial positions
(a) In general
If there is a constructive sale of an appreciated financial position—
(1) the taxpayer shall recognize gain as if such position were sold, assigned, or otherwise terminated at its fair market value on the date of such constructive sale (and any gain shall be taken into account for the taxable year which includes such date), and
(2) for purposes of applying this title for periods after the constructive sale—
(A) proper adjustment shall be made in the amount of any gain or loss subsequently realized with respect to such position for any gain taken into account by reason of paragraph (1), and
(B) the holding period of such position shall be determined as if such position were originally acquired on the date of such constructive sale.
(b) Appreciated financial position
For purposes of this section—
(1) In general
Except as provided in paragraph (2), the term "appreciated financial position" means any position with respect to any stock, debt instrument, or partnership interest if there would be gain were such position sold, assigned, or otherwise terminated at its fair market value.
(2) Exceptions
The term "appreciated financial position" shall not include—
(A) any position with respect to debt if—
(i) the position unconditionally entitles the holder to receive a specified principal amount,
(ii) the interest payments (or other similar amounts) with respect to such position meet the requirements of clause (i) of section 860G(a)(1)(B), and
(iii) such position is not convertible (directly or indirectly) into stock of the issuer or any related person,
(B) any hedge with respect to a position described in subparagraph (A), and
(C) any position which is marked to market under any provision of this title or the regulations thereunder.
(3) Position
The term "position" means an interest, including a futures or forward contract, short sale, or option.
(c) Constructive sale
For purposes of this section—
(1) In general
A taxpayer shall be treated as having made a constructive sale of an appreciated financial position if the taxpayer (or a related person)—
(A) enters into a short sale of the same or substantially identical property,
(B) enters into an offsetting notional principal contract with respect to the same or substantially identical property,
(C) enters into a futures or forward contract to deliver the same or substantially identical property,
(D) in the case of an appreciated financial position that is a short sale or a contract described in subparagraph (B) or (C) with respect to any property, acquires the same or substantially identical property, or
(E) to the extent prescribed by the Secretary in regulations, enters into 1 or more other transactions (or acquires 1 or more positions) that have substantially the same effect as a transaction described in any of the preceding subparagraphs.
(2) Exception for sales of nonpublicly traded property
A taxpayer shall not be treated as having made a constructive sale solely because the taxpayer enters into a contract for sale of any stock, debt instrument, or partnership interest which is not a marketable security (as defined in section 453(f)) if the contract settles within 1 year after the date such contract is entered into.
(3) Exception for certain closed transactions
(A) In general
In applying this section, there shall be disregarded any transaction (which would otherwise cause a constructive sale) during the taxable year if—
(i) such transaction is closed on or before the 30th day after the close of such taxable year,
(ii) the taxpayer holds the appreciated financial position throughout the 60-day period beginning on the date such transaction is closed, and
(iii) at no time during such 60-day period is the taxpayer's risk of loss with respect to such position reduced by reason of a circumstance which would be described in section 246(c)(4) if references to stock included references to such position.
(B) Treatment of certain closed transactions where risk of loss on appreciated financial position diminished
If—
(i) a transaction, which would otherwise cause a constructive sale of an appreciated financial position, is closed during the taxable year or during the 30 days thereafter, and
(ii) another transaction is entered into during the 60-day period beginning on the date the transaction referred to in clause (i) is closed—
(I) which would (but for this subparagraph) cause the requirement of subparagraph (A)(iii) not to be met with respect to the transaction described in clause (i) of this subparagraph,
(II) which is closed on or before the 30th day after the close of the taxable year in which the transaction referred to in clause (i) occurs, and
(III) which meets the requirements of clauses (ii) and (iii) of subparagraph (A),
the transaction referred to in clause (ii) shall be disregarded for purposes of determining whether the requirements of subparagraph (A)(iii) are met with respect to the transaction described in clause (i).
(4) Related person
A person is related to another person with respect to a transaction if—
(A) the relationship is described in section 267(b) or 707(b), and
(B) such transaction is entered into with a view toward avoiding the purposes of this section.
(d) Other definitions
For purposes of this section—
(1) Forward contract
The term "forward contract" means a contract to deliver a substantially fixed amount of property (including cash) for a substantially fixed price.
(2) Offsetting notional principal contract
The term "offsetting notional principal contract" means, with respect to any property, an agreement which includes—
(A) a requirement to pay (or provide credit for) all or substantially all of the investment yield (including appreciation) on such property for a specified period, and
(B) a right to be reimbursed for (or receive credit for) all or substantially all of any decline in the value of such property.
(e) Special rules
(1) Treatment of subsequent sale of position which was deemed sold
If—
(A) there is a constructive sale of any appreciated financial position,
(B) such position is subsequently disposed of, and
(C) at the time of such disposition, the transaction resulting in the constructive sale of such position is open with respect to the taxpayer or any related person,
solely for purposes of determining whether the taxpayer has entered into a constructive sale of any other appreciated financial position held by the taxpayer, the taxpayer shall be treated as entering into such transaction immediately after such disposition. For purposes of the preceding sentence, an assignment or other termination shall be treated as a disposition.
(2) Certain trust instruments treated as stock
For purposes of this section, an interest in a trust which is actively traded (within the meaning of section 1092(d)(1)) shall be treated as stock unless substantially all (by value) of the property held by the trust is debt described in subsection (b)(2)(A).
(3) Multiple positions in property
If a taxpayer holds multiple positions in property, the determination of whether a specific transaction is a constructive sale and, if so, which appreciated financial position is deemed sold shall be made in the same manner as actual sales.
(f) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.
(Added
Editorial Notes
Amendments
2004—Subsec. (c)(2).
Subsec. (c)(3)(A).
Subsec. (c)(3)(A)(i).
Subsec. (c)(3)(B).
Subsec. (c)(3)(B)(i).
Subsec. (c)(3)(B)(ii).
Subsec. (c)(3)(B)(ii)(I).
Subsec. (c)(3)(B)(ii)(II).
1998—Subsec. (b)(2)(A)(i) to (iii).
Subsec. (b)(2)(B), (C).
Subsec. (d)(1).
Statutory Notes and Related Subsidiaries
Effective Date of 2004 Amendment
Amendment by
Effective Date of 1998 Amendment
Amendment by
Effective Date
Section applicable to any constructive sale after June 8, 1997, with certain exceptions, see section 1001(d) of
§1260. Gains from constructive ownership transactions
(a) In general
If the taxpayer has gain from a constructive ownership transaction with respect to any financial asset and such gain would (without regard to this section) be treated as a long-term capital gain—
(1) such gain shall be treated as ordinary income to the extent that such gain exceeds the net underlying long-term capital gain, and
(2) to the extent such gain is treated as a long-term capital gain after the application of paragraph (1), the determination of the capital gain rate (or rates) applicable to such gain under section 1(h) shall be determined on the basis of the respective rate (or rates) that would have been applicable to the net underlying long-term capital gain.
(b) Interest charge on deferral of gain recognition
(1) In general
If any gain is treated as ordinary income for any taxable year by reason of subsection (a)(1), the tax imposed by this chapter for such taxable year shall be increased by the amount of interest determined under paragraph (2) with respect to each prior taxable year during any portion of which the constructive ownership transaction was open. Any amount payable under this paragraph shall be taken into account in computing the amount of any deduction allowable to the taxpayer for interest paid or accrued during such taxable year.
(2) Amount of interest
The amount of interest determined under this paragraph with respect to a prior taxable year is the amount of interest which would have been imposed under section 6601 on the underpayment of tax for such year which would have resulted if the gain (which is treated as ordinary income by reason of subsection (a)(1)) had been included in gross income in the taxable years in which it accrued (determined by treating the income as accruing at a constant rate equal to the applicable Federal rate as in effect on the day the transaction closed). The period during which such interest shall accrue shall end on the due date (without extensions) for the return of tax imposed by this chapter for the taxable year in which such transaction closed.
(3) Applicable Federal rate
For purposes of paragraph (2), the applicable Federal rate is the applicable Federal rate determined under section 1274(d) (compounded semiannually) which would apply to a debt instrument with a term equal to the period the transaction was open.
(4) No credits against increase in tax
Any increase in tax under paragraph (1) shall not be treated as tax imposed by this chapter for purposes of determining—
(A) the amount of any credit allowable under this chapter, or
(B) the amount of the tax imposed by section 55.
(c) Financial asset
For purposes of this section—
(1) In general
The term "financial asset" means—
(A) any equity interest in any pass-thru entity, and
(B) to the extent provided in regulations—
(i) any debt instrument, and
(ii) any stock in a corporation which is not a pass-thru entity.
(2) Pass-thru entity
For purposes of paragraph (1), the term "pass-thru entity" means—
(A) a regulated investment company,
(B) a real estate investment trust,
(C) an S corporation,
(D) a partnership,
(E) a trust,
(F) a common trust fund,
(G) a passive foreign investment company (as defined in section 1297 without regard to subsection (d) thereof), and
(H) a REMIC.
(d) Constructive ownership transaction
For purposes of this section—
(1) In general
The taxpayer shall be treated as having entered into a constructive ownership transaction with respect to any financial asset if the taxpayer—
(A) holds a long position under a notional principal contract with respect to the financial asset,
(B) enters into a forward or futures contract to acquire the financial asset,
(C) is the holder of a call option, and is the grantor of a put option, with respect to the financial asset and such options have substantially equal strike prices and substantially contemporaneous maturity dates, or
(D) to the extent provided in regulations prescribed by the Secretary, enters into one or more other transactions (or acquires one or more positions) that have substantially the same effect as a transaction described in any of the preceding subparagraphs.
(2) Exception for positions which are marked to market
This section shall not apply to any constructive ownership transaction if all of the positions which are part of such transaction are marked to market under any provision of this title or the regulations thereunder.
(3) Long position under notional principal contract
A person shall be treated as holding a long position under a notional principal contract with respect to any financial asset if such person—
(A) has the right to be paid (or receive credit for) all or substantially all of the investment yield (including appreciation) on such financial asset for a specified period, and
(B) is obligated to reimburse (or provide credit for) all or substantially all of any decline in the value of such financial asset.
(4) Forward contract
The term "forward contract" means any contract to acquire in the future (or provide or receive credit for the future value of) any financial asset.
(e) Net underlying long-term capital gain
For purposes of this section, in the case of any constructive ownership transaction with respect to any financial asset, the term "net underlying long-term capital gain" means the aggregate net capital gain that the taxpayer would have had if—
(1) the financial asset had been acquired for fair market value on the date such transaction was opened and sold for fair market value on the date such transaction was closed, and
(2) only gains and losses that would have resulted from the deemed ownership under paragraph (1) were taken into account.
The amount of the net underlying long-term capital gain with respect to any financial asset shall be treated as zero unless the amount thereof is established by clear and convincing evidence.
(f) Special rule where taxpayer takes delivery
Except as provided in regulations prescribed by the Secretary, if a constructive ownership transaction is closed by reason of taking delivery, this section shall be applied as if the taxpayer had sold all the contracts, options, or other positions which are part of such transaction for fair market value on the closing date. The amount of gain recognized under the preceding sentence shall not exceed the amount of gain treated as ordinary income under subsection (a). Proper adjustments shall be made in the amount of any gain or loss subsequently realized for gain recognized and treated as ordinary income under this subsection.
(g) Regulations
The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations—
(1) to permit taxpayers to mark to market constructive ownership transactions in lieu of applying this section, and
(2) to exclude certain forward contracts which do not convey substantially all of the economic return with respect to a financial asset.
(Added
Editorial Notes
Amendments
2007—Subsec. (c)(2)(G).
2004—Subsec. (c)(2)(H) to (J).
Statutory Notes and Related Subsidiaries
Effective Date of 2004 Amendment
Amendment by