Collapse to view only [§ 1238. Repealed.
- § 1231. Property used in the trade or business and involuntary conversions
- [§§ 1232 to 1232B. Repealed.
- § 1233. Gains and losses from short sales
- § 1234. Options to buy or sell
- § 1234A. Gains or losses from certain terminations
- § 1234B. Gains or losses from securities futures contracts
- § 1235. Sale or exchange of patents
- § 1236. Dealers in securities
- § 1237. Real property subdivided for sale
- [§ 1238. Repealed.
- § 1239. Gain from sale of depreciable property between certain related taxpayers
- [§ 1240. Repealed.
- § 1241. Cancellation of lease or distributor’s agreement
- § 1242. Losses on small business investment company stock
- § 1243. Loss of small business investment company
- § 1244. Losses on small business stock
- § 1245. Gain from dispositions of certain depreciable property
- [§§ 1246, 1247. Repealed.
- § 1248. Gain from certain sales or exchanges of stock in certain foreign corporations
- § 1249. Gain from certain sales or exchanges of patents, etc., to foreign corporations
- § 1250. Gain from dispositions of certain depreciable realty
- [§ 1251. Repealed.
- § 1252. Gain from disposition of farm land
- § 1253. Transfers of franchises, trademarks, and trade names
- § 1254. Gain from disposition of interest in oil, gas, geothermal, or other mineral properties
- § 1255. Gain from disposition of section 126 property
- § 1256. Section 1256 contracts marked to market
- § 1257. Disposition of converted wetlands or highly erodible croplands
- § 1258. Recharacterization of gain from certain financial transactions
- § 1259. Constructive sales treatment for appreciated financial positions
- § 1260. Gains from constructive ownership transactions
§ 1231. Property used in the trade or business and involuntary conversions
(a) General rule
(1) Gains exceed lossesIf—
(A) the section 1231 gains for any taxable year, exceed
(B) the section 1231 losses for such taxable year,
such gains and losses shall be treated as long-term capital gains or long-term capital losses, as the case may be.
(2) Gains do not exceed lossesIf—
(A) the section 1231 gains for any taxable year, do not exceed
(B) the section 1231 losses for such taxable year,
such gains and losses shall not be treated as gains and losses from sales or exchanges of capital assets.
(3) Section 1231 gains and lossesFor purposes of this subsection—
(A) Section 1231 gainThe term “section 1231 gain” means—
(i) any recognized gain on the sale or exchange of property used in the trade or business, and
(ii) any recognized gain from the compulsory or involuntary conversion (as a result of destruction in whole or in part, theft or seizure, or an exercise of the power of requisition or condemnation or the threat or imminence thereof) into other property or money of—(I) property used in the trade or business, or(II) any capital asset which is held for more than 1 year and is held in connection with a trade or business or a transaction entered into for profit.
(B) Section 1231 loss
(4) Special rulesFor purposes of this subsection—
(A) In determining under this subsection whether gains exceed losses—
(i) the section 1231 gains shall be included only if and to the extent taken into account in computing gross income, and
(ii) the section 1231 losses shall be included only if and to the extent taken into account in computing taxable income, except that section 1211 shall not apply.
(B) Losses (including losses not compensated for by insurance or otherwise) on the destruction, in whole or in part, theft or seizure, or requisition or condemnation of—
(i) property used in the trade or business, or
(ii) capital assets which are held for more than 1 year and are held in connection with a trade or business or a transaction entered into for profit,
shall be treated as losses from a compulsory or involuntary conversion.
(C) In the case of any involuntary conversion (subject to the provisions of this subsection but for this sentence) arising from fire, storm, shipwreck, or other casualty, or from theft, of any—
(i) property used in the trade or business, or
(ii) any capital asset which is held for more than 1 year and is held in connection with a trade or business or a transaction entered into for profit,
this subsection shall not apply to such conversion (whether resulting in gain or loss) if during the taxable year the recognized losses from such conversions exceed the recognized gains from such conversions.
(b) Definition of property used in the trade or businessFor purposes of this section—
(1) General ruleThe term “property used in the trade or business” means property used in the trade or business, of a character which is subject to the allowance for depreciation provided in section 167, held for more than 1 year, and real property used in the trade or business, held for more than 1 year, which is not—
(A) property of a kind which would properly be includible in the inventory of the taxpayer if on hand at the close of the taxable year,
(B) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business,
(C) a patent, invention, model or design (whether or not patented), a secret formula or process, a copyright, a literary, musical, or artistic composition, a letter or memorandum, or similar property, held by a taxpayer described in paragraph (3) of section 1221(a), or
(D) a publication of the United States Government (including the Congressional Record) which is received from the United States Government, or any agency thereof, other than by purchase at the price at which it is offered for sale to the public, and which is held by a taxpayer described in paragraph (5) of section 1221(a).
(2) Timber, coal, or domestic iron ore
(3) LivestockSuch term includes—
(A) cattle and horses, regardless of age, held by the taxpayer for draft, breeding, dairy, or sporting purposes, and held by him for 24 months or more from the date of acquisition, and
(B) other livestock, regardless of age, held by the taxpayer for draft, breeding, dairy, or sporting purposes, and held by him for 12 months or more from the date of acquisition.
Such term does not include poultry.
(4) Unharvested crop
(c) Recapture of net ordinary losses
(1) In general
(2) Non-recaptured net section 1231 lossesFor purposes of this subsection, the term “non-recaptured net section 1231 losses” means the excess of—
(A) the aggregate amount of the net section 1231 losses for the 5 most recent preceding taxable years, over
(B) the portion of such losses taken into account under paragraph (1) for such preceding taxable years.
(3) Net section 1231 gainFor purposes of this subsection, the term “net section 1231 gain” means the excess of—
(A) the section 1231 gains, over
(B) the section 1231 losses.
(4) Net section 1231 lossFor purposes of this subsection, the term “net section 1231 loss” means the excess of—
(A) the section 1231 losses, over
(B) the section 1231 gains.
(5) Special rules
(Aug. 16, 1954, ch. 736, 68A Stat. 325; Pub. L. 85–866, title I, § 49(a), Sept. 2, 1958, 72 Stat. 1642; Pub. L. 88–272, title II, § 227(a)(2), Feb. 26, 1964, 78 Stat. 97; Pub. L. 91–172, title II, § 212(b)(1), title V, §§ 514(b)(2), 516(b), Dec. 30, 1969, 83 Stat. 571, 643, 646; Pub. L. 94–455, title XIV, § 1402(b)(1)(R), (2), Oct. 4, 1976, 90 Stat. 1732; Pub. L. 95–600, title VII, § 701(ee)(1), Nov. 6, 1978, 92 Stat. 2924; Pub. L. 97–34, title V, § 505(c)(1), Aug. 13, 1981, 95 Stat. 332; Pub. L. 98–369, div. A, title I, § 176(a), title VII, § 711(c)(2)(A)(iii), title X, § 1001(b)(15), (e), July 18, 1984, 98 Stat. 709, 944, 1012; Pub. L. 106–170, title V, § 532(c)(1)(G), Dec. 17, 1999, 113 Stat. 1930; Pub. L. 113–295, div. A, title II, § 221(a)(81), Dec. 19, 2014, 128 Stat. 4049; Pub. L. 115–97, title I, § 13314(b), Dec. 22, 2017, 131 Stat. 2133.)
[§§ 1232 to 1232B. Repealed. Pub. L. 98–369, div. A, title I, § 42(a)(1), July 18, 1984, 98 Stat. 556]
§ 1233. Gains and losses from short sales
(a) Capital assets
(b) Short-term gains and holding periodsIf gain or loss from a short sale is considered as gain or loss from the sale or exchange of a capital asset under subsection (a) and if on the date of such short sale substantially identical property has been held by the taxpayer for not more than 1 year (determined without regard to the effect, under paragraph (2) of this subsection, of such short sale on the holding period), or if substantially identical property is acquired by the taxpayer after such short sale and on or before the date of the closing thereof—
(1) any gain on the closing of such short sale shall be considered as a gain on the sale or exchange of a capital asset held for not more than 1 year (notwithstanding the period of time any property used to close such short sale has been held); and
(2) the holding period of such substantially identical property shall be considered to begin (notwithstanding section 1223, relating to the holding period of property) on the date of the closing of the short sale, or on the date of a sale, gift, or other disposition of such property, whichever date occurs first. This paragraph shall apply to such substantially identical property in the order of the dates of the acquisition of such property, but only to so much of such property as does not exceed the quantity sold short.
For purposes of this subsection, the acquisition of an option to sell property at a fixed price shall be considered as a short sale, and the exercise or failure to exercise such option shall be considered as a closing of such short sale.
(c) Certain options to sell
(d) Long-term losses
(e) Rules for application of section
(1) Subsection (b)(1) or (d) shall not apply to the gain or loss, respectively, on any quantity of property used to close such short sale which is in excess of the quantity of the substantially identical property referred to in the applicable subsection.
(2) For purposes of subsections (b) and (d)—
(A) the term “property” includes only stocks and securities (including stocks and securities dealt with on a “when issued” basis), and commodity futures, which are capital assets in the hands of the taxpayer, but does not include any position to which section 1092(b) applies;
(B) in the case of futures transactions in any commodity on or subject to the rules of a board of trade or commodity exchange, a commodity future requiring delivery in 1 calendar month shall not be considered as property substantially identical to another commodity future requiring delivery in a different calendar month;
(C) in the case of a short sale of property by an individual, the term “taxpayer”, in the application of this subsection and subsections (b) and (d), shall be read as “taxpayer or his spouse”; but an individual who is legally separated from the taxpayer under a decree of divorce or of separate maintenance shall not be considered as the spouse of the taxpayer;
(D) a securities futures contract (as defined in section 1234B) to acquire substantially identical property shall be treated as substantially identical property; and
(E) entering into a securities futures contract (as so defined) to sell shall be considered to be a short sale, and the settlement of such contract shall be considered to be the closing of such short sale.
(3) Where the taxpayer enters into 2 commodity futures transactions on the same day, one requiring delivery by him in one market and the other requiring delivery to him of the same (or substantially identical) commodity in the same calendar month in a different market, and the taxpayer subsequently closes both such transactions on the same day, subsections (b) and (d) shall have no application to so much of the commodity involved in either such transaction as does not exceed in quantity the commodity involved in the other.
(4)
(A) In the case of a taxpayer who is a dealer in securities (within the meaning of section 1236)—
(i) if, on the date of a short sale of stock, substantially identical property which is a capital asset in the hands of the taxpayer has been held for not more than 1 year, and
(ii) if such short sale is closed more than 20 days after the date on which it was made,
subsection (b)(2) shall apply in respect of the holding period of such substantially identical property.
(B) For purposes of subparagraph (A)—
(i) the last sentence of subsection (b) applies; and
(ii) the term “stock” means any share or certificate of stock in a corporation, any bond or other evidence of indebtedness which is convertible into any such share or certificate, or any evidence of an interest in, or right to subscribe to or purchase, any of the foregoing.
(f) Arbitrage operations in securitiesIn the case of a short sale which had been entered into as an arbitrage operation, to which sale the rule of subsection (b)(2) would apply except as otherwise provided in this subsection—
(1) subsection (b)(2) shall apply first to substantially identical assets acquired for arbitrage operations held at the close of business on the day such sale is made, and only to the extent that the quantity sold short exceeds the substantially identical assets acquired for arbitrage operations held at the close of business on the day such sale is made, shall the holding period of any other such identical assets held by the taxpayer be affected;
(2) in the event that assets acquired for arbitrage operations are disposed of in such manner as to create a net short position in assets acquired for arbitrage operations, such net short position shall be deemed to constitute a short sale made on that day;
(3) for the purpose of paragraphs (1) and (2) of this subsection the taxpayer will be deemed as of the close of any business day to hold property which he is or will be entitled to receive or acquire by virtue of any other asset acquired for arbitrage operations or by virtue of any contract he has entered into in an arbitrage operation; and
(4) for the purpose of this subsection arbitrage operations are transactions involving the purchase and sale of assets for the purpose of profiting from a current difference between the price of the asset purchased and the price of the asset sold, and in which the asset purchased, if not identical to the asset sold, is such that by virtue thereof the taxpayer is, or will be, entitled to acquire assets identical to the assets sold. Such operations must be clearly identified by the taxpayer in his records as arbitrage operations on the day of the transaction or as soon thereafter as may be practicable. Assets acquired for arbitrage operations will include stocks and securities and the right to acquire stocks and securities.
(g) Hedging transactions
(h) Short sales of property which becomes substantially worthless
(1) In generalIf—
(A) the taxpayer enters into a short sale of property, and
(B) such property becomes substantially worthless,
the taxpayer shall recognize gain in the same manner as if the short sale were closed when the property becomes substantially worthless. To the extent provided in regulations prescribed by the Secretary, the preceding sentence also shall apply with respect to any option with respect to property, any offsetting notional principal contract with respect to property, any futures or forward contract to deliver any property, and any other similar transaction.
(2) Statute of limitationsIf property becomes substantially worthless during a taxable year and any short sale of such property remains open at the time such property becomes substantially worthless, then—
(A) the statutory period for the assessment of any deficiency attributable to any part of the gain on such transaction shall not expire before the earlier of—
(i) the date which is 3 years after the date the Secretary is notified by the taxpayer (in such manner as the Secretary may by regulations prescribe) of the substantial worthlessness of such property, or
(ii) the date which is 6 years after the date the return for such taxable year is filed, and
(B) such deficiency may be assessed before the date applicable under subparagraph (A) notwithstanding the provisions of any other law or rule of law which would otherwise prevent such assessment.
(Aug. 16, 1954, ch. 736, 68A Stat. 327; Aug. 12, 1955, ch. 871, § 1, 69 Stat. 717; Pub. L. 85–866, title I, § 52(a), (b), Sept. 2, 1958, 72 Stat. 1643, 1644; Pub. L. 94–455, title XIV, § 1402(b)(1)(T), (2), title XIX, § 1901(a)(137), Oct. 4, 1976, 90 Stat. 1732, 1787; Pub. L. 97–34, title V, § 501(c), Aug. 13, 1981, 95 Stat. 326; Pub. L. 98–369, div. A, title X, § 1001(b)(17), (e), July 18, 1984, 98 Stat. 1012; Pub. L. 105–34, title X, § 1003(b)(1), Aug. 5, 1997, 111 Stat. 910; Pub. L. 106–554, § 1(a)(7) [title IV, § 401(f)], Dec. 21, 2000, 114 Stat. 2763, 2763A–649; Pub. L. 107–147, title IV, § 412(d)(3)(A), Mar. 9, 2002, 116 Stat. 54.)
§ 1234. Options to buy or sell
(a) Treatment of gain or loss in the case of the purchaser
(1) General rule
(2) Special rule for loss attributable to failure to exercise option
(3) Nonapplication of subsection
This subsection shall not apply to—
(A) an option which constitutes property described in paragraph (1) of section 1221(a);
(B) in the case of gain attributable to the sale or exchange of an option, any income derived in connection with such option which, without regard to this subsection, is treated as other than gain from the sale or exchange of a capital asset; and
(C) a loss attributable to failure to exercise an option described in section 1233(c).
(b) Treatment of grantor of option in the case of stock, securities, or commodities
(1) General rule
(2) Definitions
For purposes of this subsection—
(A) Closing transaction
(B) Property
(3) Nonapplication of subsection
(c) Treatment of options on section 1256 contracts and cash settlement options
(1) Section 1256 contracts
(2) Treatment of cash settlement options
(A) In general
(B) Cash settlement option
(Aug. 16, 1954, ch. 376, 68A Stat. 329; Pub. L. 85–866, title I, § 53, Sept. 2, 1958, 72 Stat. 1644; Pub. L. 89–809, title II, § 210(a), Nov. 13, 1966, 80 Stat. 1580; Pub. L. 94–455, title XIV, § 1402(b)(1)(U), (2), title XXI, § 2136(a), Oct. 4, 1976, 90 Stat. 1732, 1929; Pub. L. 98–369, div. A, title I, § 105(a), title X, § 1001(b)(18), (e), July 18, 1984, 98 Stat. 629, 1012; Pub. L. 106–170, title V, § 532(c)(1)(H), Dec. 17, 1999, 113 Stat. 1930.)
§ 1234A. Gains or losses from certain terminations
Gain or loss attributable to the cancellation, lapse, expiration, or other termination of—
(1) a right or obligation (other than a securities futures contract, as defined in section 1234B) with respect to property which is (or on acquisition would be) a capital asset in the hands of the taxpayer, or
(2) a section 1256 contract (as defined in section 1256) not described in paragraph (1) which is a capital asset in the hands of the taxpayer,
shall be treated as gain or loss from the sale of a capital asset. The preceding sentence shall not apply to the retirement of any debt instrument (whether or not through a trust or other participation arrangement).
(Added Pub. L. 97–34, title V, § 507(a), Aug. 13, 1981, 95 Stat. 333; amended Pub. L. 97–448, title I, § 105(e), Jan. 12, 1983, 96 Stat. 2387; Pub. L. 98–369, div. A, title I, § 102(e)(4), (9), July 18, 1984, 98 Stat. 624, 625; Pub. L. 105–34, title X, § 1003(a)(1), Aug. 5, 1997, 111 Stat. 909; Pub. L. 106–554, § 1(a)(7) [title IV, § 401(b)], Dec. 21, 2000, 114 Stat. 2763, 2763A–648; Pub. L. 107–147, title IV, § 412(d)(1)(A), Mar. 9, 2002, 116 Stat. 53.)
§ 1234B. Gains or losses from securities futures contracts
(a) Treatment of gain or loss
(1) In general
(2) Nonapplication of subsection
This subsection shall not apply to—
(A) a contract which constitutes property described in paragraph (1) or (7) of section 1221(a), and
(B) any income derived in connection with a contract which, without regard to this subsection, is treated as other than gain from the sale or exchange of a capital asset.
(b) Short-term gains and losses
(c) Securities futures contract
(d) Contracts not treated as commodity futures contracts
(e) Regulations
(f) Cross reference
(Added Pub. L. 106–554, § 1(a)(7) [title IV, § 401(a)], Dec. 21, 2000, 114 Stat. 2763, 2763A–648; amended Pub. L. 107–147, title IV, § 412(d)(1)(B), (3)(B), Mar. 9, 2002, 116 Stat. 53, 54; Pub. L. 108–311, title IV, § 405(a)(1), Oct. 4, 2004, 118 Stat. 1188.)
§ 1235. Sale or exchange of patents
(a) GeneralA transfer (other than by gift, inheritance, or devise) of property consisting of all substantial rights to a patent, or an undivided interest therein which includes a part of all such rights, by any holder shall be considered the sale or exchange of a capital asset held for more than 1 year, regardless of whether or not payments in consideration of such transfer are—
(1) payable periodically over a period generally coterminous with the transferee’s use of the patent, or
(2) contingent on the productivity, use, or disposition of the property transferred.
(b) “Holder” definedFor purposes of this section, the term “holder” means—
(1) any individual whose efforts created such property, or
(2) any other individual who has acquired his interest in such property in exchange for consideration in money or money’s worth paid to such creator prior to actual reduction to practice of the invention covered by the patent, if such individual is neither—
(A) the employer of such creator, nor
(B) related to such creator (within the meaning of subsection (c)).
(c) Related personsSubsection (a) shall not apply to any transfer, directly or indirectly, between persons specified within any one of the paragraphs of section 267(b) or persons described in section 707(b); except that, in applying section 267(b) and (c) and section 707(b) for purposes of this section—
(1) the phrase “25 percent or more” shall be substituted for the phrase “more than 50 percent” each place it appears in section 267(b) or 707(b), and
(2) paragraph (4) of section 267(c) shall be treated as providing that the family of an individual shall include only his spouse, ancestors, and lineal descendants.
(d) Cross reference
(Aug. 16, 1954, ch. 736, 68A Stat. 329; Pub. L. 85–866, title I, § 54(a), Sept. 2, 1958, 72 Stat. 1644; Pub. L. 94–455, title XIV, § 1402(b)(1)(V), (2), Oct. 4, 1976, 90 Stat. 1732; Pub. L. 98–369, div. A, title I, § 174(b)(5)(C), title X, § 1001(b)(19), (e), July 18, 1984, 98 Stat. 707, 1012; Pub. L. 105–206, title V, § 5001(a)(5), title VI, § 6005(d)(4), July 22, 1998, 112 Stat. 788, 805; Pub. L. 113–295, div. A, title II, § 221(a)(82), Dec. 19, 2014, 128 Stat. 4049.)
§ 1236. Dealers in securities
(a) Capital gains
Gain by a dealer in securities from the sale or exchange of any security shall in no event be considered as gain from the sale or exchange of a capital asset unless—
(1) the security was, before the close of the day on which it was acquired (or such earlier time as the Secretary may prescribe by regulations), clearly identified in the dealer’s records as a security held for investment; and
(2) the security was not, at any time after the close of such day (or such earlier time), held by such dealer primarily for sale to customers in the ordinary course of his trade or business.
(b) Ordinary losses
(c) Definition of security
(d) Special rule for floor specialists
(1) In general
In the case of a floor specialist (but only with respect to acquisitions, in connection with his duties on an exchange, of stock in which the specialist is registered with the exchange), subsection (a) shall be applied—
(A) by inserting “the 7th business day following” before “the day” the first place it appears in paragraph (1) and by inserting “7th business” before “day” in paragraph (2), and
(B) by striking the parenthetical phrase in paragraph (1).
(2) Floor specialist
The term “floor specialist” means a person who is—
(A) a member of a national securities exchange,
(B) is registered as a specialist with the exchange, and
(C) meets the requirements for specialists established by the Securities and Exchange Commission.
(e) Special rule for options
(Aug. 16, 1954, ch. 736, 68A Stat. 330; Pub. L. 94–455, title XIX, § 1901(b)(3)(E), Oct. 4, 1976, 90 Stat. 1793; Pub. L. 97–34, title V, § 506, Aug. 13, 1981, 95 Stat. 332; Pub. L. 97–448, title I, § 105(d)(1), Jan. 12, 1983, 96 Stat. 2387; Pub. L. 98–369, div. A, title I, § 107(b), July 18, 1984, 98 Stat. 630; Pub. L. 113–295, div. A, title II, § 221(a)(83), Dec. 19, 2014, 128 Stat. 4049.)
§ 1237. Real property subdivided for sale
(a) GeneralAny lot or parcel which is part of a tract of real property in the hands of a taxpayer other than a C corporation shall not be deemed to be held primarily for sale to customers in the ordinary course of trade or business at the time of sale solely because of the taxpayer having subdivided such tract for purposes of sale or because of any activity incident to such subdivision or sale, if—
(1) such tract, or any lot or parcel thereof, had not previously been held by such taxpayer primarily for sale to customers in the ordinary course of trade or business (unless such tract at such previous time would have been covered by this section) and, in the same taxable year in which the sale occurs, such taxpayer does not so hold any other real property; and
(2) no substantial improvement that substantially enhances the value of the lot or parcel sold is made by the taxpayer on such tract while held by the taxpayer or is made pursuant to a contract of sale entered into between the taxpayer and the buyer. For purposes of this paragraph, an improvement shall be deemed to be made by the taxpayer if such improvement was made by—
(A) the taxpayer or members of his family (as defined in section 267(c)(4)), by a corporation controlled by the taxpayer, an S corporation which included the taxpayer as a shareholder, or by a partnership which included the taxpayer as a partner; or
(B) a lessee, but only if the improvement constitutes income to the taxpayer; or
(C) Federal, State, or local government, or political subdivision thereof, but only if the improvement constitutes an addition to basis for the taxpayer; and
(3) such lot or parcel, except in the case of real property acquired by inheritance or devise, is held by the taxpayer for a period of 5 years.
(b) Special rules for application of section
(1) Gains
(2) Expenditures of sale
(3) Necessary improvementsNo improvement shall be deemed a substantial improvement for purposes of subsection (a) if the lot or parcel is held by the taxpayer for a period of 10 years and if—
(A) such improvement is the building or installation of water, sewer, or drainage facilities or roads (if such improvement would except for this paragraph constitute a substantial improvement);
(B) it is shown to the satisfaction of the Secretary that the lot or parcel, the value of which was substantially enhanced by such improvement, would not have been marketable at the prevailing local price for similar building sites without such improvement; and
(C) the taxpayer elects, in accordance with regulations prescribed by the Secretary, to make no adjustment to basis of the lot or parcel, or of any other property owned by the taxpayer, on account of the expenditures for such improvements. Such election shall not make any item deductible which would not otherwise be deductible.
(c) Tract defined
(Aug. 16, 1954, ch. 736, 68A Stat. 330; Apr. 27, 1956, ch. 214, §§ 1, 2, 70 Stat. 118; Pub. L. 85–866, title I, § 55, Sept. 2, 1958, 72 Stat. 1645; Pub. L. 91–686, § 2(a), Jan. 12, 1971, 84 Stat. 2071; Pub. L. 94–455, title XIX, §§ 1901(a)(138), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1787, 1834; Pub. L. 104–188, title I, § 1314, Aug. 20, 1996, 110 Stat. 1785.)
[§ 1238. Repealed. Pub. L. 101–508, title XI, § 11801(a)(35), Nov. 5, 1990, 104 Stat. 1388–521]
§ 1239. Gain from sale of depreciable property between certain related taxpayers
(a) Treatment of gain as ordinary income
(b) Related persons
For purposes of subsection (a), the term “related persons” means—
(1) a person and all entities which are controlled entities with respect to such person,
(2) a taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless such beneficiary’s interest in the trust is a remote contingent interest (within the meaning of section 318(a)(3)(B)(i)), and
(3) except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of such estate.
(c) Controlled entity defined
(1) General rule
For purposes of this section, the term “controlled entity” means, with respect to any person—
(A) a corporation more than 50 percent of the value of the outstanding stock of which is owned (directly or indirectly) by or for such person,
(B) a partnership more than 50 percent of the capital interest or profits interest in which is owned (directly or indirectly) by or for such person, and
(C) any entity which is a related person to such person under paragraph (3), (10), (11), or (12) of section 267(b).
(2) Constructive ownership
(d) Employer and related employee association
For purposes of subsection (a), the term “related person” also includes—
(1) an employer and any person related to the employer (within the meaning of subsection (b)), and
(2) a welfare benefit fund (within the meaning of section 419(e)) which is controlled directly or indirectly by persons referred to in paragraph (1).
(e) Patent applications treated as depreciable property
(Aug. 16, 1954, ch. 736, 68A Stat. 332; Pub. L. 85–866, title I, § 56, Sept. 2, 1958, 72 Stat. 1645; Pub. L. 94–455, title XXI, § 2129(a), Oct. 4, 1976, 90 Stat. 1922; Pub. L. 95–600, title VII, § 701(v)(1), Nov. 6, 1978, 92 Stat. 2920; Pub. L. 96–471, § 5, Oct. 19, 1980, 94 Stat. 2255; Pub. L. 97–448, title III, § 301, Jan. 12, 1983, 96 Stat. 2397; Pub. L. 98–369, div. A, title I, § 175(a), (b), title IV, § 421(b)(6)(A), title V, § 557(a), July 18, 1984, 98 Stat. 708, 794, 898; Pub. L. 99–514, title VI, § 642(a)(1)(A)–(C), Oct. 22, 1986, 100 Stat. 2283, 2284; Pub. L. 105–34, title XIII, § 1308(b), Aug. 5, 1997, 111 Stat. 1041.)
[§ 1240. Repealed. Pub. L. 94–455, title XIX, § 1901(a)(139), Oct. 4, 1976, 90 Stat. 1787]
§ 1241. Cancellation of lease or distributor’s agreement
Amounts received by a lessee for the cancellation of a lease, or by a distributor of goods for the cancellation of a distributor’s agreement (if the distributor has a substantial capital investment in the distributorship), shall be considered as amounts received in exchange for such lease or agreement.
(Aug. 16, 1954, ch. 736, 68A Stat. 333.)
§ 1242. Losses on small business investment company stock
If—
(1) a loss is on stock in a small business investment company operating under the Small Business Investment Act of 1958, and
(2) such loss would (but for this section) be a loss from the sale or exchange of a capital asset,
then such loss shall be treated as an ordinary loss. For purposes of section 172 (relating to the net operating loss deduction) any amount of loss treated by reason of this section as an ordinary loss shall be treated as attributable to a trade or business of the taxpayer.
(Added Pub. L. 85–866, title I, § 57(a), Sept. 2, 1958, 72 Stat. 1645; amended Pub. L. 94–455, title XIX, § 1901(b)(3)(F), Oct. 4, 1976, 90 Stat. 1793.)
§ 1243. Loss of small business investment company
In the case of a small business investment company operating under the Small Business Investment Act of 1958, if—
(1) a loss is on stock received pursuant to the conversion privilege of convertible debentures acquired pursuant to section 304 of the Small Business Investment Act of 1958, and
(2) such loss would (but for this section) be a loss from the sale or exchange of a capital asset,
then such loss shall be treated as an ordinary loss.
(Added Pub. L. 85–866, title I, § 57(a), Sept. 2, 1958, 72 Stat. 1645; amended Pub. L. 91–172, title IV, § 433(b), Dec. 30, 1969, 83 Stat. 624; Pub. L. 94–455, title XIX, § 1901(b)(3)(F), Oct. 4, 1976, 90 Stat. 1793.)
§ 1244. Losses on small business stock
(a) General rule
(b) Maximum amount for any taxable year
For any taxable year the aggregate amount treated by the taxpayer by reason of this section as an ordinary loss shall not exceed—
(1) $50,000, or
(2) $100,000, in the case of a husband and wife filing a joint return for such year under section 6013.
(c) Section 1244 stock defined
(1) In general
For purposes of this section, the term “section 1244 stock” means stock in a domestic corporation if—
(A) at the time such stock is issued, such corporation was a small business corporation,
(B) such stock was issued by such corporation for money or other property (other than stock and securities), and
(C) such corporation, during the period of its 5 most recent taxable years ending before the date the loss on such stock was sustained, derived more than 50 percent of its aggregate gross receipts from sources other than royalties, rents, dividends, interests, annuities, and sales or exchanges of stocks or securities.
(2) Rules for application of paragraph (1)(C)
(A) Period taken into account with respect to new corporations
For purposes of paragraph (1)(C), if the corporation has not been in existence for 5 taxable years ending before the date the loss on the stock was sustained, there shall be substituted for such 5-year period—
(i) the period of the corporation’s taxable years ending before such date, or
(ii) if the corporation has not been in existence for 1 taxable year ending before such date, the period such corporation has been in existence before such date.
(B) Gross receipts from sales of securities
(C) Nonapplication where deductions exceed gross income
(3) Small business corporation defined
(A) In general
(B) Amount taken into account with respect to property
(d) Special rules
(1) Limitations on amount of ordinary loss
(A) Contributions of property having basis in excess of value
If—
(i) section 1244 stock was issued in exchange for property,
(ii) the basis of such stock in the hands of the taxpayer is determined by reference to the basis in his hands of such property, and
(iii) the adjusted basis (for determining loss) of such property immediately before the exchange exceeded its fair market value at such time,
then in computing the amount of the loss on such stock for purposes of this section the basis of such stock shall be reduced by an amount equal to the excess described in clause (iii).
(B) Increases in basis
(2) Recapitalizations, changes in name, etc.
(3) Relationship to net operating loss deduction
(4) Individual defined
(e) Regulations
(Added Pub. L. 85–866, title II, § 202(b), Sept. 2, 1958, 72 Stat. 1676; amended Pub. L. 94–455, title XIX, §§ 1901(b)(1)(W), (3)(G), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1792, 1793, 1834; Pub. L. 95–600, title III, § 345(a)–(d), Nov. 6, 1978, 92 Stat. 2844, 2845; Pub. L. 98–369, div. A, title IV, § 481(a), July 18, 1984, 98 Stat. 847; Pub. L. 113–295, div. A, title II, § 221(a)(41)(H), Dec. 19, 2014, 128 Stat. 4044.)
§ 1245. Gain from dispositions of certain depreciable property
(a) General rule
(1) Ordinary incomeExcept as otherwise provided in this section, if section 1245 property is disposed of the amount by which the lower of—
(A) the recomputed basis of the property, or
(B)
(i) in the case of a sale, exchange, or involuntary conversion, the amount realized, or
(ii) in the case of any other disposition, the fair market value of such property,
exceeds the adjusted basis of such property shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.
(2) Recomputed basisFor purposes of this section—
(A) In general
(B) Taxpayer may establish amount allowed
(C) Certain deductions treated as amortization
(3) Section 1245 propertyFor purposes of this section, the term “section 1245 property” means any property which is or has been property of a character subject to the allowance for depreciation provided in section 167 and is either—
(A) personal property,
(B) other property (not including a building or its structural components) but only if such other property is tangible and has an adjusted basis in which there are reflected adjustments described in paragraph (2) for a period in which such property (or other property)—
(i) was used as an integral part of manufacturing, production, or extraction or of furnishing transportation, communications, electrical energy, gas, water, or sewage disposal services,
(ii) constituted a research facility used in connection with any of the activities referred to in clause (i), or
(iii) constituted a facility used in connection with any of the activities referred to in clause (i) for the bulk storage of fungible commodities (including commodities in a liquid or gaseous state),
(C) so much of any real property (other than any property described in subparagraph (B)) which has an adjusted basis in which there are reflected adjustments for amortization under section 169, 179, 179B, 179C, 179D, 179E, 188 (as in effect before its repeal by the Revenue Reconciliation Act of 1990), 190, 193, or 194 1
1 So in original. Probably should be followed by a comma.
(D) a single purpose agricultural or horticultural structure (as defined in section 168(i)(13)),
(E) a storage facility (not including a building or its structural components) used in connection with the distribution of petroleum or any primary product of petroleum, or
(F) any railroad grading or tunnel bore (as defined in section 168(e)(4)).
(b) Exceptions and limitations
(1) Gifts
(2) Transfers at death
(3) Certain tax-free transactions
(4) Like kind exchanges; involuntary conversions, etc.If property is disposed of and gain (determined without regard to this section) is not recognized in whole or in part under section 1031 or 1033, then the amount of gain taken into account by the transferor under subsection (a)(1) shall not exceed the sum of—
(A) the amount of gain recognized on such disposition (determined without regard to this section), plus
(B) the fair market value of property acquired which is not section 1245 property and which is not taken into account under subparagraph (A).
(5) Property distributed by a partnership to a partner
(A) In general
(B) Adjustments added backIn the case of any property described in subparagraph (A), for purposes of computing the recomputed basis of such property the amount of the adjustments added back for periods before the distribution by the partnership shall be—
(i) the amount of the gain to which subsection (a) would have applied if such property had been sold by the partnership immediately before the distribution at its fair market value at such time, reduced by
(ii) the amount of such gain to which section 751(b) applied.
(6) Transfers to tax-exempt organization where property will be used in unrelated business
(A) In general
(B) Later change in use
(7) Timber property
(8) Disposition of amortizable section 197 intangibles
(A) In general
(B) Exception
(c) Adjustments to basis
(d) Application of section
(Added Pub. L. 87–834, § 13(a)(1), Oct. 16, 1962, 76 Stat. 1032; amended Pub. L. 88–272, title II, § 203(d), Feb. 26, 1964, 78 Stat. 35; Pub. L. 91–172, title II, § 212(a)(1), (2), title VII, § 704(b)(4), Dec. 30, 1969, 83 Stat. 571, 670; Pub. L. 92–178, title I, § 104(a)(2), title III, § 303(c)(1), (2), Dec. 10, 1971, 85 Stat. 501, 522; Pub. L. 94–81, § 2(a), Aug. 9, 1975, 89 Stat. 417; Pub. L. 94–455, title II, § 212(b)(1), title XIX, §§ 1901(a)(140), (b)(3)(K), (11)(D), 1906(b) (13)(A), 1951(c)(2)(C), title XXI, §§ 2122(b)(3), 2124(a)(2), Oct. 4, 1976, 90 Stat. 1546, 1787, 1793, 1795, 1834, 1840, 1915, 1917; Pub. L. 95–600, title VII, § 701(f)(3)(A), (B), (w)(1), (2), Nov. 6, 1978, 92 Stat. 2901, 2920; Pub. L. 96–223, title II, § 251(a)(2)(C), Apr. 2, 1980, 94 Stat. 287; Pub. L. 96–451, title III, § 301(c)(1), Oct. 14, 1980, 94 Stat. 1990; Pub. L. 97–34, title II, §§ 201(b), 202(b), 204(a)–(d), 212(d)(2)(F), Aug. 13, 1981, 95 Stat. 218, 220, 222, 223, 239; Pub. L. 97–448, title I, § 102(e)(2)(B), Jan. 12, 1983, 96 Stat. 2371; Pub. L. 98–369, div. A, title I, § 111(e)(5), (10), July 18, 1984, 98 Stat. 633; Pub. L. 99–121, title I, § 103(b)(1)(D), Oct. 11, 1985, 99 Stat. 509; Pub. L. 99–514, title II, § 201(d)(11), Oct. 22, 1986, 100 Stat. 2141; Pub. L. 100–647, title I, § 1002(i)(2)(I), Nov. 10, 1988, 102 Stat. 3371; Pub. L. 101–239, title VII, § 7622(b)(2)[(d)(2)], Dec. 19, 1989, 103 Stat. 2378; Pub. L. 101–508, title XI, §§ 11704(a)(13), 11801(c)(6)(E), (8)(H), 11813(b)(21), Nov. 5, 1990, 104 Stat. 1388–518, 1388–524, 1388–555; Pub. L. 103–66, title XIII, § 13261(f)(4), (5), Aug. 10, 1993, 107 Stat. 539; Pub. L. 104–7, § 2(b), Apr. 11, 1995, 109 Stat. 93; Pub. L. 104–188, title I, § 1703(n)(6), Aug. 20, 1996, 110 Stat. 1877; Pub. L. 105–34, title XVI, § 1604(a)(3), Aug. 5, 1997, 111 Stat. 1097; Pub. L. 108–357, title III, § 338(b)(5), title VIII, § 886(b)(2), Oct. 22, 2004, 118 Stat. 1481, 1641; Pub. L. 109–58, title XIII, §§ 1323(b)(1), 1331(b)(2), 1363(a), Aug. 8, 2005, 119 Stat. 1014, 1024, 1060; Pub. L. 109–135, title IV, §§ 402(a)(6), 403(e)(2), (i)(2), Dec. 21, 2005, 119 Stat. 2610, 2623, 2625; Pub. L. 109–432, div. A, title IV, § 404(b)(3), Dec. 20, 2006, 120 Stat. 2956
[§§ 1246, 1247. Repealed. Pub. L. 108–357, title IV, § 413(a)(2), (3), Oct. 22, 2004, 118 Stat. 1506]
§ 1248. Gain from certain sales or exchanges of stock in certain foreign corporations
(a) General ruleIf—
(1) a United States person sells or exchanges stock in a foreign corporation, and
(2) such person owns, within the meaning of section 958(a), or is considered as owning by applying the rules of ownership of section 958(b), 10 percent or more of the total combined voting power of all classes of stock entitled to vote of such foreign corporation at any time during the 5-year period ending on the date of the sale or exchange when such foreign corporation was a controlled foreign corporation (as defined in section 957),
then the gain recognized on the sale or exchange of such stock shall be included in the gross income of such person as a dividend, to the extent of the earnings and profits of the foreign corporation attributable (under regulations prescribed by the Secretary) to such stock which were accumulated in taxable years of such foreign corporation beginning after December 31, 1962, and during the period or periods the stock sold or exchanged was held by such person while such foreign corporation was a controlled foreign corporation. For purposes of this section, a United States person shall be treated as having sold or exchanged any stock if, under any provision of this subtitle, such person is treated as realizing gain from the sale or exchange of such stock.
(b) Limitation on tax applicable to individualsIn the case of an individual, if the stock sold or exchanged is a capital asset (within the meaning of section 1221) and has been held for more than 1 year, the tax attributable to an amount included in gross income as a dividend under subsection (a) shall not be greater than a tax equal to the sum of—
(1) a pro rata share of the excess of—
(A) the taxes that would have been paid by the foreign corporation with respect to its income had it been taxed under this chapter as a domestic corporation (but without allowance for deduction of, or credit for, taxes described in subparagraph (B)), for the period or periods the stock sold or exchanged was held by the United States person in taxable years beginning after December 31, 1962, while the foreign corporation was a controlled foreign corporation, adjusted for distributions and amounts previously included in gross income of a United States shareholder under section 951, over
(B) the income, war profits, or excess profits taxes paid by the foreign corporation with respect to such income; and
(2) an amount equal to the tax that would result by including in gross income, as gain from the sale or exchange of a capital asset held for more than 1 year, an amount equal to the excess of (A) the amount included in gross income as a dividend under subsection (a), over (B) the amount determined under paragraph (1).
(c) Determination of earnings and profits
(1) In general
(2) Earnings and profits of subsidiaries of foreign corporationsIf—
(A) subsection (a) or (f) applies to a sale, exchange, or distribution by a United States person of stock of a foreign corporation and, by reason of the ownership of the stock sold or exchanged, such person owned within the meaning of section 958(a)(2) stock of any other foreign corporation; and
(B) such person owned, within the meaning of section 958(a), or was considered as owning by applying the rules of ownership of section 958(b), 10 percent or more of the total combined voting power of all classes of stock entitled to vote of such other foreign corporation at any time during the 5-year period ending on the date of the sale or exchange when such other foreign corporation was a controlled foreign corporation (as defined in section 957),
then, for purposes of this section, the earnings and profits of the foreign corporation the stock of which is sold or exchanged which are attributable to the stock sold or exchanged shall be deemed to include the earnings and profits of such other foreign corporation which—
(C) are attributable (under regulations prescribed by the Secretary) to the stock of such other foreign corporation which such person owned within the meaning of section 958(a)(2) (by reason of his ownership within the meaning of section 958(a)(1)(A) of the stock sold or exchanged) on the date of such sale or exchange (or on the date of any sale or exchange of the stock of such other foreign corporation occurring during the 5-year period ending on the date of the sale or exchange of the stock of such foreign corporation, to the extent not otherwise taken into account under this section but not in excess of the fair market value of the stock of such other foreign corporation sold or exchanged over the basis of such stock (for determining gain) in the hands of the transferor); and
(D) were accumulated in taxable years of such other corporation beginning after December 31, 1962, and during the period or periods—
(i) such other corporation was a controlled foreign corporation, and
(ii) such person owned within the meaning of section 958(a) the stock of such other foreign corporation.
(d) Exclusions from earnings and profitsFor purposes of this section, the following amounts shall be excluded, with respect to any United States person, from the earnings and profits of a foreign corporation:
(1) Amounts included in gross income under section 951
[(2) Repealed. Pub. L. 100–647, title I, § 1006(e)(14)(A), Nov. 10, 1988, 102 Stat. 3402]
(3) Less developed country corporations under prior law
(4) United States incomeAny item includible in gross income of the foreign corporation under this chapter—
(A) for any taxable year beginning before January 1, 1967, as income derived from sources within the United States of a foreign corporation engaged in trade or business within the United States, or
(B) for any taxable year beginning after December 31, 1966, as income effectively connected with the conduct by such corporation of a trade or business within the United States.
This paragraph shall not apply with respect to any item which is exempt from taxation (or is subject to a reduced rate of tax) pursuant to a treaty obligation of the United States.
(5) Foreign trade incomeEarnings and profits of the foreign corporation attributable to foreign trade income of a FSC (as defined in section 922) other than foreign trade income which—
(A) is section 923(a)(2) non-exempt income (within the meaning of section 927(d)(6)), or
(B) would not (but for section 923(a)(4)) be treated as exempt foreign trade income.
For purposes of the preceding sentence, the terms “foreign trade income” and “exempt foreign trade income” have the respective meanings given such terms by section 923. Any reference in this paragraph to section 922, 923, or 927 shall be treated as a reference to such section as in effect before its repeal by the FSC Repeal and Extraterritorial Income Exclusion Act of 2000.
(6) Amounts included in gross income under section 1293
(e) Sales or exchanges of stock in certain domestic corporationsExcept as provided in regulations prescribed by the Secretary, if—
(1) a United States person sells or exchanges stock of a domestic corporation, and
(2) such domestic corporation was formed or availed of principally for the holding, directly or indirectly, of stock of one or more foreign corporations,
such sale or exchange shall, for purposes of this section, be treated as a sale or exchange of the stock of the foreign corporation or corporations held by the domestic corporation.
(f) Certain nonrecognition transactionsExcept as provided in regulations prescribed by the Secretary—
(1) In generalIf—
(A) a domestic corporation satisfies the stock ownership requirements of subsection (a)(2) with respect to a foreign corporation, and
(B) such domestic corporation distributes stock of such foreign corporation in a distribution to which section 311(a), 337, 355(c)(1), or 361(c)(1) applies,
then, notwithstanding any other provision of this subtitle, an amount equal to the excess of the fair market value of such stock over its adjusted basis in the hands of the domestic corporation shall be included in the gross income of the domestic corporation as a dividend to the extent of the earnings and profits of the foreign corporation attributable (under regulations prescribed by the Secretary) to such stock which were accumulated in taxable years of such foreign corporation beginning after December 31, 1962, and during the period or periods the stock was held by such domestic corporation while such foreign corporation was a controlled foreign corporation. For purposes of subsections (c)(2), (d), and (h), a distribution of stock to which this subsection applies shall be treated as a sale of stock to which subsection (a) applies.
(2) Exception for certain distributionsIn the case of any distribution of stock of a foreign corporation, paragraph (1) shall not apply if such distribution is to a domestic corporation—
(A) which is treated under this section as holding such stock for the period for which the stock was held by the distributing corporation, and
(B) which, immediately after the distribution, satisfies the stock ownership requirements of subsection (a)(2) with respect to such foreign corporation.
(3) Application to cases described in subsection (e)
(g) ExceptionsThis section shall not apply to—
(1) distributions to which section 303 (relating to distributions in redemption of stock to pay death taxes) applies; or
(2) any amount to the extent that such amount is, under any other provision of this title, treated as—
(A) a dividend (other than an amount treated as a dividend under subsection (f)),
(B) ordinary income, or
(C) gain from the sale of an asset held for not more than 1 year.
(h) Taxpayer to establish earnings and profits
(i) Treatment of certain indirect transfers
(1) In generalIf any shareholder of a 10-percent corporate shareholder of a foreign corporation exchanges stock of the 10-percent corporate shareholder for stock of the foreign corporation, such 10-percent corporate shareholder shall recognize gain in the same manner as if the stock of the foreign corporation received in such exchange had been—
(A) issued to the 10-percent corporate shareholder, and
(B) then distributed by the 10-percent corporate shareholder to such shareholder in redemption or liquidation (whichever is appropriate).
The amount of gain recognized by such 10-percent corporate shareholder under the preceding sentence shall not exceed the amount treated as a dividend under this section.
(2) 10-percent corporate shareholder defined
(j) Coordination with dividends received deduction
(k) Cross reference
(Added Pub. L. 87–834, § 15(a), Oct. 16, 1962, 76 Stat. 1041; amended Pub. L. 89–809, title I, § 104(k), Nov. 13, 1966, 80 Stat. 1562; Pub. L. 91–172, title IV, § 442(b)(2), Dec. 30, 1969, 83 Stat. 628; Pub. L. 94–455, title X, §§ 1022(a), 1042(b), (c)(1), (3), title XIV, § 1402(b)(1)(Y), (2), title XIX, §§ 1901(b)(3)(H), (32)(B)(iii), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1619, 1636, 1637, 1732, 1793, 1800, 1834; Pub. L. 97–448, title I, § 102(c)(1), Jan. 12, 1983, 96 Stat. 2370; Pub. L. 98–369, div. A, title I, § 133(a), (b)(2), (c), title VIII, § 801(d)(6), title X, § 1001(b)(22), (e), July 18, 1984, 98 Stat. 667, 668, 996, 1012; Pub. L. 99–514, title VI, § 631(d)(2), title XVIII, §§ 1810(i)(1), 1875(g)(1), 1876(a)(2), Oct. 22, 1986, 100 Stat. 2272, 2829, 2897; Pub. L. 100–647, title I, §§ 1006(e)(14), 1012(p)(19), Nov. 10, 1988, 102 Stat. 3402, 3518; Pub. L. 104–188, title I, § 1702(g)(1), Aug. 20, 1996, 110 Stat. 1872; Pub. L. 108–357, title IV, § 413(c)(22), Oct. 22, 2004, 118 Stat. 1509; Pub. L. 110–172, § 11(g)(17), Dec. 29, 2007, 121 Stat. 2491; Pub. L. 115–97, title I, § 14102(a)(1), Dec. 22, 2017, 131 Stat. 2192.)
§ 1249. Gain from certain sales or exchanges of patents, etc., to foreign corporations
(a) General rule
(b) Control
(Added Pub. L. 87–834, § 16(a), Oct. 16, 1962, 76 Stat. 1045; amended Pub. L. 89–809, title I, § 104(m)(3), Nov. 13, 1966, 80 Stat. 1563; Pub. L. 94–455, title XIX, § 1901(b)(3)(K), Oct. 4, 1976, 90 Stat. 1793; Pub. L. 113–295, div. A, title II, § 221(a)(84), Dec. 19, 2014, 128 Stat. 4049.)
§ 1250. Gain from dispositions of certain depreciable realty
(a) General rule
Except as otherwise provided in this section—
(1) Additional depreciation after December 31, 1975
(A) In general
If section 1250 property is disposed of after December 31, 1975, then the applicable percentage of the lower of—
(i) that portion of the additional depreciation (as defined in subsection (b)(1) or (4)) attributable to periods after December 31, 1975, in respect of the property, or
(ii) the excess of the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value of such property (in the case of any other disposition), over the adjusted basis of such property,
shall be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.
(B) Applicable percentage
For purposes of subparagraph (A), the term “applicable percentage” means—
(i) in the case of section 1250 property with respect to which a mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of State or local laws and with respect to which the owner is subject to the restrictions described in section 1039(b)(1)(B) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months;
(ii) in the case of dwelling units which, on the average, were held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under the provisions of State or local law authorizing similar levels of subsidy for lower-income families, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months;
(iii) in the case of section 1250 property with respect to which a depreciation deduction for rehabilitation expenditures was allowed under section 167(k), 100 percent minus 1 percentage point for each full month in excess of 100 full months after the date on which such property was placed in service;
(iv) in the case of section 1250 property with respect to which a loan is made or insured under title V of the Housing Act of 1949, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months; and
(v) in the case of all other section 1250 property, 100 percent.
In the case of a building (or a portion of a building devoted to dwelling units), if, on the average, 85 percent or more of the dwelling units contained in such building (or portion thereof) are units described in clause (ii), such building (or portion thereof) shall be treated as property described in clause (ii). Clauses (i), (ii), and (iv) shall not apply with respect to the additional depreciation described in subsection (b)(4) which was allowed under section 167(k).
(2) Additional depreciation after December 31, 1969, and before January 1, 1976
(A) In general
If section 1250 property is disposed of after December 31, 1969, and the amount determined under paragraph (1)(A)(ii) exceeds the amount determined under paragraph (1)(A)(i), then the applicable percentage of the lower of—
(i) that portion of the additional depreciation attributable to periods after December 31, 1969, and before January 1, 1976, in respect of the property, or
(ii) the excess of the amount determined under paragraph (1)(A)(ii) over the amount determined under paragraph (1)(A)(i),
shall also be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.
(B) Applicable percentage
For purposes of subparagraph (A), the term “applicable percentage” means—
(i) in the case of section 1250 property disposed of pursuant to a written contract which was, on July 24, 1969, and at all times thereafter, binding on the owner of the property, 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 20 full months;
(ii) in the case of section 1250 property with respect to which a mortgage is insured under section 221(d)(3) or 236 of the National Housing Act, or housing financed or assisted by direct loan or tax abatement under similar provisions of State or local laws, and with respect to which the owner is subject to the restrictions described in section 1039(b)(1)(B) (as in effect on the day before the date of the enactment of the Revenue Reconciliation Act of 1990), 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 20 full months;
(iii) in the case of residential rental property (as defined in section 167(j)(2)(B)) other than that covered by clauses (i) and (ii), 100 percent minus 1 percentage point for each full month the property was held after the date the property was held 100 full months;
(iv) in the case of section 1250 property with respect to which a depreciation deduction for rehabilitation expenditures was allowed under section 167(k), 100 percent minus 1 percentage point for each full month in excess of 100 full months after the date on which such property was placed in service; and
(v) in the case of all other section 1250 property, 100 percent.
Clauses (i), (ii), and (iii) shall not apply with respect to the additional depreciation described in subsection (b)(4).
(3) Additional depreciation before January 1, 1970
(A) In general
If section 1250 property is disposed of after December 31, 1963, and the amount determined under paragraph (1)(A)(ii) exceeds the sum of the amounts determined under paragraphs (1)(A)(i) and (2)(A)(i), then the applicable percentage of the lower of—
(i) that portion of the additional depreciation attributable to periods before January 1, 1970, in respect of the property, or
(ii) the excess of the amount determined under paragraph (1)(A)(ii) over the sum of the amounts determined under paragraphs (1)(A)(i) and (2)(A)(i),
shall also be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.
(B) Applicable percentage
(4) Special rule
(5) Cross reference
(b) Additional depreciation defined
For purposes of this section—
(1) In general
(2) Property held by lessee
In the case of a lessee, in determining the depreciation adjustments which would have resulted in respect of any building erected (or other improvement made) on the leased property, or in respect of any cost of acquiring the lease, the lease period shall be treated as including all renewal periods. For purposes of the preceding sentence—
(A) the term “renewal period” means any period for which the lease may be renewed, extended, or continued pursuant to an option exercisable by the lessee, but
(B) the inclusion of renewal periods shall not extend the period taken into account by more than ⅔ of the period on the basis of which the depreciation adjustments were allowed.
(3) Depreciation adjustments
(4) Additional depreciation attributable to rehabilitation expenditures
(5) Method of computing straight line adjustments
For purposes of paragraph (1), the depreciation adjustments which would have resulted for any taxable year under the straight line method shall be determined—
(A) in the case of property to which section 168 applies, by determining the adjustments which would have resulted for such year if the taxpayer had elected the straight line method for such year using the recovery period applicable to such property, and
(B) in the case any property to which section 168 does not apply, if a useful life (or salvage value) was used in determining the amount allowable as a deduction for any taxable year, by using such life (or value).
(c) Section 1250 property
(d) Exceptions and limitations
(1) Gifts
(2) Transfers at death
(3) Certain tax-free transactions
(4) Like kind exchanges; involuntary conversions, etc.
(A) Recognition limit
If property is disposed of and gain (determined without regard to this section) is not recognized in whole or in part under section 1031 or 1033, then the amount of gain taken into account by the transferor under subsection (a) shall not exceed the greater of the following:
(i) the amount of gain recognized on the disposition (determined without regard to this section), increased as provided in subparagraph (B), or
(ii) the amount determined under subparagraph (C).
(B) Increase for certain stock
(C) Adjustment where insufficient section 1250 property is acquired
With respect to any transaction, the amount determined under this subparagraph shall be the excess of—
(i) the amount of gain which would (but for this paragraph) be taken into account under subsection (a), over
(ii) the fair market value (or cost in the case of a transaction described in section 1033(a)(2)) of the section 1250 property acquired in the transaction.
(D) Basis of property acquired
In the case of property purchased by the taxpayer in a transaction described in section 1033(a)(2), in applying section 1033(b)(2), such sentence 1
1 See References in Text note below.
shall be applied—(i) first solely to section 1250 properties and to the amount of gain not taken into account under subsection (a) by reason of this paragraph, and
(ii) then to all purchased properties to which such sentence applies and to the remaining gain not recognized on the transaction as if the cost of the section 1250 properties were the basis of such properties computed under clause (i).
In the case of property acquired in any other transaction to which this paragraph applies, rules consistent with the preceding sentence shall be applied under regulations prescribed by the Secretary.
(E) Additional depreciation with respect to property disposed of
(5) Property distributed by a partnership to a partner
(A) In general
(B) Additional depreciation
In respect of any property described in subparagraph (A), the additional depreciation attributable to periods before the distribution by the partnership shall be—
(i) the amount of the gain to which subsection (a) would have applied if such property had been sold by the partnership immediately before the distribution at its fair market value at such time and the applicable percentage for the property had been 100 percent, reduced by
(ii) if section 751(b) applied to any part of such gain, the amount of such gain to which section 751(b) would have applied if the applicable percentage for the property had been 100 percent.
(6) Transfers to tax-exempt organization where property will be used in unrelated business
(A) In general
(B) Later change in use
(7) Foreclosure dispositions
(e) Holding period
For purposes of determining the applicable percentage under this section, the provisions of section 1223 shall not apply, and the holding period of section 1250 property shall be determined under the following rules:
(1) Beginning of holding period
The holding period of section 1250 property shall be deemed to begin—
(A) in the case of property acquired by the taxpayer, on the day after the date of acquisition, or
(B) in the case of property constructed, reconstructed, or erected by the taxpayer, on the first day of the month during which the property is placed in service.
(2) Property with transferred basis
(f) Special rules for property which is substantially improved
(1) Amount treated as ordinary income
(2) Ordinary income attributable to an element
For purposes of paragraph (1), the amount taken into account for any element shall be the sum of a series of amounts determined for the periods set forth in subsection (a), with the amount for any such period being determined by multiplying—
(A) the amount which bears the same ratio to the lower of the amounts specified in clause (i) or (ii) of subsection (a)(1)(A), in clause (i) or (ii) of subsection (a)(2)(A), or in clause (i) or (ii) of subsection (a)(3)(A), as the case may be, for the section 1250 property as the additional depreciation for such element attributable to such period bears to the sum of the additional depreciation for all elements attributable to such period, by
(B) the applicable percentage for such element for such period.
For purposes of this paragraph, determinations with respect to any element shall be made as if it were a separate property.
(3) Property consisting of more than one element
In applying this subsection in the case of any section 1250 property, there shall be treated as a separate element—
(A) each separate improvement,
(B) if, before completion of section 1250 property, units thereof (as distinguished from improvements) were placed in service, each such unit of section 1250 property, and
(C) the remaining property which is not taken into account under subparagraphs (A) and (B).
(4) Property which is substantially improved
For purposes of this subsection—
(A) In general
The term “separate improvement” means each improvement added during the 36–month period ending on the last day of any taxable year to the capital account for the property, but only if the sum of the amounts added to such account during such period exceeds the greatest of—
(i) 25 percent of the adjusted basis of the property,
(ii) 10 percent of the adjusted basis of the property, determined without regard to the adjustments provided in paragraphs (2) and (3) of section 1016(a), or
(iii) $5,000.
For purposes of clauses (i) and (ii), the adjusted basis of the property shall be determined as of the beginning of the first day of such 36–month period, or of the holding period of the property (within the meaning of subsection (e)), whichever is the later.
(B) Exception
Improvements in any taxable year shall be taken into account for purposes of subparagraph (A) only if the sum of the amounts added to the capital account for the property for such taxable year exceeds the greater of—
(i) $2,000, or
(ii) one percent of the adjusted basis referred to in subparagraph (A)(ii), determined, however, as of the beginning of such taxable year.
For purposes of this section, if the amount added to the capital account for any separate improvement does not exceed the greater of clause (i) or (ii), such improvement shall be treated as placed in service on the first day, of a calendar month, which is closest to the middle of the taxable year.
(C) Improvement
(g) Adjustments to basis
(h) Application of section
(Added Pub. L. 88–272, title II, § 231(a), Feb. 26, 1964, 78 Stat. 100; amended Pub. L. 91–172, title V, § 521(b), (c), (e), title VII, § 704(b)(5), title IX, § 910(b), Dec. 30, 1969, 83 Stat. 652, 653, 670, 720; Pub. L. 92–178, title III, § 303(c)(3), Dec. 10, 1971, 85 Stat. 522; Pub. L. 93–625, § 5(c), Jan. 3, 1975, 88 Stat. 2112; Pub. L. 94–81, § 2(b), Aug. 9, 1975, 89 Stat. 417; Pub. L. 94–455, title II, § 202(a)–(c)(1), (2), title XIX, §§ 1901(b)(3)(K), (31)(A), (B), (E), 1906(b)(13)(A), 1951(c)(2)(C), title XXI, §§ 2122(b)(4), 2124(a)(3)(D), Oct. 4, 1976, 90 Stat. 1527, 1529, 1530, 1793, 1799, 1800, 1834, 1840, 1915, 1918; Pub. L. 95–600, title IV, §§ 404(c)(7), 405(c)(4), title VII, § 701(f)(3)(C), (E), Nov. 6, 1978, 92 Stat. 2870, 2871, 2901; Pub. L. 96–222, title I, § 107(a)(1)(D), Apr. 1, 1980, 94 Stat. 222; Pub. L. 96–223, title II, § 251(a)(2)(D), Apr. 2, 1980, 94 Stat. 287; Pub. L. 97–34, title II, §§ 204(e), 212(d)(2)(F), Aug. 13, 1981, 95 Stat. 223, 239; Pub. L. 97–448, title I, § 102(a)(7), Jan. 12, 1983, 96 Stat. 2368; Pub. L. 98–369, div. A, title VII, § 712(a)(1)(B), July 18, 1984, 98 Stat. 946; Pub. L. 99–514, title II, § 242(b)(2), Oct. 22, 1986, 100 Stat. 2181; Pub. L. 100–647, title I, § 1002(a)(1), Nov. 10, 1988, 102 Stat. 3352; Pub. L. 101–239, title VII, § 7831(b), Dec. 19, 1989, 103 Stat. 2426; Pub. L. 101–508, title XI, §§ 11801(c)(6)(F), (8)(I), (15), 11812(b)(11), (12), Nov. 5, 1990, 104 Stat. 1388–524, 1388–527, 1388–536; Pub. L. 104–7, § 2(b), Apr. 11, 1995, 109 Stat. 93; Pub. L. 104–188, title I, § 1702(h)(18), Aug. 20, 1996, 110 Stat. 1874; Pub. L. 105–34, title III, § 312(d)(10), Aug. 5, 1997, 111 Stat. 840; Pub. L. 105–206, title VI, § 6023(12), July 22, 1998, 112 Stat. 825; Pub. L. 109–58, title XIII, § 1331(b)(3), Aug. 8, 2005, 119 Stat. 1024; Pub. L. 109–135, title IV, § 402(a)(7), (h), Dec. 21, 2005, 119 Stat. 2610, 2611; Pub. L. 115–141, div. U, title IV, § 401(a)(174), Mar. 23, 2018, 132 Stat. 1192.)
[§ 1251. Repealed. Pub. L. 98–369, div. A, title IV, § 492(a), July 18, 1984, 98 Stat. 853]
§ 1252. Gain from disposition of farm land
(a) General rule
(1) Ordinary incomeExcept as otherwise provided in this section, if farm land which the taxpayer has held for less than 10 years is disposed of, the lower of—
(A) the applicable percentage of the aggregate of the deductions allowed under section 175 (relating to soil and water conservation expenditures) for expenditures made by the taxpayer with respect to the farm land or
(B) the excess of—
(i) the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value of the farm land (in the case of any other disposition), over
(ii) the adjusted basis of such land,
shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.
(2) Farm land
(3) Applicable percentage
(b) Special rules
(Added Pub. L. 91–172, title II, § 214(a), Dec. 30, 1969, 83 Stat. 572; amended Pub. L. 94–455, title XIX, §§ 1901(b)(3)(K), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1793, 1834; Pub. L. 98–369, div. A, title IV, § 492(b)(5), July 18, 1984, 98 Stat. 854; Pub. L. 99–514, title IV, § 402(b)(2), Oct. 22, 1986, 100 Stat. 2221; Pub. L. 113–295, div. A, title II, § 221(a)(85), Dec. 19, 2014, 128 Stat. 4049; Pub. L. 115–141, div. U, title IV, § 401(b)(32), Mar. 23, 2018, 132 Stat. 1204.)
§ 1253. Transfers of franchises, trademarks, and trade names
(a) General rule
(b) DefinitionsFor purposes of this section—
(1) Franchise
(2) Significant power, right, or continuing interestThe term “significant power, right, or continuing interest” includes, but is not limited to, the following rights with respect to the interest transferred:
(A) A right to disapprove any assignment of such interest, or any part thereof.
(B) A right to terminate at will.
(C) A right to prescribe the standards of quality of products used or sold, or of services furnished, and of the equipment and facilities used to promote such products or services.
(D) A right to require that the transferee sell or advertise only products or services of the transferor.
(E) A right to require that the transferee purchase substantially all of his supplies and equipment from the transferor.
(F) A right to payments contingent on the productivity, use, or disposition of the subject matter of the interest transferred, if such payments constitute a substantial element under the transfer agreement.
(3) Transfer
(c) Treatment of contingent payments by transferor
(d) Treatment of payments by transferee
(1) Contingent serial payments
(A) In general
(B) Amounts to which paragraph appliesAn amount is described in this subparagraph if it—
(i) is contingent on the productivity, use, or disposition of the franchise, trademark, or trade name, and
(ii) is paid as part of a series of payments—(I) which are payable not less frequently than annually throughout the entire term of the transfer agreement, and(II) which are substantially equal in amount (or payable under a fixed formula).
(2) Other payments
(3) Renewals, etc.
(Added Pub. L. 91–172, title V, § 516(c)(1), Dec. 30, 1969, 83 Stat. 647; amended Pub. L. 94–455, title XIX, § 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1834; Pub. L. 101–239, title VII, § 7622(a)–(c), Dec. 19, 1989, 103 Stat. 2377; Pub. L. 101–508, title XI, § 11701(i), Nov. 5, 1990, 104 Stat. 1388–508; Pub. L. 103–66, title XIII, § 13261(c), Aug. 10, 1993, 107 Stat. 539; Pub. L. 104–188, title I, § 1704(t)(47), Aug. 20, 1996, 110 Stat. 1889; Pub. L. 108–357, title VIII, § 886(b)(3), Oct. 22, 2004, 118 Stat. 1641.)
§ 1254. Gain from disposition of interest in oil, gas, geothermal, or other mineral properties
(a) General rule
(1) Ordinary incomeIf any section 1254 property is disposed of, the lesser of—
(A) the aggregate amount of—
(i) expenditures which have been deducted by the taxpayer or any person under section 263, 616, or 617 with respect to such property and which, but for such deduction, would have been included in the adjusted basis of such property, and
(ii) the deductions for depletion under section 611 which reduced the adjusted basis of such property, or
(B) the excess of—
(i) in the case of—(I) a sale, exchange, or involuntary conversion, the amount realized, or(II) in the case of any other disposition, the fair market value of such property, over
(ii) the adjusted basis of such property,
shall be treated as gain which is ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle.
(2) Disposition of portion of propertyFor purposes of paragraph (1)—
(A) In the case of the disposition of a portion of section 1254 property (other than an undivided interest), the entire amount of the aggregate expenditures or deductions described in paragraph (1)(A) with respect to such property shall be treated as allocable to such portion to the extent of the amount of the gain to which paragraph (1) applies.
(B) In the case of the disposition of an undivided interest in a section 1254 property (or a portion thereof), a proportionate part of the expenditures or deductions described in paragraph (1)(A) with respect to such property shall be treated as allocable to such undivided interest to the extent of the amount of the gain to which paragraph (1) applies.
This paragraph shall not apply to any expenditures to the extent the taxpayer establishes to the satisfaction of the Secretary that such expenditures do not relate to the portion (or interest therein) disposed of.
(3) Section 1254 propertyThe term “section 1254 property” means any property (within the meaning of section 614) if—
(A) any expenditures described in paragraph (1)(A) are properly chargeable to such property, or
(B) the adjusted basis of such property includes adjustments for deductions for depletion under section 611.
(4) Adjustment for amounts included in gross income under section 617(b)(1)(A)
(b) Special rules under regulationsUnder regulations prescribed by the Secretary—
(1) rules similar to the rule of subsection (g) of section 617 and to the rules of subsections (b) and (c) of section 1245 shall be applied for purposes of this section; and
(2) in the case of the sale or exchange of stock in an S corporation, rules similar to the rules of section 751 shall be applied to that portion of the excess of the amount realized over the adjusted basis of the stock which is attributable to expenditures referred to in subsection (a)(1)(A) of this section.
(Added Pub. L. 94–455, title II, § 205(a), Oct. 4, 1976, 90 Stat. 1533; amended Pub. L. 95–618, title IV, § 402(c)(1)–(3), Nov. 9, 1978, 92 Stat. 3202; Pub. L. 97–354, § 5(a)(37), Oct. 19, 1982, 96 Stat. 1696; Pub. L. 99–514, title IV, § 413(a), Oct. 22, 1986, 100 Stat. 2227; Pub. L. 100–647, title I, § 1004(c), Nov. 10, 1988, 102 Stat. 3387.)
§ 1255. Gain from disposition of section 126 property
(a) General rule
(1) Ordinary incomeExcept as otherwise provided in this section, if section 126 property is disposed of, the lower of—
(A) the applicable percentage of the aggregate payments, with respect to such property, excluded from gross income under section 126, or
(B) the excess of—
(i) the amount realized (in the case of a sale, exchange, or involuntary conversion), or the fair market value of such section 126 property (in the case of any other disposition), over
(ii) the adjusted basis of such property,
shall be treated as ordinary income. Such gain shall be recognized notwithstanding any other provision of this subtitle, except that this section shall not apply to the extent such gain is recognized as ordinary income under any other provision of this part.
(2) Section 126 property
(3) Applicable percentage
(b) Special rulesUnder regulations prescribed by the Secretary—
(1) rules similar to the rules applicable under section 1245 shall be applied for purposes of this section, and
(2) for purposes of sections 170(e) and 751(c), amounts treated as ordinary income under this section shall be treated in the same manner as amounts treated as ordinary income under section 1245.
(Added Pub. L. 95–600, title V, § 543(c)(1), Nov. 6, 1978, 92 Stat. 2890; amended Pub. L. 96–222, title I, § 105(a)(7)(B), (D), Apr. 1, 1980, 94 Stat. 221; Pub. L. 96–471, § 2(b)(6), Oct. 19, 1980, 94 Stat. 2254; Pub. L. 99–514, title V, § 511(d)(2)(A), title VI, § 631(e)(14), Oct. 22, 1986, 100 Stat. 2248, 2275; Pub. L. 100–647, title I, § 1005(c)(10), Nov. 10, 1988, 102 Stat. 3392; Pub. L. 108–27, title III, § 302(e)(4)(B)(ii), May 28, 2003, 117 Stat. 764; Pub. L. 115–141, div. U, title IV, § 401(a)(175), Mar. 23, 2018, 132 Stat. 1192.)
§ 1256. Section 1256 contracts marked to market
(a) General ruleFor purposes of this subtitle—
(1) each section 1256 contract held by the taxpayer at the close of the taxable year shall be treated as sold for its fair market value on the last business day of such taxable year (and any gain or loss shall be taken into account for the taxable year),
(2) proper adjustment shall be made in the amount of any gain or loss subsequently realized for gain or loss taken into account by reason of paragraph (1),
(3) any gain or loss with respect to a section 1256 contract shall be treated as—
(A) short-term capital gain or loss, to the extent of 40 percent of such gain or loss, and
(B) long-term capital gain or loss, to the extent of 60 percent of such gain or loss, and
(4) if all the offsetting positions making up any straddle consist of section 1256 contracts to which this section applies (and such straddle is not part of a larger straddle), sections 1092 and 263(g) shall not apply with respect to such straddle.
(b) Section 1256 contract defined
(1) In generalFor purposes of this section, the term “section 1256 contract” means—
(A) any regulated futures contract,
(B) any foreign currency contract,
(C) any nonequity option,
(D) any dealer equity option, and
(E) any dealer securities futures contract.
(2) ExceptionsThe term “section 1256 contract” shall not include—
(A) any securities futures contract or option on such a contract unless such contract or option is a dealer securities futures contract, or
(B) any interest rate swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement.
(c) Terminations, etc.
(1) In general
(2) Special rule where taxpayer takes delivery on or exercises part of straddleIf—
(A) 2 or more section 1256 contracts are part of a straddle (as defined in section 1092(c)), and
(B) the taxpayer takes delivery under or exercises any of such contracts,
then, for purposes of this section, each of the other such contracts shall be treated as terminated on the day on which the taxpayer took delivery.
(3) Fair market value taken into account
(d) Elections with respect to mixed straddles
(1) Election
(2) Time and manner
(3) Election revocable only with consent
(4) Mixed straddleFor purposes of this subsection, the term “mixed straddle” means any straddle (as defined in section 1092(c))—
(A) at least 1 (but not all) of the positions of which are section 1256 contracts, and
(B) with respect to which each position forming part of such straddle is clearly identified, before the close of the day on which the first section 1256 contract forming part of the straddle is acquired (or such earlier time as the Secretary may prescribe by regulations), as being part of such straddle.
(e) Mark to market not to apply to hedging transactions
(1) Section not to apply
(2) Definition of hedging transaction
(3) Special rule for syndicates
(A) In general
(B) Syndicate defined
(C) Holdings attributable to active managementFor purposes of subparagraph (B), an interest in an entity shall not be treated as held by a limited partner or a limited entrepreneur (within the meaning of section 461(k)(4))—
(i) for any period if during such period such interest is held by an individual who actively participates at all times during such period in the management of such entity,
(ii) for any period if during such period such interest is held by the spouse, children, grandchildren, and parents of an individual who actively participates at all times during such period in the management of such entity,
(iii) if such interest is held by an individual who actively participated in the management of such entity for a period of not less than 5 years,
(iv) if such interest is held by the estate of an individual who actively participated in the management of such entity or is held by the estate of an individual if with respect to such individual such interest was at any time described in clause (ii), or
(v) if the Secretary determines (by regulations or otherwise) that such interest should be treated as held by an individual who actively participates in the management of such entity, and that such entity and such interest are not used (or to be used) for tax–avoidance purposes.
For purposes of this subparagraph, a legally adopted child of an individual shall be treated as a child of such individual by blood.
(4) Limitation on losses from hedging transactions
(A) In general
(i) Limitation
(ii) Carryover of disallowed loss
(B) Exception where economic loss
(C) Exception for certain hedging transactions
(D) Hedging lossThe term “hedging loss” means the excess of—
(i) the deductions allowable under this chapter for the taxable year attributable to hedging transactions (determined without regard to subparagraph (A)(i)), over
(ii) income received or accrued by the taxpayer during such taxable year from such transactions.
(E) Unrecognized gain
(f) Special rules
(1) Denial of capital gains treatment for property identified as part of a hedging transaction
(2) Subsection (a)(3) not to apply to ordinary income property
(3) Capital gain treatment for traders in section 1256 contracts
(A) In general
(B) Exception for certain hedging transactions
(C) Treatment of underlying property
(4) Special rule for dealer equity options and dealer securities futures contracts of limited partners or limited entrepreneursIn the case of any gain or loss with respect to dealer equity options, or dealer securities futures contracts, which are allocable to limited partners or limited entrepreneurs (within the meaning of subsection (e)(3))—
(A) paragraph (3) of subsection (a) shall not apply to any such gain or loss, and
(B) all such gains or losses shall be treated as short-term capital gains or losses, as the case may be.
(5) Special rule related to losses
(g) DefinitionsFor purposes of this section—
(1) Regulated futures contracts definedThe term “regulated futures contract” means a contract—
(A) with respect to which the amount required to be deposited and the amount which may be withdrawn depends on a system of marking to market, and
(B) which is traded on or subject to the rules of a qualified board or exchange.
(2) Foreign currency contract defined
(A) Foreign currency contractThe term “foreign currency contract” means a contract—
(i) which requires delivery of, or the settlement of which depends on the value of, a foreign currency which is a currency in which positions are also traded through regulated futures contracts,
(ii) which is traded in the interbank market, and
(iii) which is entered into at arm’s length at a price determined by reference to the price in the interbank market.
(B) Regulations
(3) Nonequity option
(4) Dealer equity optionThe term “dealer equity option” means, with respect to an options dealer, any listed option which—
(A) is an equity option,
(B) is purchased or granted by such options dealer in the normal course of his activity of dealing in options, and
(C) is listed on the qualified board or exchange on which such options dealer is registered.
(5) Listed option
(6) Equity optionThe term “equity option” means any option—
(A) to buy or sell stock, or
(B) the value of which is determined directly or indirectly by reference to any stock or any narrow-based security index (as defined in section 3(a)(55) of the Securities Exchange Act of 1934, as in effect on the date of the enactment of this paragraph).
The term “equity option” includes such an option on a group of stocks only if such group meets the requirements for a narrow-based security index (as so defined). The Secretary may prescribe regulations regarding the status of options the values of which are determined directly or indirectly by reference to any index which becomes (or ceases to be) a narrow-based security index (as so defined).
(7) Qualified board or exchangeThe term “qualified board or exchange” means—
(A) a national securities exchange which is registered with the Securities and Exchange Commission,
(B) a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission, or
(C) any other exchange, board of trade, or other market which the Secretary determines has rules adequate to carry out the purposes of this section.
(8) Options dealer
(A) In general
(B) Persons trading in other markets
(9) Dealer securities futures contract
(A) In generalThe term “dealer securities futures contract” means, with respect to any dealer, any securities futures contract, and any option on such a contract, which—
(i) is entered into by such dealer (or, in the case of an option, is purchased or granted by such dealer) in the normal course of his activity of dealing in such contracts or options, as the case may be, and
(ii) is traded on a qualified board or exchange.
(B) Dealer
(C) Securities futures contract
(Added Pub. L. 97–34, title V, § 503(a), Aug. 13, 1981, 95 Stat. 327; amended Pub. L. 97–354, § 5(a)(38), Oct. 19, 1982, 96 Stat. 1696; Pub. L. 97–448, title I, § 105(c)(1)–(3), (5)(A)–(C), Jan. 12, 1983, 96 Stat. 2385, 2386; Pub. L. 98–369, div. A, title I, §§ 102(a), (b), (e)(1), (5), 104(a), 107(c), (d), title VII, § 722(a)(2), July 18, 1984, 98 Stat. 620, 621, 623, 624, 628, 630, 972; Pub. L. 99–514, title XII, § 1261(c), Oct. 22, 1986, 100 Stat. 2591; Pub. L. 106–170, title V, § 532(b)(4), Dec. 17, 1999, 113 Stat. 1930; Pub. L. 106–554, § 1(a)(7) [title IV, § 401(g)(1)–(3)], Dec. 21, 2000, 114 Stat. 2763, 2763A–649, 2763A–650; Pub. L. 107–147, title IV, § 416(b)(1), Mar. 9, 2002, 116 Stat. 55; Pub. L. 108–311, title IV, § 405(a)(2), Oct. 4, 2004, 118 Stat. 1188; Pub. L. 109–135, title IV, § 412(oo), Dec. 21, 2005, 119 Stat. 2639; Pub. L. 111–203, title XVI, § 1601(a), July 21, 2010, 124 Stat. 2223; Pub. L. 115–141, div. U, title IV, § 401(a)(176)(A), Mar. 23, 2018, 132 Stat. 1192.)
§ 1257. Disposition of converted wetlands or highly erodible croplands
(a) Gain treated as ordinary income
(b) Loss treated as long-term capital loss
(c) Definitions
For purposes of this section—
(1) Converted wetland
The term “converted wetland” means any converted wetland (as defined in section 1201(a)(7) of the Food Security Act of 1985 (16 U.S.C. 3801(7))) held—
(A) by the person whose activities resulted in such land being converted wetland, or
(B) by any other person who at any time used such land for farming purposes.
(2) Highly erodible cropland
(3) Treatment of successors
(d) Special rules
(Added Pub. L. 99–514, title IV, § 403(a), Oct. 22, 1986, 100 Stat. 2222; amended Pub. L. 108–27, title III, § 302(e)(4)(B)(ii), May 28, 2003, 117 Stat. 764; Pub. L. 115–141, div. U, title IV, § 401(a)(177), (178), Mar. 23, 2018, 132 Stat. 1192.)
§ 1258. Recharacterization of gain from certain financial transactions
(a) General ruleIn the case of any gain—
(1) which (but for this section) would be treated as gain from the sale or exchange of a capital asset, and
(2) which is recognized on the disposition or other termination of any position which was held as part of a conversion transaction,
such gain (to the extent such gain does not exceed the applicable imputed income amount) shall be treated as ordinary income.
(b) Applicable imputed income amountFor purposes of subsection (a), the term “applicable imputed income amount” means, with respect to any disposition or other termination referred to in subsection (a), an amount equal to—
(1) the amount of interest which would have accrued on the taxpayer’s net investment in the conversion transaction for the period ending on the date of such disposition or other termination (or, if earlier, the date on which the requirements of subsection (c) ceased to be satisfied) at a rate equal to 120 percent of the applicable rate, reduced by
(2) the amount treated as ordinary income under subsection (a) with respect to any prior disposition or other termination of a position which was held as a part of such transaction.
The Secretary shall by regulations provide for such reductions in the applicable imputed income amount as may be appropriate by reason of amounts capitalized under section 263(g), ordinary income received, or otherwise.
(c) Conversion transactionFor purposes of this section, the term “conversion transaction” means any transaction—
(1) substantially all of the taxpayer’s expected return from which is attributable to the time value of the taxpayer’s net investment in such transaction, and
(2) which is—
(A) the holding of any property (whether or not actively traded), and the entering into a contract to sell such property (or substantially identical property) at a price determined in accordance with such contract, but only if such property was acquired and such contract was entered into on a substantially contemporaneous basis,
(B) an applicable straddle,
(C) any other transaction which is marketed or sold as producing capital gains from a transaction described in paragraph (1), or
(D) any other transaction specified in regulations prescribed by the Secretary.
(d) Definitions and special rulesFor purposes of this section—
(1) Applicable straddle
(2) Applicable rateThe term “applicable rate” means—
(A) the applicable Federal rate determined under section 1274(d) (compounded semiannually) as if the conversion transaction were a debt instrument, or
(B) if the term of the conversion transaction is indefinite, the Federal short-term rates in effect under section 6621(b) during the period of the conversion transaction (compounded daily).
(3) Treatment of built-in losses
(A) In generalIf any position with a built-in loss becomes part of a conversion transaction—
(i) for purposes of applying this subtitle to such position for periods after such position becomes part of such transaction, such position shall be taken into account at its fair market value as of the time it became part of such transaction, except that
(ii) upon the disposition or other termination of such position in a transaction in which gain or loss is recognized, such built-in loss shall be recognized and shall have a character determined without regard to this section.
(B) Built-in loss
(4) Position taken into account at fair market value
(5) Special rule for options dealers and commodities traders
(A) In generalSubsection (a) shall not apply to transactions—
(i) of an options dealer in the normal course of the dealer’s trade or business of dealing in options, or
(ii) of a commodities trader in the normal course of the trader’s trade or business of trading section 1256 contracts.
(B) DefinitionsFor purposes of this paragraph—
(i) Options dealer
(ii) Commodities trader
(C) Limited partners and limited entrepreneursIn the case of any gain from a transaction recognized by an entity which is allocable to a limited partner or limited entrepreneur (within the meaning of section 461(k)(4)), subparagraph (A) shall not apply if—
(i) substantially all of the limited partner’s (or limited entrepreneur’s) expected return from the entity is attributable to the time value of the partner’s (or entrepreneur’s) net investment in such entity,
(ii) the transaction (or the interest in the entity) was marketed or sold as producing capital gains treatment from a transaction described in subsection (c)(1), or
(iii) the transaction (or the interest in the entity) is a transaction (or interest) specified in regulations prescribed by the Secretary.
(Added Pub. L. 103–66, title XIII, § 13206(a)(1), Aug. 10, 1993, 107 Stat. 462; amended Pub. L. 108–357, title VIII, § 888(c)(2), Oct. 22, 2004, 118 Stat. 1643; Pub. L. 115–141, div. U, title IV, § 401(a)(176)(B), Mar. 23, 2018, 132 Stat. 1192.)
§ 1259. Constructive sales treatment for appreciated financial positions
(a) In generalIf there is a constructive sale of an appreciated financial position—
(1) the taxpayer shall recognize gain as if such position were sold, assigned, or otherwise terminated at its fair market value on the date of such constructive sale (and any gain shall be taken into account for the taxable year which includes such date), and
(2) for purposes of applying this title for periods after the constructive sale—
(A) proper adjustment shall be made in the amount of any gain or loss subsequently realized with respect to such position for any gain taken into account by reason of paragraph (1), and
(B) the holding period of such position shall be determined as if such position were originally acquired on the date of such constructive sale.
(b) Appreciated financial positionFor purposes of this section—
(1) In general
(2) ExceptionsThe term “appreciated financial position” shall not include—
(A) any position with respect to debt if—
(i) the position unconditionally entitles the holder to receive a specified principal amount,
(ii) the interest payments (or other similar amounts) with respect to such position meet the requirements of clause (i) of section 860G(a)(1)(B), and
(iii) such position is not convertible (directly or indirectly) into stock of the issuer or any related person,
(B) any hedge with respect to a position described in subparagraph (A), and
(C) any position which is marked to market under any provision of this title or the regulations thereunder.
(3) Position
(c) Constructive saleFor purposes of this section—
(1) In generalA taxpayer shall be treated as having made a constructive sale of an appreciated financial position if the taxpayer (or a related person)—
(A) enters into a short sale of the same or substantially identical property,
(B) enters into an offsetting notional principal contract with respect to the same or substantially identical property,
(C) enters into a futures or forward contract to deliver the same or substantially identical property,
(D) in the case of an appreciated financial position that is a short sale or a contract described in subparagraph (B) or (C) with respect to any property, acquires the same or substantially identical property, or
(E) to the extent prescribed by the Secretary in regulations, enters into 1 or more other transactions (or acquires 1 or more positions) that have substantially the same effect as a transaction described in any of the preceding subparagraphs.
(2) Exception for sales of nonpublicly traded property
(3) Exception for certain closed transactions
(A) In generalIn applying this section, there shall be disregarded any transaction (which would otherwise cause a constructive sale) during the taxable year if—
(i) such transaction is closed on or before the 30th day after the close of such taxable year,
(ii) the taxpayer holds the appreciated financial position throughout the 60-day period beginning on the date such transaction is closed, and
(iii) at no time during such 60-day period is the taxpayer’s risk of loss with respect to such position reduced by reason of a circumstance which would be described in section 246(c)(4) if references to stock included references to such position.
(B) Treatment of certain closed transactions where risk of loss on appreciated financial position diminishedIf—
(i) a transaction, which would otherwise cause a constructive sale of an appreciated financial position, is closed during the taxable year or during the 30 days thereafter, and
(ii) another transaction is entered into during the 60-day period beginning on the date the transaction referred to in clause (i) is closed—(I) which would (but for this subparagraph) cause the requirement of subparagraph (A)(iii) not to be met with respect to the transaction described in clause (i) of this subparagraph,(II) which is closed on or before the 30th day after the close of the taxable year in which the transaction referred to in clause (i) occurs, and(III) which meets the requirements of clauses (ii) and (iii) of subparagraph (A),
the transaction referred to in clause (ii) shall be disregarded for purposes of determining whether the requirements of subparagraph (A)(iii) are met with respect to the transaction described in clause (i).
(4) Related personA person is related to another person with respect to a transaction if—
(A) the relationship is described in section 267(b) or 707(b), and
(B) such transaction is entered into with a view toward avoiding the purposes of this section.
(d) Other definitionsFor purposes of this section—
(1) Forward contract
(2) Offsetting notional principal contractThe term “offsetting notional principal contract” means, with respect to any property, an agreement which includes—
(A) a requirement to pay (or provide credit for) all or substantially all of the investment yield (including appreciation) on such property for a specified period, and
(B) a right to be reimbursed for (or receive credit for) all or substantially all of any decline in the value of such property.
(e) Special rules
(1) Treatment of subsequent sale of position which was deemed soldIf—
(A) there is a constructive sale of any appreciated financial position,
(B) such position is subsequently disposed of, and
(C) at the time of such disposition, the transaction resulting in the constructive sale of such position is open with respect to the taxpayer or any related person,
solely for purposes of determining whether the taxpayer has entered into a constructive sale of any other appreciated financial position held by the taxpayer, the taxpayer shall be treated as entering into such transaction immediately after such disposition. For purposes of the preceding sentence, an assignment or other termination shall be treated as a disposition.
(2) Certain trust instruments treated as stock
(3) Multiple positions in property
(f) Regulations
(Added Pub. L. 105–34, title X, § 1001(a), Aug. 5, 1997, 111 Stat. 903; amended Pub. L. 105–206, title VI, § 6010(a)(1), (2), July 22, 1998, 112 Stat. 812, 813; Pub. L. 108–311, title IV, § 406(e), Oct. 4, 2004, 118 Stat. 1189.)
§ 1260. Gains from constructive ownership transactions
(a) In generalIf the taxpayer has gain from a constructive ownership transaction with respect to any financial asset and such gain would (without regard to this section) be treated as a long-term capital gain—
(1) such gain shall be treated as ordinary income to the extent that such gain exceeds the net underlying long-term capital gain, and
(2) to the extent such gain is treated as a long-term capital gain after the application of paragraph (1), the determination of the capital gain rate (or rates) applicable to such gain under section 1(h) shall be determined on the basis of the respective rate (or rates) that would have been applicable to the net underlying long-term capital gain.
(b) Interest charge on deferral of gain recognition
(1) In general
(2) Amount of interest
(3) Applicable Federal rate
(4) No credits against increase in taxAny increase in tax under paragraph (1) shall not be treated as tax imposed by this chapter for purposes of determining—
(A) the amount of any credit allowable under this chapter, or
(B) the amount of the tax imposed by section 55.
(c) Financial assetFor purposes of this section—
(1) In generalThe term “financial asset” means—
(A) any equity interest in any pass-thru entity, and
(B) to the extent provided in regulations—
(i) any debt instrument, and
(ii) any stock in a corporation which is not a pass-thru entity.
(2) Pass-thru entityFor purposes of paragraph (1), the term “pass-thru entity” means—
(A) a regulated investment company,
(B) a real estate investment trust,
(C) an S corporation,
(D) a partnership,
(E) a trust,
(F) a common trust fund,
(G) a passive foreign investment company (as defined in section 1297 without regard to subsection (d) thereof), and
(H) a REMIC.
(d) Constructive ownership transactionFor purposes of this section—
(1) In generalThe taxpayer shall be treated as having entered into a constructive ownership transaction with respect to any financial asset if the taxpayer—
(A) holds a long position under a notional principal contract with respect to the financial asset,
(B) enters into a forward or futures contract to acquire the financial asset,
(C) is the holder of a call option, and is the grantor of a put option, with respect to the financial asset and such options have substantially equal strike prices and substantially contemporaneous maturity dates, or
(D) to the extent provided in regulations prescribed by the Secretary, enters into one or more other transactions (or acquires one or more positions) that have substantially the same effect as a transaction described in any of the preceding subparagraphs.
(2) Exception for positions which are marked to market
(3) Long position under notional principal contractA person shall be treated as holding a long position under a notional principal contract with respect to any financial asset if such person—
(A) has the right to be paid (or receive credit for) all or substantially all of the investment yield (including appreciation) on such financial asset for a specified period, and
(B) is obligated to reimburse (or provide credit for) all or substantially all of any decline in the value of such financial asset.
(4) Forward contract
(e) Net underlying long-term capital gainFor purposes of this section, in the case of any constructive ownership transaction with respect to any financial asset, the term “net underlying long-term capital gain” means the aggregate net capital gain that the taxpayer would have had if—
(1) the financial asset had been acquired for fair market value on the date such transaction was opened and sold for fair market value on the date such transaction was closed, and
(2) only gains and losses that would have resulted from the deemed ownership under paragraph (1) were taken into account.
The amount of the net underlying long-term capital gain with respect to any financial asset shall be treated as zero unless the amount thereof is established by clear and convincing evidence.
(f) Special rule where taxpayer takes delivery
(g) RegulationsThe Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section, including regulations—
(1) to permit taxpayers to mark to market constructive ownership transactions in lieu of applying this section, and
(2) to exclude certain forward contracts which do not convey substantially all of the economic return with respect to a financial asset.
(Added Pub. L. 106–170, title V, § 534(a), Dec. 17, 1999, 113 Stat. 1931; amended Pub. L. 108–357, title IV, § 413(c)(23), Oct. 22, 2004, 118 Stat. 1509; Pub. L. 110–172, § 11(a)(23), (24)(B), Dec. 29, 2007, 121 Stat. 2486.)