annually on receipts from the tax and on costs of administering the new private foundations tax and regulatory provisions.

The sparse Statement of Managers attached to the Conference Report (H. Rept. 91-782) does not describe the capital gains element of the excise tax on net investment income that the conferees agreed to and that was enacted. The subsequent General Explanation of the Tax Reform Act of 1969, prepared by the Staff of the Joint Committee on Internal Revenue Taxation, explained (at page 29) the Congress' compromise as follows:

General reasons for change.-The Congress has concluded that private foundations should share some of the burden of paying the cost of government, especially for more extensive and vigorous enforcement of the tax laws relating to exempt organizations.

However, the Congress believes that private foundations should continue to be exempt from income tax. Accordingly, the Act casts the charge or audit fee for private foundations in the form of an excise tax with respect to the carrying on of the organization's activities, rather than as a tax under chapter 1 of the Internal Revenue Code.

Explanation of provisions.-The Act imposes an excise tax of 4 percent upon a private foundation's net investment income. The income subject to this tax includes interest (other than exempt State and municipal bond interest), dividends, rents, and royalties, less the expenses paid or incurred in earning such income. The corporate dividends received deduction is not allowed. Depreciation is limited to straight line and depletion is limited to cost. Certain capital gains are included in full in the base for this tax. Capital losses are allowed only to the extent of gains. Unrelated business income is already taxable under the income tax provisions and so is excluded from the base of this excise tax.

In computing capital gains and losses, the basis for determining gain of property held by the foundation on December 31, 1969 (and continuously thereafter to the date of its disposition) is not less than the fair market value on that date. However, if the usual basis rules produce a higher basis, then they apply. Also, capital gains and losses are taken into account only if incurred on assets used to produce income subject to this tax or used to produce unrelated business income (except to the extent such gains and losses are used to compute the tax on unrelated business income).

The regulation.-Section 53.4940-1(f)(1), Foundation Excise Tax Regs., adopted December 29, 1972, by T.D. 7250, 1973–1 C.B. 469, 472, provides as follows:

(f) Capital gain and losses—(1) General rule. In determining net capital gain for purposes of the tax imposed by section 4940, there shall be taken into account only capital gains and losses from the sale or other disposition of property held by a private foundation for investment purposes (other than program-related investments, as defined in section 4944(c)), and property used

for the production of income included in computing the tax imposed by section 511 except to the extent gain or loss from the sale or other disposition of such property is taken into account for purposes of such tax. For taxable years beginning after December 31, 1972, property shall be treated as held for investment purposes even though such property is disposed of by the foundation immediately upon its receipt, if it is property of a type which generally produces interest, dividends, rents, royalties, or capital gains through appreciation (for example, rental real estate, stock, bonds, mineral interests, mortgages, and securities). Under this subparagraph, gains and losses from the sale or other disposition of property used for the exempt purposes of the private foundation are excluded. For example, gain or loss on the sale of the buildings used for the exempt activities of a private foundation would not be subject to the section 4940 tax. Where the foundation uses property for its exempt purposes, but also incidentally derives income from such property which is subject to the tax imposed by section 4940(a), any gain or loss resulting from the sale or other disposition of such property is not subject to the tax imposed by section 4940(a). For example, if a tax-exempt private foundation maintains buildings of a historical nature and keeps them open for public inspection, but requires a number of its employees to live in these buildings and charges the employees rent, the rent would be subject to the tax imposed by section 4940(a), but any gain or loss resulting from the sale of such property would not be subject to such tax. However, where the foundation uses property for both exempt purposes and (other than incidentally) for investment purposes (for example, a building in which the foundation's charitable and investment activities are carried on), that portion of any gain or loss from the sale or other disposition of such property which is allocable to the investment use of such property must be taken into account in computing net capital gain for such taxable year. For purposes of this paragraph, a distribution of property for purposes described in section 170(c)(1) or (2)(B) which is a qualifying distribution under section 4942 shall not be treated as a sale or other disposition of property. [Emphasis supplied.]

In Rev. Rul. 74-404, 1974-2 C.B. 382-383, respondent summarized the statute and the regulation. The ruling noted that, by its terms, the regulation applies only to taxable years beginning after December 31, 1972, and concluded as follows: "Accordingly, capital gains realized on the sale of the stock, in the instant case [i.e., “stock donated to it during its taxable years 1970 through 1972 and immediately disposed of upon receipt"], will not be taken into account for purposes of the excise tax imposed by section 4940(a) of the Code."

Application of the statute.-The bedrock question is whether petitioner's sale of the Kerr McGee Corp. stock is a “sale * * * of property used for the production of interest, dividends, rents, [or] royalties" within the meaning of section 4940(a).

Petitioner seems to assume that, if we were to hold the

regulation invalid, then petitioner's gain from the sale of its Kerr McGee Corp. stock would not be taxable. However, the statutory language before us is capable of several constructions. For example, we might conclude that the "use" referred to is use of the property by the foundation (as petitioner implicitly contends). On the other hand, we might conclude that use by either the foundation or its donors is sufficient for taxation under section 4940. Alternatively, relying on part 2 of the Ways and Means Committee Report, we might conclude that a holding for investment income consisting of capital gain is sufficient for taxation under section 4940 (here, too, we might conclude that the relevant holding must be that of the foundation alone or that the relevant holding may be that of either the foundation or the donor). As another possibility, we might conclude that the pattern of the statutory materials requires the line to be drawn between the foundation's "charitable assets" and its "noncharitable assets." Other alternatives may suggest themselves after careful perusal of the statute and its legislative history.

In short, it is apparent that there is no single "plain meaning" of the statute, nor does the legislative history point clearly to a single intended result.

It is in this setting that we turn to the interpretive regulation before us, the validity of which is drawn in question by petitioner. This regulation appears to provide a workable set of rules which harmonizes reasonably well the varied considerations and varied statutory phrases-in section 4940(c)(4)(A) and the related provisions described above. In light of the uncertainty as to the meaning of the statute and the inconclusiveness of the legislative history, we hold that this regulation is a permissible interpretation of the statute insofar as it applies the section 4940(a) tax to petitioner's sale of the Kerr McGee Corp. stock in the year before us.

In rejecting petitioner's interpretation of the statute, we note that that interpretation apparently would have taxability of the gain depend upon whether petitioner had received even a single dividend. Under that approach, the taxation of several years' worth of capital gain would depend on which month during 1973 petitioner happened to hold the stock. Such an eccentric result may be legislated by the Congress. However, we will not lightly assume that the Congress has done so where, as here, the statute does not compel such a result. Cf. Haserot v. Commissioner, 41

T.C. 562, 572 (1964), affd. sub nom. Commissioner v. Stickney, 399 F.2d 828 (6th Cir. 1968).

Petitioner points out that the regulation, adopted December 29, 1972, applies only to taxable years beginning after December 31, 1972. As respondent made clear in Rev. Rul. 74-404, supra, sales such as the one sought to be taxed in the instant case are not treated as taxable if the sales took place in 1970, 1971, or 1972. From this, petitioner concludes that the adoption of the Treasury Department regulation was an illegal exercise of legislative power.

The trouble with this argument is that the Congress has specifically authorized the Treasury Department to promulgate regulations19 and to determine the extent to which limits will be applied to the retroactivity of any Treasury Department regulation.20 The regulation before us appears to comport with the powers specifically granted by the Congress to the Secretary of the Treasury or his delegate.

We have concluded that the regulation should be sustained insofar as it seeks to apply the section 4940(a) tax to petitioner's sale of the Kerr McGee Corp. stock in the year before us. Nothing in the record or the briefs suggests any reason why this conclusion should be changed because the regulation was adopted in 1972 rather than any earlier year, or because the regulation first applied to 1973 rather than any earlier year.

We note that the limitation protects those who may have been unaware of the reach of the statute and might have been able to structure their affairs in another manner to avoid the tax21 without unnecessarily prejudicing the Government's rights Cameron v. Commissioner, 68 T.C. 774 (1977).

We are not favored by any explanation as to how petitioner

19SEC. 7805. RULES AND REGULATIONS.

(a) AUTHORIZATION.-Except where such authority is expressly given by this title to any person other than an officer or employee of the Treasury Department, the Secretary or his delegate shall prescribe all needful rules and regulations for the enforcement of this title, including all rules and regulations as may be necessary by reason of any alteration of law in relation to internal revenue. 20SEC. 7805. RULES AND REGULATIONS.

(b) RETROACTIVITY OF REGULATIONS OR RULINGS.-The Secretary or his delegate may prescribe the extent, if any, to which any ruling or regulation, relating to the internal revenue laws, shall be applied without retroactive effect.

21For example, sec. 53.4940-1(f)(1), Foundation Excise Tax Regs., provides that a qualifying distribution of property under sec. 4942 is not to be treated as a sale subject to the excise tax under sec. 4940.

has been damaged by the Treasury Department's decision to limit the retroactivity of the regulation in question. On this issue we hold for respondent.

2. Basis in the Stock

Petitioner contends that if the gain from the sale is subject to the excise tax, then the gain should be measured by the difference between the sales proceeds and the fair market value of the stock as of the date of contribution (Nov. 14, 1973) or, alternatively, the fair market value as of December 31, 1969. Petitioner asserts the invalidity of Treasury Department regulations which provide that the basis is to be determined under the rules of part II of subchapter 0 of chapter 1. Respondent maintains that the appropriate basis of the stock in the hands of petitioner is the basis of the stock in the hands of the donors under sections 1011 and 1015.

We agree with respondent.

This is a case of first impression.

Section 4940(c)(1) (n. 4 supra) provides as follows: "Except to the extent inconsistent with the provisions of this section, net investment income shall be determined under the principles of subtitle A." Section 4940(c)(4)(B) (n. 7 supra) provides a rule inconsistent with the principles of subtitle A as follows:

(B) The basis for determining gain in the case of property held by the private foundation on December 31, 1969, and continuously thereafter to the date of its disposition shall be deemed to be not less than the fair market value of such property on December 31, 1969.

The Kerr McGee Corp. stock sold by petitioner in December 1973 was not held by petitioner on December 31, 1969; the stock was not held by petitioner until November 1973. Plainly, section 4940(c)(4)(B) does not provide the rule for decision in this case.

Since there is no other relevant provision in section 4940 that is inconsistent with the principles of subtitle A, the basis is to be determined under the principles of subtitle A. See Beal Foundation v. United States, 559 F.2d 359 (5th Cir. 1977). Under