day of the first taxable year beginning after December 31, 1968, only to the extent the deduction otherwise allowed in paragraph (1)

with respect to such payment or set-aside is

treated as nondeductible by reason of the election provided in paragraph (4).

"(B) EXCEPTION.-For purposes of subparagraph (A), qualified indebtedness does not include any amounts which were, at any time after July 31, December 31, 1963, and before the payment or set-aside, owed to a person who at such time owned (or was considered as owning within the meaning of section 318 (a)) more than 10 percent in value

of the taxpayer's outstanding stock.

"(C) REDUCTION FOR AMOUNTS IRREVOCABLY SET ASIDE.-For purposes of subparagraph (A), the qualified indebtedness with respect to a contract shall be reduced by amounts irrevocably set aside before the taxable year to pay or retire

such indebtedness; and no deduction shall be al

lowed under paragraph (1) for payments out of amounts so set aside.

"(4) ELECTION NOT TO DEDUCT.-A taxpayer may elect, under regulations prescribed by the Secretary or his delegate, to treat as nondeductible an amount

otherwise deductible under paragraph (1); but only if the taxpayer files such election on or before the 15th

day of the third month following the close of the taxable

year with respect to which such election applies, designating therein the amounts which are to be treated as nondeductible and specifying the indebtedness (referred to in paragraph (3) (A) (ii)) incurred for the purpose of making the payment or set-aside.

"(5) LIMITATIONS.-The deduction otherwise allowed by this subsection for the taxable year shall be reduced by the sum of

"(A) the amount, if any, by which

"(i) the deductions allowed for the taxable

year and all preceding taxable years beginning after December 31, 1963, for exhaustion, wear

and tear, obsolescence, or amortization amor

tization, or depletion (other than such deductions which are disallowed in computing undistributed personal holding company income under subsection (b) (8)), exceed

"(ii) any reduction, by reason of this subparagraph, of the deductions otherwise allowed by this subsection for such preceding

taxable years, and

"(B) the amount, if any, by which

"(i) the deductions allowed under subsection (b) (5) in computing undistributed personal holding company income for the taxable year and all preceding taxable years beginning

after December 31, 1963, exceed

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"(ii) any reduction, by reason of this sub

paragraph, of the deductions otherwise allowed

by this subsection for such preceding taxable years.

"(6) PRO-RATA REDUCTION IN CERTAIN CASES.— For purposes of paragraph (3) (A), if property (of a character which is subject to the an allowance for exhaustion, wear and tear, obsolescence, or amortization amortization, or depletion) is disposed of after July 31 December 31, 1963, the total amounts of qualified indebtedness of the taxpayer shall be reduced pro-rata in the taxable year of such disposition by the amount, if any, by which

"(A) the adjusted basis of such property at the time of such disposition, exceeds

"(B) the amount of qualified indebtedness

which ceased to be qualified indebtedness with respect to the taxpayer by reason of the assump

tion of the indebtedness by the transferee.'

(3) Paragraph (15) of section 381 (c) (relating

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2

3

4

5

6

7

to carryovers in certain corporate acquisitions) is

amended to read as follows:

"(15) INDEBTEDNESS OF CERTAIN

PERSONAL

HOLDING COMPANIES.-The acquiring corporation shall

be considered to be the distributor or transferor corpora

tion for the purpose of determining the applicability of subsections (b) (7) and (c) of section 545, relating to deduction with respect to payment of certain indebted

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ness.

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(INCREASE IN BASIS WITH RESPECT TO CERTAIN 11 FOREIGN PERSONAL HOLDING COMPANY HOLDINGS.

(1) IN GENERAL. Part H of subchapter 0 of chapter 1 (relating to basis rules of general application) is amended by redesignating section 1022 as section

1023 and by inserting after section 1021 the following new section:

17 "SEC. 1022, INCREASE IN BASIS WITH RESPECT TO CER

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19

20

TAIN FOREIGN PERSONAL HOLDING COM

PANY HOLDINGS.

"(a) GENERAL RULE. The basis (determined under

21 section 1014(b) (5), relating to basis of stock or securities 22 in a foreign personal holding company) of a share of stock

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or a security, acquired from a decedent dying after August 24 15, 1963, of a corporation which was a foreign personal

1 holding company for its most recent taxable year ending 2 before the date of the enactment of this section shall be in3 ereased by its proportionate share of any Federal estate tax 4 attributable to the net appreciation in value of all of such 5 shares and securities determined as provided in this section: "(b) PROPORTIONATE SHARE. For purposes of sub

6

7 section (a), the proportionate share of a share of stock or of

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a security is that amount which bears the same ratio to the aggregate increase determined under subsection (e) (2) as 10 the appreciation in value of such share or security bears to 11 the aggregate appreciation in value of all such shares and 12 securities having appreciation in value.

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"(e) SPECIAL RULES AND DEFINITIONS. For pur 14 poses of this section

"(1) FEDERAL ESTATE TAX. The term Federal estate tax' means only the tax imposed by section 2001 or 2101, reduced by any eredit allowable with respect to a tax on prior transfers by section 2013 or 2102.

“(2) FEDERAL ESTATE TAX ATTRIBUTABLE TO NET APPRECIATION IN VALUE. The Federal estate tax attributable to the net appreciation in value of all shares of stock and securities to which subsection (a) applies is that amount which bears the same ratio to the Federal

estate tax as the net appreciation in value of all of such