54 Stat. 978, 979. 26 U. S. C. § 711 (b) (1). SEC. 3. ABNORMAL DEDUCTION IN BASE PERIOD. Sections 711 (b) (1) (G), (H), and (I), of the Internal Revenue Code are amended to read as follows: "(G) Dividends Received.-The credit for dividends received shall apply, without limitation, to dividends on stock of domestic corporations; "(H) Payment of Judgments, and So Forth.-Deductions attributable to any claim, award, judgment, or decree against the taxpayer, or interest on any of the foregoing, if abnormal for the taxpayer, shall not be allowed, and if normal for the taxpayer, but in excess of 125 per centum of the average amount of such deductions in the four previous taxable years, shall be disallowed in an amount equal to such excess; "(I) Intangible Drilling and Development Costs.-Deductions attributable to intangible drilling and development costs paid or incurred in or for the drilling of wells or the preparation of wells for the production of oil or gas, and for development costs in the case of mines, if abnormal for the taxpayer, shall not be allowed, and if normal for the taxpayer, but in excess of 125 per centum of the average amount of such deductions in the four previous taxable years, shall be disallowed in an amount equal to such excess; and "(J) Abnormal Deductions.-Under regulations prescribed by the Commissioner, with the approval of the Secretary, for the determination, for the purposes of this subparagraph, of the classification of deductions "(i) Deductions of any class shall not be allowed if deductions of such class were abnormal for the taxpayer, and (ii) If the class of deductions was normal for the taxpayer, but the deductions of such class were in excess of 125 per centum of the average amount of deductions of such class for the four previous taxable years, they shall be disallowed in an amount equal to such excess. "(K) Rules for Application of Subparagraphs (H), (I) and (J).-For the purposes of subparagraphs (H), and (J) 3 8: "(i) If the taxpayer was not in existence for four previous taxable years, then such average amount specified in such subparagraphs shall be determined for the previous taxable years it was in existence and the succeeding taxable years which begin before the beginning of the taxpayer's second taxable year under this subchapter. If the number of such succeeding years is greater than the number necessary to obtain an aggregate of four taxable years there shall be omitted so many of such succeeding years, beginning with the last, as are necessary to reduce the aggregate to four. "(ii) Deductions shall not be disallowed under such subparagraphs unless the taxpayer establishes that the abnormality or excess is not a consequence of an increase in the gross income of the taxpayer in its base period or a decrease in the amount of some other deduction in its base period, and is not a consequence of a change. at any time in the type, manner of operation, size, or condition of the business engaged in by the taxpayer. "(iii) The amount of deductions of any class to be disallowed under such subparagraphs with respect to any taxable year shall not exceed the amount by which SEC. 4. COMPUTATION OF AVERAGE BASE PERIOD NET INCOME. (a) Section 713 (a) (1) of the Internal Revenue Code is amended by striking out "subsection (b)" and inserting in lieu thereof "sub- (1). section (d)", and by striking out "subsection (c)" wherever occurring therein and inserting in lieu thereof "subsection_(g)". (b) Section 713 (b) of the Internal Revenue Code is amended to read as follows: "(b) BASE PERIOD. "(1) DEFINITION.-As used in this section the term 'base period' "(A) If the corporation was in existence during the whole of the forty-eight months preceding the beginning of its first taxable year under this subchapter, means the period commencing with the beginning of its first taxable year beginning after December 31, 1935, and ending with the close of its last taxable year beginning before January 1, 1940; and "(B) In the case of a corporation which was in existence during only part of the forty-eight months preceding the beginning of its first taxable year under this subchapter, means the forty-eight months preceding the beginning of its first taxable year under this subchapter. "(2) DIVISION INTO HALVES.-For the purposes of subsections (d) and (f) the base period of the taxpayer shall be divided into halves, the first half to be composed of one-half the entire number of months in the base period and to begin with the beginning of the base period. "(c) DEFICIT IN EXCESS PROFITS NET INCOME.-For the purposes of this section the term 'deficit in excess profits net income' with respect to any taxable year means the amount by which the deductions plus the credit for dividends received exceeded the gross income. For the purposes of this subsection in determining whether there was such an excess and in determining the amount thereof, the adjustments provided in section 711_(b) (1) shall be made. "(d) AVERAGE BASE PERIOD NET INCOME DETERMINATION. "(1) DEFINITION. For the purposes of this section the average base period net income of the taxpayer shall be the amount determined under subsection (e), subject to the exception that if the aggregate excess profits net income for the last half of its base period, reduced by the aggregate of the deficits in excess profits net income for such half, is greater than such aggregate so reduced for the first half, then the average base period net income shall be the amount determined under subsection (f), if greater than the amount determined under subsection (e). (2) For the purposes of subsections (e) and (f), if the taxpayer was in existence during only part of the 48 months preceding the beginning of its first taxable year under this subchapter, its excess profits net income "(A) for each taxable year of twelve months (beginning with the beginning of its base period) during which it was not in existence, shall be an amount equal to 8 per centum of the excess of "(i) the daily invested capital for the first day of the taxpayer's first taxable year beginning after December 31, 1939, over 54 Stat. 980. 26 U. S. C. § 713 (a) 54 Stat. 980. (1). 54 Stat. 977. 26 U. S. O. § 711 (b) Post, p. 701. 54 Stat. 985. 26 U. S. C. § 720. 54 Stat. 992. "(ii) an amount equal to the same percentage of such daily invested capital as is applicable under section 720 in reduction of the average invested capital of the preceding taxable year; "(B) for the taxable year of less than twelve months consisting of that part of the remainder of its base period during which it was not in existence, shall be the amount ascertained for a full year under subparagraph (A), multiplied by the number of days in such taxable year of less than twelve months and divided by the number of days in the twelve months ending with the close of such taxable year. "(3) In no case shall the average base period net income be less than zero. "(4) For the computation of average base period net income in the case of certain reorganizations, see section 742. "(e) AVERAGE BASE PERIOD NET INCOME-GENERAL AVERAGE.-The average base period net income determined under this subsection shall be determined as follows: "(1) By computing the aggregate of the excess profits net income for each of the taxable years of the taxpayer in the base period, reduced, if for more than one of such taxable years there was a deficit in excess profits net income, by the sum of such deficits, excluding the greatest; "(2) By dividing the amount ascertained under paragraph (1) by the total number of months in all such taxable years; and (3) By multiplying the amount ascertained under paragraph (2) by twelve. "(f) AVERAGE BASE PERIOD NET INCOME-INCREASED EARNINGS IN LAST HALF OF BASE PERIOD.-The average base period net income determined under this subsection shall be determined as follows: "(1) By computing, for each of the taxable years of the taxpayer in its base period, the excess profits net income for such year, or the deficit in excess profits net income for such year; "(2) By computing for each half of the base period the aggregate of the excess profits net income for each of the taxable years in such half, reduced, if for one or more of such years there was a deficit in excess profits net income, by the sum of such deficits. For the purposes of such computation, if any taxable year is partly within each half of the base period there shall be allocated to the first half an amount of the excess profits net income or deficit in excess profits net income, as the case may be, for such taxable year, which bears the same ratio thereto as the number of months falling within such half bears to the entire number of months in such taxable year; and the remainder shall be allocated to the second half; "(3) If the amount ascertained under paragraph (2) for the second half is greater than the amount ascertained for the first half, by dividing the difference by two; "(4) By adding the amount ascertained under paragraph (3) to the amount ascertained under paragraph (2) for the second half of the base period; "(5) By dividing the amount found under paragraph (4) by the number of months in the second half of the base period and by multiplying the result by twelve; "(6) The amount ascertained under paragraph (5) shall be the average base period net income determined under this subsection, except that the average base period net income determined under this subsection shall in no case be greater than the highest excess profits net income for any taxable year in the base period. For the purpose of such limitation if any taxable year is of less than twelve months, the excess profits net income for such taxable year shall be placed on an annual basis by multiplying by twelve and dividing by the number of months included in such taxable year. "(7) For the purposes of this subsection, the excess profits net income for any taxable year ending after May 31, 1940, shall not be greater than an amount computed as follows: (A) By reducing the excess profits net income by an amount which bears the same ratio thereto as the number of months after May 31, 1940, bears to the total number of months in such taxable year; and "(B) By adding to the amount ascertained under subparagraph (A) an amount which bears the same ratio to the excess profits net income for the last preceding taxable year as such number of months after May 31, 1940, bears to the number of months in such preceding year. The amount added under this subparagraph shall not exceed the amount of the excess profits net income for such last preceding taxable year. "(C) If the number of months in such preceding taxable year is less than such number of months after May 31, 1940, by adding to the amount ascertained under subparagraph (B) an amount which bears the same ratio to the excess profits net income for the second preceding taxable year as the excess of such number of months after May 31, 1940, over the number of months in such preceding taxable year bears to the number of months in such second preceding taxable year." (c) Section 713 (c) of the Internal Revenue Code is amended by striking out "(c)" and inserting in lieu thereof "(g)". (d) Section 743 (a) of the Internal Revenue Code is amended by striking out "section 713 (c)" and inserting in lieu thereof "section 713 (g)". SEC. 5. ABNORMALITIES IN INCOME IN TAXABLE PERIOD. Section 721 of the Internal Revenue Code is amended to read as follows: “SEC. 721. ABNORMALITIES IN INCOME IN TAXABLE PERIOD. "(a) DEFINITIONS.-For the purposes of this section "(1) ABNORMAL INCOME.-The term 'abnormal income' means income of any class includible in the gross income of the taxpayer for any taxable year under this subchapter if it is abnormal for the taxpayer to derive income of such class, or, if the taxpayer normally derives income of such class but the amount of such income of such class includible in the gross income of the taxable year is in excess of 125 per centum of the average amount of the gross income of the same class for the four previous taxable years, or, if the taxpayer was not in existence for four previous taxable years, the taxable years during which the taxpayer was in existence. "(2) SEPARATE CLASSES OF INCOME.-Each of the following subparagraphs shall be held to describe a separate class of income: "(A) Income arising out of a claim, award, judgment, or decree, or interest on any of the foregoing; or 54 Stat. 981; 26 U.S. C. § 713 (c). 54 Stat. 994. 26 U.S. C. § 743 (a). 54 Stat. 986. "(B) Income constituting an amount payable under a contract the performance of which required more than 12 months; or "(C) Income resulting from exploration, discovery, prospecting, research, or development of tangible property, patents, formulae, or processes, or any combination of the foregoing, extending over a period of more than 12 months; or "(D) Income includible in gross income for the taxable year rather than for a different taxable year by reason of a change in the taxpayer's accounting period or method of accounting; or "(E) In the case of a lessor of real property, income included in gross income for the taxable year by reason of the termination of the lease; or "(F) Income consisting of dividends on stock of foreign corporations, except foreign personal holding companies. All the income which is classifiable in more than one of such subparagraphs shall be classified under the one which the taxpayer irrevocably elects. The classification of income of any class not described in subparagraphs (A) to (F), inclusive, shall be subject to regulations prescribed by the Commissioner with the approval of the Secretary. "(3) NET ABNORMAL INCOME.-The term 'net abnormal income' means the amount of the abnormal income less, under regulations prescribed by the Commissioner with the approval of the Secretary, (A) 125 per centum of the average amount of the gross income of the same class determined under paragraph (1), and (B) an amount which bears the same ratio to the amount of any direct costs or expenses, deductible in determining the normal-tax net income of the taxable year, through the expenditure of which such abnormal income was in whole or in part derived as the excess of the amount of such abnormal income over 125 per centum of such average amount bears to the amount of such abnormal income. "(b) AMOUNT ATTRIBUTABLE TO OTHER YEARS.-The amount of the net abnormal income that is attributable to any previous or future taxable year or years shall be determined under regulations prescribed by the Commissioner with the approval of the Secretary. In the case of amounts otherwise attributable to future taxable years, if the taxpayer either transfers substantially all its properties or distributes any property in complete liquidation, then there shall be attributable to the first taxable year in which such transfer or distribution occurs (or if such year is previous to the taxable year in which the abnormal income is includible in gross income, to such latter taxable year) all amounts so attributable to future taxable years not included in the gross income of a previous taxable year. "(c) COMPUTATION OF TAX FOR CURRENT TAXABLE YEAR.-The tax under this subchapter for the taxable year, in which the whole of such abnormal income would without regard to this section be includible, shall not exceed the sum of: "(1) The tax under this subchapter for such taxable year computed without the inclusion in gross income of the portion of the net abnormal income which is attributable to any other taxable year, and "(2) The aggregate of the increase in the tax under this subchapter which would have resulted for each previous taxable year to which any portion of such net abnormal income is attributable, computed as if an amount equal to such portion had been included in the gross income for such previous taxable year. |