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SEC. 1551 (revised 1964)—Continued

time of such acquisition, and if after such transfer the transferor or transferors are in control of such transferee corporation during any part of the taxable year of such transferee corporation, then for such taxable year of such transferee corporation the Secretary or his delegate may (except as may be otherwise determined under subsection (d)) disallow the surtax exemption (as defined in section 11(d)), or the $100,000 accumulated earnings credit provided in paragraph (2) or (3) of section 535(c), unless such transferee corporation shall establish by the clear preponderance of the evidence that the securing of such exemption or credit was not a major purpose of such transfer.

"(b) CONTROL.–For purposes of subsection (a), the term'control means

"(1) With respect to a transferee corporation described in subsection (a) (1) or (2), the ownership by the transferor corporation, its shareholders, or both, of stock possessing at least 80 percent of the total combined voting power of all classes of stock entitled to vote or at least 80 percent of the total value of shares of all classes of the stock; or

(2) With respect to each corporation described in subsection (a)(3), the ownership by the five or fewer individuals described in such subsection of stock possessing

“(A) at least 80 percent of the total combined voting power of all classes of stock enitled to vote or at least 80 percent of the total value of shares of all classes of the stock of each corporation, and

(B) more than 50 percent of the total combined voting power of all classes of stock entitled to vote or more than 50 percent of the total value of shares of all classes of stock of each corporation, taking into account the stock ownership of each such individual only to the extent such stock ownership

is identical with respect to each such corporation. For purposes of this subsection, section 1563(e) shall apply in determining the ownership of stock.

"(c) AUTHORITY OF THE SECRETARY UNDER THIS SECTION.—The provisions of section 269(b), and the authority of the Secretary under such section, shall, to the extent not inconsistent with the provisions

of this section, be applicable to this section."
Applicability:
Transfers made after June 12, 1963.

(Id., § 235(d), 78 Stat. 127.) SEC. 1552. EARNINGS AND PROFITS (68A Stat. 371–372): (a) (3) ------ Feb. 26, 1964, H.R. 8363, P.L. 88-272, § 234(b)(8), 78 Stat. 116: (in part)

Amended Sec. 1552(a)(3) 350 (relating to allocation of tax liability among members of affiliated group) by striking out

(determined without regard to the 2 percent increase provided by section 1503(a)).

350 Paragraph (3) of section 1552(a) originally read as follows (68A Stat. 372): "(3) The tax liability of the group (excluding the tax increases arising from the consolidation) shall be allocated on the basis of the contribution of each member of the group to the consolidated taxable income of the group. Any tax increases arising from the consolidation shall be distributed to the several members in direct proportion to the reduction in tax liability resulting to such members from the filing of the consolidated return as measured by the difference between their tax liabilities determined on a separate return basis and their tax liabilities (determined without regard to the 2 percent increase provided by section 1503(a)) based on their contributions to the consolidated taxable income.'

SEC. 1552–Continued
(a) (3) (amended 1964)— Continued

Applicability:
Taxable years beginning after December 31, 1963.

(Id., $ 234(c), 78 Stat. 116.) CH. 6, SUBCH. B, PART II–CERTAIN CONTROLLED CORPORA

TIONS (Added 1964—78 Stat. 116, ff.): Added.----- Feb. 26, 1964, H.R. 8363, P.L. 88–272, $ 235(a), 78 Stat. 116-125:

Amended Subchapter B of Chapter 6 (relating to rules for consolidated returns) by adding at the end thereof the following new Part: “PART II—CERTAIN CONTROLLED CORPORATIONS

“Sec. 1561. Surtax exemptions in case of certain controlled corporations. “Sec. 1562. Privilege of groups to elect multiple surtax exemptions.

“Sec. 1563. Definitions and special rules.” followed by the text of new sections 1561-1563, inclusive, as set forth below. Applicability: Taxable years ending after December 31, 1963. .

(Id., § 235(d), 78 Stat. 127.) SEC. 1561. SURTAX EXEMPTIONS IN CASE OF CERTAIN CON

TROLLED CORPORATIONS (Added 1964—78 Stat.

116–117): Added.---- Feb. 26, 1964, H.R. 8363, P.L. 88–272, $ 235(a), 78 Stat. 116-117:

Amended Subchapter B of Chapter 6 by adding as the first section of the new Part II of such Subchapter B the following new section 1561: “SEC. 1561. SURTAX EXEMPTIONS IN CASE OF CERTAIN CON.

TROLLED CORPORATIONS. "(a) GENERAL RULE.—If a corporation is a component member of a controlled group of corporations on a December 31, then for purposes of this subtitle the surtax exemption of such corporation for the taxable year which includes such December 31 shall be an amount equal to

“(1) $25,000 divided by the number of corporations which are component members of such group on such December 31, or

“(2) if all such component members consent (at such time and in such manner as the Secretary or his delegate shall by regulations prescribe) to an apportionment plan, such portion of $25,000

as is apportioned to such member in accordance with such plan. The sum of the amounts apportioned under paragraph (2) among the component members of any controlled group shall not exceed $25,000. "(b) CERTAIN SHORT TAXABLE YEARS.—If a corporation

"(1) has a short taxable year which does not include a December 31, and

(2) is a component member of a controlled group of corpora-
tions with respect to such taxable year,
then for purposes of this subtitle the surtax exemption of such corpo-
ration for such taxable year shall be an amount equal to $25,000
divided by the number of corporations which are component mem-
bers of such group on the last day of such taxable year. For pur-
poses of the preceding sentence, section 1563(b) shall be applied as if

such last day were substituted for December 31."
Applicability:
Taxable years ending after December 31, 1963.

(Id., § 235(d), 78 Stat. 127.)

SEC. 1562. PRIVILEGE OF GROUPS TO ELECT MULTIPLE SUR

TAX EXEMPTIONS (Added 1964—78 Stat. 117–120): Added.----- Feb. 26, 1964, H.R. 8363, P.L. 88–272, § 235(a), 78 Stat. 117–120:

Amended Subchapter B of Chapter 6 by adding after the new
section 1561 the following new section 1562:
“SEC. 1562. PRIVILEGE OF GROUPS TO ELECT MULTIPLE SURTAX

EXEMPTIONS
“(a) ELECTION OF MULTIPLE SURTAX EXEMPTIONS.—

“(1) IN GENERAL.-A controlled group of corporations shall (subject to the provisions of this section) have the privilege of electing to have each of its component members make its returns without regard to section 1561. Such election shall be made with respect to a specified December 31 and shall be valid only if —

(A) each corporation which is a component member of such group on such December 31, and

"(B) each other corporation which is a component member of such group on any succeeding December 31 before the

day on which the election is filed, consents to such election.

“(2) YEARS FOR WHICH EFFECTIVE.-An election by a controlled group of corporations under paragraph (1) shall be effective with respect to the taxable year of each component member of such group which includes the specified December 31, and each taxable year of each corporation which is a component member of such group (or a successor group) on a succeeding December 31 included within such taxable year, unless the election is terminated under subsection (c).

“(3) EFFECT OF ELECTION.-If an election by a controlled group of corporations under paragraph (1) is effective with respect to any taxable year of a corporation

(A) section 1561 shall not apply to such corporation for such taxable year, but

“(B) the additional tax imposed by subsection (b) shall apply to such corporation for such taxable year. (b) ADDITIONAL Tax IMPOSED.-.

"(1) GENERAL RULE.—If an election under subsection (a)(1) by a controlled group of corporations is effective with respect to the taxable year of a corporation, there is hereby imposed for such taxable year on the taxable income of such corporation a tax equal to 6 percent of so much of such corporation's taxable income for such taxable year as does not exceed $25,000. This paragraph shall not apply to the taxable year of a corporation if

"(A) such corporation is the only component member of such controlled group on the December 31 included in such corporation's taxable year which has taxable income for a taxable year including such December 31, or

"(B) such corporation's surtax exemption is disallowed for such taxable year under any provision of this subtitle.

(2) Tax TREATED AS IMPOSED BY SECTION 11, ETC.—If for the taxable year of a corporation a tax is imposed by section 11 on the taxable income of such corporation, the additional tax imposed by this subsection shall be treated for purposes of this title as a tax imposed by section 11. If for the taxable year of a corporation a tax is imposed on the taxable income of such corporation which is computed under any other section by reference to section 11, the additional tax imposed by this subsection shall be treated for purposes of this title as imposed by such other section.

SEC. 1562 (added 1964)— Continued

"(3) TAXABLE INCOME DEFINED.—For purposes of this subsection, the term 'taxable income' means

“(A) in the case of a corporation subject to tax under section 511, its unrelated business taxable income (within the meaning of section 512);

"(B) in the case of a life insurance company, its life insurance company taxable income (within the meaning of section 802(b));

(C) in the case of a regulated investment company, its investment company taxable income (within the meaning of section 852(b)(2)); and

(D) in the case of a real estate investment trust, its real estate investment trust taxable income (within the meaning of section 857(b)(2)).

“(4) SPECIAL RULES.—If for the taxable year an additional tax is imposed on the taxable income of a corporation by this subsection, then sections 244 (relating to dividends received on certajn preferred stock), 247 (relating to dividends paid on certain preferred stock of public utilities), 804(a)(3) (relating to deduetion for partially tax-exempt interest in the case of a life insurance company), and 922 (relating to special deduction for Western Hemisphere trade corporations) shall be applied without regard to the additional tax imposed by this subsection.

"(c) TERMINATION OF ELECTION.-An election by a controlled group of corporations under subsection (a) shall terminate with respect to such group

"(1) CONSENT OF THE MEMBERS.—If such group files a termination of such election with respect to a specified December 31, and

“(A) each corporation which is a component member of such group on such December 31, and

“(B) each other corporation which is a component member of such group on any succeeding December 31 before the day on which the termination is filed, consents to such termination.

“(2) REFUSAL BY NEW MEMBER TO CONSENT.—If on December 31 of any year such group includes a component member which—

“(A) on the immediately preceding January 1 was not a member of such group, and

"(B) within the time and in the manner provided by regulations prescribed by the Secretary or his delegate, files a statement that it does not consent to the election. “(3) CONSOLIDATED RETURNS.—If

"(A) a corporation is a component member (determined without regard to section 1563(b)(3)) of such group on a December 31 included within a taxable year ending on or after January 1, 1964, and

"(B) such corporation is a member of an affiliated group of corporations which makes a consolidated return under this chapter (sec. 1501 and following) for such taxable year.

(4) CONTROLLED GROUP NO LONGER IN EXISTENCE.—If such group is considered as no longer in existence with respect to any

December 31. Such termination shall be effective with respect to the December 31 referred to in paragraph (1)(A), (2), (3), or (4), as the case may be.

SEC. 1562 (added 1964)— Continued

"(d) ELECTION AFTER TERMINATION.-If an election by a controlled group of corporations is terminated under subsection (c), such group (and any successor group) shall not be eligible to make an election under subsection (a) with respect to any December 31 before the sixth December 31 after the December 31 with respect to which such termination was effective.

"(e) MANNER AND TIME OF GIVING CONSENT AND MAKING ELECTION, ETC.-An election under subsection (a)(1) or a termination under subsection (c)(1) (and the consent of each member of a controlled group of corporations which is required with respect to such election or termination) shall be made in such manner as the Secretary or his delegate shall by regulations prescribe, and shall be made at any time before the expiration of 3 years after

“(1) in the case of such an election, the date when the income tax return for the taxable year of the component member of the controlled group which has the taxable year ending first on or after the specified December 31 is required to be filed (without regard to any extensions of time), and

"(2) in the case of such a termination, the specified December 31 with respect to which such termination was made. Any consent to such an election or termination, and a failure by a component member to file a statement that it does not consent to an election under this section, shall be deemed to be a consent to the application of subsection (g)(1) (relating to tolling of statute of limitations on assessment of deficiencies). (f) SPECIAL RULES.-For purposes of this section

“(1) CONTINUING AND SUCCESSOR CONTROLLED GROUPS.—The determination of whether a controlled group of corporations

“(A) is considered as no longer in existence with respect to any December 31, or

"(B) is a successor to another controlled group of corporations (and the effect of such determination with respect

to any election or termination), shall be made under regulations prescribed by the Secretary or his delegate. For purposes of subparagraph (B), such regulations shall be based on the continuation (or termination) of predominant equitable ownership.

(2) CERTAIN SHORT TAXABLE YEARS. — If one or more corporations have short taxable years which do not include a December 31 and are component members of a controlled group of corporations with respect to such taxable years (determined by applying section 1563(b) as if the last day of each such taxable year were substituted for December 31), then an election by such group under this section shall apply with respect to such corporations with respect to such taxable years if —

"(A) such election is in effect with respect to both the December 31 immediately preceding such taxable years and the December 31 immediately succeeding such taxable years,

or

"(B) such election is in effect with respect to the December 31 immediately preceding or succeeding such taxable years and each such corporaion files a consent to the application of such election to its short taxable year at such time and in such manner as the Secretary or his delgate shall prescribe by regulations.

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