114
PUBLIC LAW 89-389-APRIL 14, 1966 "(3)
72 Stat. 1650.
[80 STAT.
PROPERTY WITH SUBSTITUTED BASIS.—If—
" (A) but for paragraph (1) or (2), Sfubsection (a) would apply for the taxable year, " (B) any long-term capital gain is attributable to property acquired by the electing small business corporation during the period beginning 3 years before the first day of the taxable year and ending on the last day of the taxable year, and " (C) the basis of such property is determined in whole or in part by reference to the basis of any property in the hands of another corporation which was not an electing small business corporation throughout all of the period described in subparagraph (B) before the transfer by such other corporation and during which such other corporation was in existence, then subsection (a) shall apply for the taxable year, but the amount of the tax determined under subsection (b) shall not exceed 25 percent of the excess of the net long-term capital gain over the net short-term capital loss attributable to property acquired as provided in subparagraph (B) and having a basis described in subparagraph (C). " (b)(1) The table of sections for subchapter S of chapter 1 of such (^^odc is amended by adding at the end thereof the following new item: "Sec. 1378. Tax imposed on certain capital gains."
Ante, p. 113.
vsstlTsi^^' 68A Stat. 182;
Applicability.
(2) Section 1372(b)(1) of such Code (relating to effect of election by small business corporation) is amended by inserting "(other than ^j^g ^g^^ imposcd by section 1378)" after "this chapter'". (3) Section 1373(c) of such Code (relating to definition of undistributed taxable income) is amended by inserting "the sum of (1) the tax imposed by section 1378(a) and (2) " after "minus"'. (4) Section 1375(a) of such Code (relating to treatment of capital gains in the hands of shareholders) is amended by adding at the end thereof the following new paragraph: "(3) REDUCTION FOR TAX IMPOSED BY SECTION i.s-s.—For purposes of paragraphs (1) and (2), the excess of an electing small business corporation's net long-term capital gain over its net short-term capital loss for a taxable year shall be reduced by an amount equal to the amount of the tax imposed by section 1378(a) on the income of such corporation for such year." ^^) Section 46(a)(3) of such Code (relating to liability for tax for purposes of the credit for investment in certain depreciable property) jg amended by striking out "or by section 541 (relating to personal holding company tax) ' and inserting m lieu thereof ", section 541 (relating to personal holding company tax), or section 1378 (relating to tax on certain capital gains of subchapter S corporations)'". (g^ 'pj^g, amendments made by this section shall apply with respect to taxable years of electing small business corporations beginning after the date of the enactment of this Act, but such amendments shall not apply with respect to sales or exchanges occurring before February 24, 1966. SEC. 3. (a) Section 1372(e)(5) of the Internal Revenue Code of 1954 (relating to termination of election by small business corporations) is amended to read as follows: "(5)
PASSIVE INVESTMENT INCOME.—
" (A) Except as provided in subparagraph (B), an election under subsection (a) made by a small business corporation shall terminate if, for any taxable year of the corporation for which the election is in effect, such corporation has gross
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