This title may be cited as the "Income Tax Act of 1928."

SEC. 65. EFFECTIVE DATE OF TITLE.

This title shall take effect as of January 1, 1928, except that sections 146 and 151, and this section, shall take effect on the enactment of this Act.

DIVISION III.-SUPPLEMENTAL PROVISIONS

SUBTITLE C-SUPPLEMENTAL PROVISIONS

SUPPLEMENT A-RATES OF TAX

[Supplementary to Subtitle B, Part I]

SEC. 101. CAPITAL NET GAINS AND LOSSES.

(a) Tax in case of capital net gain.-In the case of any taxpayer, other than a corporation, who for any taxable year derives a capital net gain (as hereinafter defined in this section), there shall, at the election of the taxpayer, be levied, collected, and paid, in lieu of all other taxes imposed by this title, a tax determined as follows: a partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner as if this section had not been enacted and the total tax shall be this amount plus 121⁄2 per centum of the capital net gain.

(b) Tax in case of capital net loss.-In the case of any taxpayer, other than a corporation, who for any taxable year sustains a capital net loss (as hereinafter defined in this section), there shall be levied, collected, and paid, in lieu of all other taxes imposed by this title, a tax determined as follows: a partial tax shall first be computed upon the basis of the ordinary net income at the rates and in the manner as if this section had not been enacted, and the total tax shall be this amount minus 122 per centum of the capital net loss; but in no case shall the tax of a taxpayer who has sustained a capital net loss be less than the tax computed without regard to the provisions of this section. (c) Definitions. For the purposes of this title—

(1) "Capital gain" means taxable gain from the sale or exchange of capital assets consummated after December 31, 1921. (2) "Capital loss" means deductible loss resulting from the sale or exchange of capital assets.

(3) "Capital deductions" means such deductions as are allowed by section 23 for the purpose of computing net income, and are properly allocable to or chargeable against capital assets sold or exchanged during the taxable year.

(4) "Ordinary deductions" means the deductions allowed by section 23 other than capital losses and capital deductions.

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(5) Capital net gain" means the excess of the total amount of capital gain over the sum of (A) the capital deductions and capital losses, plus (B) the amount, if any, by which the ordinary deductions exceed the gross income computed without including capital gains.

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(6) "Capital net loss" means the excess of the sum of the capital losses plus the capital deductions over the total amount of capital gain.

(7) “Ordinary net income" means the net income, computed in accordance with the provisions of this title, after excluding all items of capital gain, capital loss, and capital deductions.

(8) "Capital assets' means property held by the taxpayer for more than two years (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business. For the purposes of this definition

(A) In determining the period for which the taxpayer has held property received on, an exchange there shall be included the period for which he held the property exchanged, if under the provisions of section 113, the property received has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as the property exchanged.

(B) In determining the period for which the taxpayer has held property however acquired there shall be included the period for which such property was held by any other person, if under the provisions of section 113, such property has, for the purpose of determining gain or loss from a sale or exchange, the same basis in whole or in part in his hands as it would have in the hands of such other person.

(C) In determining the period for which the taxpayer has held stock or securities received upon a distribution where no gain is recognized to the distributee under the provisions of section 112 (g) of this title or under the provisions of section 203 (c) of the Revenue Act of 1924 or 1926, there shall be included the period for which he held the stock or securities in the distributing corporation prior to the receipt of the stock or securities upon such distribution.

(d) Collection and payment of tax.-The total tax determined under subsection (a) or (b) shall be collected and paid in the same manner, at the same time, and subject to the same provisions of law, including penalties, as other taxes under this title.

ART. 501. Definition and illustration of capital net gain.-Section 101, which applies to sales and exchanges of capital assets consummated after December 31, 1921, provides that any taxpayer other than a corporation may, if he so desires, state separately in his return his net gain on sales or exchanges of capital assets, and pay on such capital net gain (as defined and limited in the section) a tax of 121⁄2 per cent of the capital net gain in lieu of the tax he would otherwise pay on such income under sections 11, 12, 102, and 211. The tax upon his net income from other sources, termed "ordinary net income," is

to be computed at the rates and in the manner provided in sections 11, 12, 102, and 211. The total tax will be the sum of the tax upon the ordinary net income plus 122 per cent of the capital net gain.

The term "capital assets" is defined to mean property held by the taxpayer for more than two years, whether or not connected with his trade or business, but not including stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale in the course of his trade or business. See articles 101-108 with reference to inventories. A dealer in securities is not entitled to the benefits of section 101 with reference to gain from the sale of securities. The specific property sold or exchanged must in general have been held for more than two years. However, in determining the period for which the taxpayer has held stock or securities received upon a distribution in connection with a reorganization where no gain is recognized to the distributee under the provisions of section 203 (c) of the Revenue Acts of 1924 and 1926 and section 112 (g) of the Revenue Act of 1928 (see article 576), there shall be included the period for which the taxpayer held the stock or securities in the distributing corporation prior to the receipt of the stock or securities upon such distribution. If the taxpayer has held for more than two years stock upon which a stock dividend has been declared, both the original and dividend shares are considered to be capital assets. If under the provisions of section 113 property received in an exchange has for the purpose of determining gain or loss the same basis in whole or in part in the taxpayer's hands as the property exchanged therefor, the property received in exchange is considered to be capital assets if the total period during which such property and the original property have been held is more than two years. If property is acquired from any person, and under the provisions of section 113 has the same basis in whole or in part for the purpose of determining gain or loss as it would have in the hands of the person from whom acquired, there shall be included in determining the period for which the taxpayer has held such property the period for which it was held by such person. For instance, in the case of property acquired after December 31, 1920, either by gift or by transfer in trust, the period for which the property was held by the donor shall be added to the period for which the property was held by the donee in determining whether the property was held for more than two years. (See articles 593 and 594.)

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Capital gain" is taxable gain from the sale or exchange of capital assets consummated after December 31, 1921. "Capital loss" is deductible loss resulting from the sale or exchange of capital assets. See article 591 for the basis for determining such gain or loss, and article 561 as to adjustments for improvements, depreciation, and other items. Capital deductions " are deductions properly allocable to or chargeable against capital assets sold or exchanged during the taxable year. "Capital net gain" is the excess of the total amount of capital gain over the sum of (1) capital deductions and capital losses, and (2) the amount, if any, by which the ordinary deductions exceed the gross income computed without including capital gain.

Example: A in 1928 sold an office building for $1,000,000, which he had bought in 1917 for $500,000 and on which there was depreciation aggregating $100,000, and stock in a mining company for $10,000, which he had purchased in 1921 for $20,000. Without regard to capital deductions his capital gain would be $600,000, his capital loss $10,000, and his capital net gain $590,000. If his other net income (ordinary net income) in 1928 was $50,000, he may, instead of paying normal tax and surtax on his total net income of $640,000, segregate these transactions in his return and pay a tax of 121⁄2 per cent of his capital net gain of $590,000 plus the normal tax and surtax upon his ordinary net income of $50,000. If, on the other hand, A sustained a net loss of $50,000 in his business, had a capital gain of $600,000, and a capital loss of $10,000, his capital net gain would be $540,000. In such a case, A may, instead of paying normal tax and surtax upon his total net income of $540,000, pay a tax of 122 per cent upon this amount.

The credit for taxes allowed by section 131 (see articles 691698) is a credit against the total tax, however computed, but the credits allowed by section 25 are allowed "for the purpose of the normal tax only" and may not be taken against capital net gain, although they may be deducted from "ordinary net income" in computing the amount of the tax.

Example: If B, a married person, had capital net gain of $60,000 and ordinary net income of $3,000, his $3,500 personal exemption would more than offset his ordinary net income, but he may not apply any part of it to reduce his capital net gain.

Residential property held by the taxpayer for more than two years but not primarily for sale in the course of his trade or business is included within the definition of capital assets; hence, a taxpayer (other than a corporation) selling such property at a profit may elect to be taxed under section 101, A loss from the sale of such property