
From the U.S. Code Online via GPO Access
[wais.access.gpo.gov]
[Laws in effect as of January 2, 2001]
[Document affected by Public Law 106-554 Section 1(a)(7)]
[Document affected by Public Law 107-16 Section 205(b)(3)]
[Document affected by Public Law 106-554 Section 1(a)(7)[116(c)]]
[CITE: 26USC1016]

 
                     TITLE 26--INTERNAL REVENUE CODE
 
                        Subtitle A--Income Taxes
 
                  CHAPTER 1--NORMAL TAXES AND SURTAXES
 
          Subchapter O--Gain or Loss on Disposition of Property
 
               PART II--BASIS RULES OF GENERAL APPLICATION
 
Sec. 1016. Adjustments to basis


(a) General rule

    Proper adjustment in respect of the property shall in all cases be 
made--
        (1) for expenditures, receipts, losses, or other items, properly 
    chargeable to capital account, but no such adjustment shall be 
    made--
            (A) for taxes or other carrying charges described in section 
        266, or
            (B) for expenditures described in section 173 (relating to 
        circulation expenditures),

    for which deductions have been taken by the taxpayer in determining 
    taxable income for the taxable year or prior taxable years;
        (2) in respect of any period since February 28, 1913, for 
    exhaustion, wear and tear, obsolescence, amortization, and 
    depletion, to the extent of the amount--
            (A) allowed as deductions in computing taxable income under 
        this subtitle or prior income tax laws, and
            (B) resulting (by reason of the deductions so allowed) in a 
        reduction for any taxable year of the taxpayer's taxes under 
        this subtitle (other than chapter 2, relating to tax on self-
        employment income), or prior income, war-profits, or excess-
        profits tax laws,

    but not less than the amount allowable under this subtitle or prior 
    income tax laws. Where no method has been adopted under section 167 
    (relating to depreciation deduction), the amount allowable shall be 
    determined under the straight line method. Subparagraph (B) of this 
    paragraph shall not apply in respect of any period since February 
    28, 1913, and before January 1, 1952, unless an election has been 
    made under section 1020 (as in effect before the date of the 
    enactment of the Tax Reform Act of 1976). Where for any taxable year 
    before the taxable year 1932 the depletion allowance was based on 
    discovery value or a percentage of income, then the adjustment for 
    depletion for such year shall be based on the depletion which would 
    have been allowable for such year if computed without reference to 
    discovery value or a percentage of income;
        (3) in respect of any period--
            (A) before March 1, 1913,
            (B) since February 28, 1913, during which such property was 
        held by a person or an organization not subject to income 
        taxation under this chapter or prior income tax laws,
            (C) since February 28, 1913, and before January 1, 1958, 
        during which such property was held by a person subject to tax 
        under part I of subchapter L (or the corresponding provisions of 
        prior income tax laws), to the extent that paragraph (2) does 
        not apply, and
            (D) since February 28, 1913, during which such property was 
        held by a person subject to tax under part II \1\ of subchapter 
        L (or the corresponding provisions of prior income tax laws), to 
        the extent that paragraph (2) does not apply,
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    \1\ See References in Text note below.

    for exhaustion, wear and tear, obsolescence, amortization, and 
    depletion, to the extent sustained;
        (4) in the case of stock (to the extent not provided for in the 
    foregoing paragraphs) for the amount of distributions previously 
    made which, under the law applicable to the year in which the 
    distribution was made, either were tax-free or were applicable in 
    reduction of basis (not including distributions made by a 
    corporation which was classified as a personal service corporation 
    under the provisions of the Revenue Act of 1918 (40 Stat. 1057), or 
    the Revenue Act of 1921 (42 Stat. 227), out of its earnings or 
    profits which were taxable in accordance with the provisions of 
    section 218 of the Revenue Act of 1918 or 1921);
        (5) in the case of any bond (as defined in section 171(d)) the 
    interest on which is wholly exempt from the tax imposed by this 
    subtitle, to the extent of the amortizable bond premium disallowable 
    as a deduction pursuant to section 171(a)(2), and in the case of any 
    other bond (as defined in section 171(d)) to the extent of the 
    deductions allowable pursuant to section 171(a)(1) (or the amount 
    applied to reduce interest payments under section 171(e)(2)) with 
    respect thereto;
        (6) in the case of any municipal bond (as defined in section 
    75(b)), to the extent provided in section 75(a)(2);
        (7) in the case of a residence the acquisition of which 
    resulted, under section 1034 (as in effect on the day before the 
    date of the enactment of the Taxpayer Relief Act of 1997), in the 
    nonrecognition of any part of the gain realized on the sale, 
    exchange, or involuntary conversion of another residence, to the 
    extent provided in section 1034(e) (as so in effect);
        (8) in the case of property pledged to the Commodity Credit 
    Corporation, to the extent of the amount received as a loan from the 
    Commodity Credit Corporation and treated by the taxpayer as income 
    for the year in which received pursuant to section 77, and to the 
    extent of any deficiency on such loan with respect to which the 
    taxpayer has been relieved from liability;
        (9) for amounts allowed as deductions as deferred expenses under 
    section 616(b) (relating to certain expenditures in the development 
    of mines) and resulting in a reduction of the taxpayer's taxes under 
    this subtitle, but not less than the amounts allowable under such 
    section for the taxable year and prior years;
        [(10) Repealed. Pub. L. 94-455, title XIX, Sec. 1901(b)(21)(G), 
    Oct. 4, 1976, 90 Stat. 1798.]
        (11) for deductions to the extent disallowed under section 268 
    (relating to sale of land with unharvested crops), notwithstanding 
    the provisions of any other paragraph of this subsection;
        (12) to the extent provided in section 28(h) of the Internal 
    Revenue Code of 1939 in the case of amounts specified in a 
    shareholder's consent made under section 28 of such code;
        (13) to the extent provided in section 551(e) in the case of the 
    stock of United States shareholders in a foreign personal holding 
    company;
        (14) for amounts allowed as deductions as deferred expenses 
    under section 174(b)(1) (relating to research and experimental 
    expenditures) and resulting in a reduction of the taxpayers' taxes 
    under this subtitle, but not less than the amounts allowable under 
    such section for the taxable year and prior years;
        (15) for deductions to the extent disallowed under section 272 
    (relating to disposal of coal or domestic iron ore), notwithstanding 
    the provisions of any other paragraph of this subsection;
        (16) in the case of any evidence of indebtedness referred to in 
    section 811(b) (relating to amortization of premium and accrual of 
    discount in the case of life insurance companies), to the extent of 
    the adjustments required under section 811(b) (or the corresponding 
    provisions of prior income tax laws) for the taxable year and all 
    prior taxable years;
        (17) to the extent provided in section 1367 in the case of stock 
    of, and indebtedness owed to, shareholders of an S corporation;
        (18) to the extent provided in section 961 in the case of stock 
    in controlled foreign corporations (or foreign corporations which 
    were controlled foreign corporations) and of property by reason of 
    which a person is considered as owning such stock;
        (19) to the extent provided in section 50(c), in the case of 
    expenditures with respect to which a credit has been allowed under 
    section 38;
        (20) for amounts allowed as deductions under section 59(e) 
    (relating to optional 10-year writeoff of certain tax preferences);
        (21) to the extent provided in section 1059 (relating to 
    reduction in basis for extraordinary dividends);
        (22) in the case of qualified replacement property the 
    acquisition of which resulted under section 1042 in the 
    nonrecognition of any part of the gain realized on the sale or 
    exchange of any property, to the extent provided in section 
    1042(d),\2\
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    \2\ So in original. The comma probably should be a semicolon.
---------------------------------------------------------------------------
        (23) in the case of property the acquisition of which resulted 
    under section 1043, 1044, 1045, or 1397B in the nonrecognition of 
    any part of the gain realized on the sale of other property, to the 
    extent provided in section 1043(c), 1044(d), 1045(b)(4), or 
    1397B(b)(4), as the case may be,\2\
        (24) to the extent provided in section 179A(e)(6)(A),\2\
        (25) to the extent provided in section 30(d)(1),\2\
        (26) to the extent provided in sections 23(g) and 137(e),\2\ and
        (27) in the case of a residence with respect to which a credit 
    was allowed under section 1400C, to the extent provided in section 
    1400C(h).

(b) Substituted basis

    Whenever it appears that the basis of property in the hands of the 
taxpayer is a substituted basis, then the adjustments provided in 
subsection (a) shall be made after first making in respect of such 
substituted basis proper adjustments of a similar nature in respect of 
the period during which the property was held by the transferor, donor, 
or grantor, or during which the other property was held by the person 
for whom the basis is to be determined. A similar rule shall be applied 
in the case of a series of substituted bases.

(c) Increase in basis of property on which additional estate tax is 
        imposed

           (1) Tax imposed with respect to entire interest

        If an additional estate tax is imposed under section 2032A(c)(1) 
    with respect to any interest in property and the qualified heir 
    makes an election under this subsection with respect to the 
    imposition of such tax, the adjusted basis of such interest shall be 
    increased by an amount equal to the excess of--
            (A) the fair market value of such interest on the date of 
        the decedent's death (or the alternate valuation date under 
        section 2032, if the executor of the decedent's estate elected 
        the application of such section), over
            (B) the value of such interest determined under section 
        2032A(a).

                      (2) Partial dispositions

        (A) In general

            In the case of any partial disposition for which an election 
        under this subsection is made, the increase in basis under 
        paragraph (1) shall be an amount--
                (i) which bears the same ratio to the increase which 
            would be determined under paragraph (1) (without regard to 
            this paragraph) with respect to the entire interest, as
                (ii) the amount of the tax imposed under section 
            2032A(c)(1) with respect to such disposition bears to the 
            adjusted tax difference attributable to the entire interest 
            (as determined under section 2032A(c)(2)(B)).

        (B) Partial disposition

            For purposes of subparagraph (A), the term ``partial 
        disposition'' means any disposition or cessation to which 
        subsection (c)(2)(D), (h)(1)(B), or (i)(1)(B) of section 2032A 
        applies.

                      (3) Time adjustment made

        Any increase in basis under this subsection shall be deemed to 
    have occurred immediately before the disposition or cessation 
    resulting in the imposition of the tax under section 2032A(c)(1).

        (4) Special rule in the case of substituted property

        If the tax under section 2032A(c)(1) is imposed with respect to 
    qualified replacement property (as defined in section 
    2032A(h)(3)(B)) or qualified exchange property (as defined in 
    section 2032A(i)(3)), the increase in basis under paragraph (1) 
    shall be made by reference to the property involuntarily converted 
    or exchanged (as the case may be).

                            (5) Election

        (A) In general

            An election under this subsection shall be made at such time 
        and in such manner as the Secretary shall by regulations 
        prescribe. Such an election, once made, shall be irrevocable.

        (B) Interest on recaptured amount

            If an election is made under this subsection with respect to 
        any additional estate tax imposed under section 2032A(c)(1), for 
        purposes of section 6601 (relating to interest on 
        underpayments), the last date prescribed for payment of such tax 
        shall be deemed to be the last date prescribed for payment of 
        the tax imposed by section 2001 with respect to the estate of 
        the decedent (as determined for purposes of section 6601).

(d) Reduction in basis of automobile on which gas guzzler tax was 
        imposed

    If--
        (1) the taxpayer acquires any automobile with respect to which a 
    tax was imposed by section 4064, and
        (2) the use of such automobile by the taxpayer begins not more 
    than 1 year after the date of the first sale for ultimate use of 
    such automobile,

the basis of such automobile shall be reduced by the amount of the tax 
imposed by section 4064 with respect to such automobile. In the case of 
importation, if the date of entry or withdrawal from warehouse for 
consumption is later than the date of the first sale for ultimate use, 
such later date shall be substituted for the date of such first sale in 
the preceding sentence.

(e) Cross reference

            For treatment of separate mineral interests as one property, 
        see section 614.

(Aug. 16, 1954, ch. 736, 68A Stat. 299; June 29, 1956, ch. 464, 
Sec. 4(c), 70 Stat. 407; Pub. L. 85-866, title I, Secs. 2(b), 64(d)(2), 
Sept. 2, 1958, 72 Stat. 1607, 1656; Pub. L. 86-69, Sec. 3(d), June 25, 
1959, 73 Stat. 139; Pub. L. 87-834, Secs. 2(f), 8(g)(2), 12(b)(4), Oct. 
16, 1962, 76 Stat. 972, 998, 1031; Pub. L. 88-272, title II, 
Secs. 203(a)(3)(C), 225(j)(2), 227(b)(5), Feb. 26, 1964, 78 Stat. 34, 
93, 98; Pub. L. 91-172, title II, Sec. 231(c)(3), title V, 
Secs. 504(c)(4), 516(c)(2)(B), Dec. 30, 1969, 83 Stat. 580, 633, 648; 
Pub. L. 94-455, title XIX, Sec. 1901(a)(123), (b)(1)(F)(ii), (21)(G), 
(29)(A), (30)(A), title XX, Sec. 2005(a)(3), Oct. 4, 1976, 90 Stat. 
1784, 1790, 1798, 1799, 1876; Pub. L. 95-472, Sec. 4(b), Oct. 17, 1978, 
92 Stat. 1335; Pub. L. 95-600, title V, Sec. 515(2), title VI, 
Sec. 601(b)(3), title VII, Sec. 702(r)(3), Nov. 6, 1978, 92 Stat. 2884, 
2896, 2938; Pub. L. 95-618, title I, Sec. 101(b)(3), title II, 
Sec. 201(b), Nov. 9, 1978, 92 Stat. 3179, 3183; Pub. L. 96-222, title I, 
Secs. 106(a)(2), (3), 107(a)(2)(C), Apr. 1, 1980, 94 Stat. 221, 222; 
Pub. L. 96-223, title IV, Sec. 401(a), (c)(1), Apr. 2, 1980, 94 Stat. 
299, 300; Pub. L. 97-34, title II, Sec. 212(d)(2)(G), title IV, 
Sec. 421(g), Aug. 13, 1981, 95 Stat. 239, 310; Pub. L. 97-248, title II, 
Secs. 201(c)(2), 205(a)(5)(B), Sept. 3, 1982, 96 Stat. 418, 429; Pub. L. 
97-354, Sec. 5(a)(33), Oct. 19, 1982, 96 Stat. 1695; Pub. L. 98-369, 
div. A, title I, Secs. 43(a)(2), 53(d)(3), title II, Sec. 211(b)(14), 
title IV, Sec. 474(r)(23), title V, Sec. 541(b)(2), July 18, 1984, 98 
Stat. 558, 568, 756, 844, 890; Pub. L. 99-514, title II, Sec. 241(b)(2), 
title VII, Sec. 701(e)(4)(D), title XIII, Sec. 1303(b)(3), title XVIII, 
Sec. 1899A(25), Oct. 22, 1986, 100 Stat. 2181, 2343, 2658, 2959; Pub. L. 
100-647, title I, Secs. 1006(j)(1)(B), 1018(u)(22), Nov. 10, 1988, 102 
Stat. 3411, 3591; Pub. L. 101-194, title V, Sec. 502(b)(2), Nov. 30, 
1989, 103 Stat. 1755; Pub. L. 101-508, title XI, Secs. 11801(c)(1), 
11812(b)(10), 11813(b)(19), Nov. 5, 1990, 104 Stat. 1388-522, 1388-535, 
1388-555; Pub. L. 102-486, title XIX, Sec. 1913(a)(3)(A), (b)(2)(B), 
Oct. 24, 1992, 106 Stat. 3019, 3020; Pub. L. 103-66, title XIII, 
Secs. 13114(b), 13213(a)(2)(F), 13261(f)(3), Aug. 10, 1993, 107 Stat. 
431, 474, 539; Pub. L. 104-188, title I, Secs. 1704(t)(56), 1807(c)(5), 
Aug. 20, 1996, 110 Stat. 1890, 1902; Pub. L. 105-34, title III, 
Secs. 312(d)(6), 313(b)(1), title VII, Sec. 701(b)(2), Aug. 5, 1997, 111 
Stat. 840, 842, 869; Pub. L. 106-554, Sec. 1(a)(7) [title I, 
Sec. 116(b)(1)], Dec. 21, 2000, 114 Stat. 2763, 2763A-603.)

                       References in Text

    Section 1020, referred to in subsec. (a)(2), was repealed by Pub. L. 
94-455, title XIX, Sec. 1901(a)(125), Oct. 4, 1976, 90 Stat. 1784.
    The Tax Reform Act of 1976, referred to in subsec. (a)(2), is Pub. 
L. 94-455, Oct. 4, 1976, 90 Stat. 1520, as amended, which was enacted 
Oct. 4, 1976. For complete classification of this Act to the Code, see 
Tables.
    Part II of subchapter L, referred to in subsec. (a)(3)(D), was 
repealed and part III of subchapter L was redesignated as part II by 
Pub. L. 99-514, title X, Sec. 1024(a)(1), (2), Oct. 22, 1986, 100 Stat. 
2405.
    The Revenue Act of 1918 (40 Stat. 1057), referred to in subsec. 
(a)(4), is act Feb. 24, 1919, ch. 18, 40 Stat. 1057. For complete 
classification of this Act to the Code, see Tables.
    The Revenue Act of 1921 (42 Stat. 227), referred to in subsec. 
(a)(4), is act Nov. 23, 1921, ch. 136, 42 Stat. 227. For complete 
classification of this Act to the Code, see Tables.
    Section 218 of the Revenue Act of 1918 or 1921, referred to in 
subsec. (a)(4), was not classified to the Code.
    The date of the enactment of the Taxpayer Relief Act of 1997, 
referred to in subsec. (a)(7), is the date of enactment of Pub. L. 105-
34, which was approved Aug. 5, 1997.
    Section 28 of the Internal Revenue Code of 1939, referred to in 
subsec. (a)(12), was classified to section 28 of former Title 26, 
Internal Revenue Code. Section 28 was repealed by section 7851(a)(1)(A) 
of this title. For table of comparisons of the 1939 Code to the 1986 
Code, see Table I preceding section 1 of this title. See, also, section 
7851(e) of this title for provision that references in the 1986 Code to 
a provision of the 1939 Code, not then applicable, shall be deemed a 
reference to the corresponding provision of the 1986 Code, which is then 
applicable.


                               Amendments

    2000--Subsec. (a)(23). Pub. L. 106-554 substituted ``1045, or 
1397B'' for ``or 1045'' and ``1045(b)(4), or 1397B(b)(4)'' for ``or 
1045(b)(4)''.
    1997--Subsec. (a)(7). Pub. L. 105-34, Sec. 312(d)(6), inserted ``(as 
in effect on the day before the date of the enactment of the Taxpayer 
Relief Act of 1997)'' after ``section 1034'' and ``(as so in effect)'' 
after ``section 1034(e)''.
    Subsec. (a)(23). Pub. L. 105-34, Sec. 313(b)(1), substituted ``, 
1044, or 1045'' for ``or 1044'' and ``, 1044(d), or 1045(b)(4)'' for 
``or 1044(d)''.
    Subsec. (a)(27). Pub. L. 105-34, Sec. 701(b)(2), added par. (27).
    1996--Subsec. (a)(20). Pub. L. 104-188, Sec. 1704(t)(56), provided 
that section 11813(b)(19) of Pub. L. 101-508 shall be applied as if 
``Paragraph (20) of section 1016(a), as redesignated by section 11801,'' 
appeared instead of ``paragraph (21) of section 1016(a)''. See 1990 
Amendment note below.
    Subsec. (a)(26). Pub. L. 104-188, Sec. 1807(c)(5), added par. (26).
    1993--Subsec. (a)(19) to (23). Pub. L. 103-66, Sec. 13261(f)(3), 
redesignated pars. (20) to (24) as (19) to (23), respectively, and 
struck out former par. (19) which read as follows: ``for amounts allowed 
as deductions for payments made on account of transfers of franchises, 
trademarks, or trade names under section 1253(d)(2);''.
    Subsec. (a)(24). Pub. L. 103-66, Sec. 13261(f)(3), redesignated par. 
(25) as (24). Former par. (24) redesignated (23).
    Pub. L. 103-66, Sec. 13114(b), substituted ``section 1043 or 1044'' 
for ``section 1043'' and ``section 1043(c) or 1044(d), as the case may 
be'' for ``section 1043(c)''.
    Subsec. (a)(25), (26). Pub. L. 103-66, Sec. 13261(f)(3), 
redesignated pars. (25) and (26) as (24) and (25), respectively.
    Subsec. (e). Pub. L. 103-66, Sec. 13213(a)(2)(F), amended heading 
and text of subsec. (e) generally. Prior to amendment, text read as 
follows:
    ``(1) For treatment of certain expenses incident to the purchase of 
a residence which were deducted as moving expenses by the taxpayer or 
his spouse under section 217(a), see section 217(e).
    ``(2) For treatment of separate mineral interests as one property, 
see section 614.''
    1992--Subsec. (a)(25), (26). Pub. L. 102-486 added pars. (25) and 
(26).
    1990--Subsec. (a)(2). Pub. L. 101-508, Sec. 11812(b)(10), 
substituted ``under the straight line method'' for ``under section 
167(b)(1)'' in concluding provisions.
    Subsec. (a)(20). Pub. L. 101-508, Sec. 11813(b)(19), which directed 
the amendment of subsec. (a)(21) by striking ``section 48(q)'' and 
inserting ``section 50(c)'', was executed to subsec. (a)(20). See 1996 
Amendment note above.
    Pub. L. 101-508, Sec. 11801(c)(1), redesignated par. (21) as (20) 
and struck out former par. (20) which read as follows: ``to the extent 
provided in section 23(e), in the case of property with respect to which 
a credit has been allowed under section 23;''.
    Subsec. (a)(21) to (25). Pub. L. 101-508, Sec. 11801(c)(1), 
redesignated pars. (21) to (25) as (20) to (24), respectively.
    1989--Subsec. (a)(25). Pub. L. 101-194 added par. (25).
    1988--Subsec. (a)(5). Pub. L. 100-647, Sec. 1006(j)(1)(B), inserted 
``(or the amount applied to reduce interest payments under section 
171(e)(2))'' after ``allowable pursuant to section 171(a)(1)''.
    Subsec. (a)(21) to (26). Pub. L. 100-647, Sec. 1018(u)(22), added 
pars. (21) to (24) and struck out former pars. (23) to (26) which read 
as follows:
    ``(23) to the extent provided in section 48(q) in the case of 
expenditures with respect to which a credit has been allowed under 
section 38;
    ``(24) for amounts allowed as deductions under section 59(d) 
(relating to optional 10-year writeoff of certain tax preferences);
    ``(25) to the extent provided in section 1059 (relating to reduction 
in basis for extraordinary dividends); and
    ``(26) in the case of qualified replacement property, the 
acquisition of which resulted under section 1042 in the nonrecognition 
of any part of the gain realized on the sale or exchange of any 
property, to the extent provided in section 1042(c).''

Former pars. (21) and (22) had been struck out previously.
    1986--Subsec. (a). Pub. L. 99-514, Sec. 1899A(25), which directed 
the amendment of pars. (23) to (26) by substituting a semicolon for a 
comma at the end thereof was executed to pars. (24) to (26) in view of 
the prior repeal of par. (23).
    Pub. L. 99-514, Sec. 1303(b)(3), which directed the amendment of 
subsec. (a) by striking out par. (22) and redesignating pars. (23) to 
(27) as (22) to (26), respectively, was executed by striking out par. 
(21) to reflect the probable intent of Congress in view of the amendment 
by section 241(b)(2) of Pub. L. 99-514. Prior to the amendment, par. 
(21) read as follows: ``to the extent provided in section 1395 in the 
case of stock of shareholders of a general stock ownership corporation 
(as defined in section 1391) which makes the election provided by 
section 1392;''.
    Pub. L. 99-514, Sec. 241(b)(2), redesignated pars. (17) to (27) as 
(16) to (26), respectively, and struck out former par. (16) which read 
as follows: ``for amounts allowed as deductions for expenditures treated 
as deferred expenses under section 177 (relating to trademark and trade 
name expenditures) and resulting in a reduction of the taxpayer's taxes 
under this subtitle, but not less than the amounts allowable under such 
section for the taxable year and prior years;''.
    Subsec. (a)(24). Pub. L. 99-514, Sec. 701(e)(4)(D), substituted 
``section 59(d)'' for ``section 58(i)''.
    1984--Subsec. (a)(17). Pub. L. 98-369, Sec. 211(b)(14), substituted 
``section 811(b)'' for ``section 818(b)'' in two places.
    Subsec. (a)(21). Pub. L. 98-369, Sec. 474(r)(23), substituted 
``section 23(e)'' for ``section 44C(e)'' and ``section 23'' for 
``section 44C''.
    Subsec. (a)(26). Pub. L. 98-369, Sec. 53(d)(3), added par. (26).
    Subsec. (a)(27). Pub. L. 98-369, Sec. 541(b)(2), added par. (27).
    Subsec. (b). Pub. L. 98-369, Sec. 43(a)(2), struck out ``The term 
`substituted basis' as used in this section means a basis determined 
under any provision of this subchapter and subchapters C (relating to 
corporate distributions and adjustments), K (relating to partners and 
partnerships), and P (relating to capital gains and losses), or under 
any corresponding provision of a prior income tax law, providing that 
the basis shall be determined (1) by reference to the basis in the hands 
of a transferor, donor, or grantor, or (2) by reference to other 
property held at any time by the person for whom the basis is to be 
determined.'' See section 7701(a)(42) of this title.
    1982--Subsec. (a)(18). Pub. L. 97-354 substituted ``section 1367'' 
for ``section 1376'', ``indebtedness owed to'' for ``indebtedness 
owing'', and ``an S corporation'' for ``an electing small business 
corporation (as defined in section 1371(b))''.
    Subsec. (a)(24). Pub. L. 97-248, Sec. 205(a)(5)(B), substituted ``to 
the extent provided in section 48(q)'' for ``to the extent provided in 
section 48(g)(5)''.
    Subsec. (a)(25). Pub. L. 97-248, Sec. 201(c)(2), added par. (25).
    1981--Subsec. (a)(24). Pub. L. 97-34, Sec. 212(d)(2)(G), added par. 
(24).
    Subsec. (c). Pub. L. 97-34, Sec. 421(g), substituted provisions 
respecting increase in basis of property on which additional estate tax 
is imposed for provisions for increase in basis in the case of certain 
involuntary conversions, if such compulsory or involuntary conversions 
are within the meaning of section 1033, and an additional estate tax is 
imposed under section 2032A, and provisions respecting time adjustment 
made.
    1980--Subsec. (a)(22). Pub. L. 96-222, Sec. 106(a)(2), redesignated 
par. (21), relating to the extent provided in section 1395 in the case 
of stock of shareholders of a general stock ownership corporation, as 
(22).
    Subsec. (a)(23). Pub. L. 96-223, Sec. 401(a), repealed the 
amendments made by Pub. L. 94-455, Sec. 2005(a)(3), and Pub. L. 95-600, 
Sec. 702(r)(3). See 1976 and 1978 Amendment notes below.
    Subsec. (c). Pub. L. 96-223, Sec. 401(c)(1), struck out provision 
relating to the net appreciation of in value of certain property and 
struck out references to section 1023 of this title.
    1978--Subsec. (a)(21). Pub. L. 95-618, Sec. 101(b)(3), added par. 
(21) relating to an adjustment to the extent provided in section 44C.
    Pub. L. 95-600, Sec. 601(b)(3), as amended by Pub. L. 96-222, 
Sec. 106(a)(3), added par. (21) relating to an adjustment to the extent 
provided in section 1395.
    Subsec. (a)(23). Pub. L. 95-600, Sec. 702(r)(3), which redesignated 
par. (23) as (21), was repealed by Pub. L. 96-222, Sec. 107(a)(2)(C), 
and Pub. L. 96-223, Sec. 401(a). See Repeals note below.
    Pub. L. 95-600, Sec. 515(2), substituted ``December 31, 1979'' for 
``December 31, 1976''.
    Subsec. (c). Pub. L. 95-472 added subsec. (c). Former subsec. (c) 
redesignated (d).
    Subsec. (d). Pub. L. 95-618, Sec. 201(b), added subsec. (d). Former 
subsec. (d) redesignated (e).
    Pub. L. 95-472 redesignated former subsec. (c) as (d).
    Subsec. (e). Pub. L. 95-618, Sec. 201(b), redesignated former 
subsec. (d) as (e).
    1976--Subsec. (a)(2). Pub. L. 94-455, Sec. 1901(b)(29)(A), inserted 
``(as in effect before the date of the enactment of the Tax Reform Act 
of 1976)'' after ``under section 1020''.
    Subsec. (a)(10). Pub. L. 94-455, Sec. 1901(b)(21)(G), struck out 
par. (10) which related to adjustment for the amounts allowed as 
deductions as deferred expenses under section 615(b) of this title.
    Subsec. (a)(13). Pub. L. 94-455, Sec. 1901(b)(1)(F)(ii), substituted 
``section 551(e)'' for ``section 551(f)''.
    Subsec. (a)(19). Pub. L. 94-455, Sec. 1901(a)(123), (b)(30)(A), 
redesignated par. (20) as (19). Former par. (19), which related to 
adjustment of section 38 property to the extent provided in sections 
48(g) and 203 of this title, was struck out.
    Subsec. (a)(20). Pub. L. 94-455, Sec. 1901(b)(30)(A), redesignated 
par. (22) as (20). Former par. (20) redesignated (19).
    Subsec. (a)(21). Pub. L. 94-455, Sec. 1901(b)(30)(A), struck out 
par. (21) which related to property adjustment to the extent provided in 
section 1022 of this title.
    Subsec. (a)(22). Pub. L. 94-455, Sec. 1901(b)(30)(A), redesignated 
par. (22) as (20).
    Subsec. (a)(23). Pub. L. 94-455, Sec. 2005(a)(3), added par. (23). 
See Repeals note below.
    1969--Subsec. (a)(22). Pub. L. 91-172, Sec. 516(c)(2)(B), added par. 
(22).
    Subsec. (a)(10). Pub. L. 91-172, Sec. 504(c)(4), limited exploration 
expenditures referred to in this par. to pre-1970 exploration 
expenditures.
    Subsec. (c). Pub. L. 91-172, Sec. 231(c)(3), redesignated existing 
provisions as par. (2) and added par. (1).
    1964--Subsec. (a)(15). Pub. L. 88-272, Sec. 227(b)(5), inserted ``or 
domestic iron ore''.
    Subsec. (a)(19). Pub. L. 88-272, Sec. 203(a)(3)(C), inserted ``and 
in section 203(a)(2) of the Revenue Act of 1964''.
    Subsec. (a)(21). Pub. L. 88-272, Sec. 225(j)(2), added par. (21).
    1962--Subsec. (a)(3)(D). Pub. L. 87-834, Sec. 8(g)(2), added subpar. 
(D).
    Subsec. (a)(19). Pub. L. 87-834, Sec. 2(f), added par. (19).
    Subsec. (a)(20). Pub. L. 87-834, Sec. 12(b)(4), added par. (20).
    1959--Subsec. (a)(3)(C). Pub. L. 86-69, Sec. 3(d)(1), added subpar. 
(C).
    Subsec. (a)(17). Pub. L. 86-69, Sec. 3(d)(2), added par. (17).
    1958--Subsec. (a)(6). Pub. L. 85-866, Sec. 2(b), struck out ``short-
term'' before ``municipal bond''.
    Subsec. (a)(18). Pub. L. 85-866, Sec. 64(d)(2), added par. (18).
    1956--Subsec. (a)(16). Act June 29, 1956, added par. (16).


                    Effective Date of 2000 Amendment

    Pub. L. 106-554, Sec. 1(a)(7) [title I, Sec. 116(c)], Dec. 21, 2000, 
114 Stat. 2763, 2763A-604, provided that: ``The amendments made by this 
section [enacting subpart C of part III of subchapter U of this chapter, 
amending this section and sections 1223, 1394, 1400, and 1400B of this 
title, redesignating subpart C of part III of subchapter U of this 
chapter as subpart D of part III of subchapter U of this chapter, and 
renumbering sections 1397B and 1397C of this title as 1397C and 1397D, 
respectively, of this title] shall apply to qualified empowerment zone 
assets acquired after the date of the enactment of this Act [Dec. 21, 
2000].''


                    Effective Date of 1997 Amendment

    Amendment by section 312(d)(6) of Pub. L. 105-34 applicable to sales 
and exchanges after May 6, 1997, with certain exceptions, see section 
312(d) of Pub. L. 105-34, set out as a note under section 121 of this 
title.
    Section 313(c) of Pub. L. 105-34 provided that: ``The amendments 
made by this section [enacting section 1045 of this title and amending 
this section and section 1223 of this title] shall apply to sales after 
the date of enactment of this Act [Aug. 5, 1997].''
    Amendment by section 701(b)(2) of Pub. L. 105-34 effective Aug. 5, 
1997, see section 701(d) of Pub. L. 105-34, set out as a note under 
section 39 of this title.


                    Effective Date of 1996 Amendment

    Amendment by section 1807(c)(5) of Pub. L. 104-188 applicable to 
taxable years beginning after Dec. 31, 1996, see section 1807(e) of Pub. 
L. 104-188, set out as an Effective Date note under section 23 of this 
title.


                    Effective Date of 1993 Amendment

    Section 13114(d) of Pub. L. 103-66 provided that: ``The amendments 
made by this section [enacting section 1044 of this title and amending 
this section] shall apply to sales on and after the date of the 
enactment of this Act [Aug. 10, 1993], in taxable years ending on and 
after such date.''
    Amendment by section 13213(a)(2)(F) of Pub. L. 103-66 applicable to 
expenses incurred after Dec. 31, 1993, see section 13213(e) of Pub. L. 
103-66 set out as a note under section 62 of this title.
    Amendment by section 13261(f)(3) of Pub. L. 103-66 applicable, 
except as otherwise provided, with respect to property acquired after 
Aug. 10, 1993, see section 13261(g) of Pub. L. 103-66, set out as an 
Effective Date note under section 197 of this title.


                    Effective Date of 1992 Amendment

    Amendment by Pub. L. 102-486 applicable to property placed in 
service after June 30, 1993, see section 1913(c) of Pub. L. 102-486, set 
out as an Effective Date note under section 30 of this title.


                    Effective Date of 1990 Amendment

    Amendment by section 11812(b)(10) of Pub. L. 101-508 applicable to 
property placed in service after Nov. 5, 1990, but not applicable to any 
property to which section 168 of this title does not apply by reason of 
subsec. (f)(5) of section 168, and not applicable to rehabilitation 
expenditures described in section 252(f)(5) of Pub. L. 99-514, see 
section 11812(c) of Pub. L. 101-508, set out as a note under section 42 
of this title.
    Amendment by section 11813(b)(19) of Pub. L. 101-508 applicable to 
property placed in service after Dec. 31, 1990, but not applicable to 
any transition property (as defined in section 49(e) of this title), any 
property with respect to which qualified progress expenditures were 
previously taken into account under section 46(d) of this title, and any 
property described in section 46(b)(2)(C) of this title, as such 
sections were in effect on Nov. 4, 1990, see section 11813(c) of Pub. L. 
101-508, set out as a note under section 29 of this title.


                    Effective Date of 1989 Amendment

    Section 502(c) of Pub. L. 101-194 provided that: ``The amendments 
made by this section [enacting section 1043 of this title and amending 
this section and section 1223 of this title] shall apply to sales after 
the date of the enactment of this Act [Nov. 30, 1989].''


                    Effective Date of 1988 Amendment

    Amendment by section 1006(j)(1)(B) of Pub. L. 100-647 applicable in 
the case of obligations acquired after Dec. 31, 1987, with exception 
allowing taxpayer to elect to have amendment apply to obligations 
acquired after Oct. 22, 1986, see section 1006(j)(1)(C) of Pub. L. 100-
647, set out as a note under section 171 of this title.
    Amendment by section 1018(u)(22) of Pub. L. 100-647 effective, 
except as otherwise provided, as if included in the provision of the Tax 
Reform Act of 1986, Pub. L. 99-514, to which such amendment relates, see 
section 1019(a) of Pub. L. 100-647, set out as a note under section 1 of 
this title.


                    Effective Date of 1986 Amendment

    Amendment by section 241(b)(2) of Pub. L. 99-514 applicable to 
expenditures paid or incurred after Dec. 31, 1986, except as otherwise 
provided, see section 241(c) of Pub. L. 99-514, set out as an Effective 
Date of Repeal note under former section 177 of this title.
    Amendment by section 701(e)(4)(D) of Pub. L. 99-514 applicable to 
taxable years beginning after Dec. 31, 1986, with certain exceptions and 
qualifications, see section 701(f) of Pub. L. 99-514, set out as an 
Effective Date note under section 55 of this title.
    Amendment by section 1303(b)(3) of Pub. L. 99-514 effective Oct. 22, 
1986, see section 1311(f) of Pub. L. 99-514, as amended, set out as an 
Effective Date; Transitional Rules note under section 141 of this title.


                    Effective Date of 1984 Amendment

    Amendment by section 43(a)(2) of Pub. L. 98-369 applicable to 
taxable years ending after July 18, 1984, see section 44 of Pub. L. 98-
369, set out as an Effective Date note under section 1271 of this title.
    Amendment by section 53(d)(3) of Pub. L. 98-369 applicable to 
distribution after Mar. 1, 1984, in taxable years ending after such 
date, see section 53(e)(1) of Pub. L. 98-369, set out as an Effective 
Date note under section 1059 of this title.
    Amendment by section 211(b)(14) of Pub. L. 98-369 applicable to 
taxable years beginning after Dec. 31, 1983, see section 215 of Pub. L. 
98-369, set out as an Effective Date note under section 801 of this 
title.
    Amendment by section 474(r)(23) of Pub. L. 98-369 applicable to 
taxable years beginning after Dec. 31, 1983, and to carrybacks from such 
years, see section 475(a) of Pub. L. 98-369, set out as a note under 
section 21 of this title.
    Amendment by section 541(b)(2) of Pub. L. 98-369 applicable to sales 
of securities in taxable years beginning after July 18, 1984, see 
section 541(c) of Pub. L. 98-369, set out as an Effective Date note 
under section 1042 of this title.


                    Effective Date of 1982 Amendments

    Amendment by Pub. L. 97-354 applicable to taxable years beginning 
after Dec. 31, 1982, see section 6(a) of Pub. L. 97-354, set out as an 
Effective Date note under section 1361 of this title.
    Amendment by section 201(c)(2) of Pub. L. 97-248 applicable to 
taxable years beginning after Dec. 31, 1982, see section 201(e)(1) of 
Pub. L. 97-248, set out as a note under section 5 of this title.
    Amendment by section 205(a)(5)(B) of Pub. L. 97-248 applicable to 
periods after Dec. 31, 1982, under rules similar to the rules of section 
48(m) of this title, with certain qualifications, see section 205(c)(1) 
of Pub. L. 97-248, set out as an Effective Date note under section 196 
of this title.


                    Effective Date of 1981 Amendment

    Amendment by section 212(d)(2)(G) of Pub. L. 97-34 applicable to 
expenditures incurred after Dec. 31, 1981, in taxable years ending after 
that date, see section 212(e) of Pub. L. 97-34, set out as a note under 
section 46 of this title.
    Amendment by section 421(g) of Pub. L. 97-34 applicable with respect 
to the estates of decedents dying after Dec. 31, 1981, see section 
421(k) of Pub. L. 97-34, set out as a note under section 2032A of this 
title.


       Effective Date of 1980 Amendments and Revival of Prior Law

    Amendment by section 401(a) of Pub. L. 96-223 (repealing section 
2005(a)(3) of Pub. L. 94-455 and section 702(r)(3) of Pub. L. 96-500 and 
the amendments made thereby, which had amended this section) applicable 
in respect of decedents dying after Dec. 31, 1976, and except for 
certain elections, this title to be applied as if those repealed 
provisions had not been enacted, see section 401(b), (e) of Pub. L. 96-
223, set out as a note under section 1023 of this title.
    Amendment by Pub. L. 96-222 effective, except as otherwise provided, 
as if it had been included in the provisions of the Revenue Act of 1978, 
Pub. L. 95-600, to which such amendment relates, see section 201 of Pub. 
L. 96-222, set out as an Effective Date of 1980 Amendment note under 
section 32 of this title.


                    Effective Date of 1978 Amendments

    Section 101(c) of Pub. L. 95-618 provided that: ``The amendments 
made by this section [enacting section 23 of this title and amending 
this section and sections 56 and 6096 of this title] shall apply to 
taxable years ending on or after April 20, 1977.''
    Amendment by section 201(b) of Pub. L. 95-618 applicable with 
respect to 1980 and later model year automobiles, see section 201(g) of 
Pub. L. 95-618, set out as an Effective Date note under section 4064 of 
this title.
    Amendment by section 601(b)(3) of Pub. L. 95-600 effective with 
respect to corporations chartered after Dec. 31, 1978, and before Jan. 
1, 1984, see section 601(d) of Pub. L. 95-600, set out as a note under 
section 172 of this title.
    Amendment by section 702(r)(3) of Pub. L. 95-600 applicable to 
estates of decedents dying after Dec. 31, 1976, see section 702(r)(5) of 
Pub. L. 95-600, set out as a note under section 2051 of this title.
    Section 4(d) of Pub. L. 95-472 provided that: ``The amendments made 
by this section [amending this section and section 2032A of this title] 
shall apply to involuntary conversions after December 31, 1976.''


                    Effective Date of 1976 Amendment

    Amendment by section 1901(a)(123), (b)(1)(F)(ii), (21)(G), (29)(A) 
of Pub. L. 94-455 applicable with respect to taxable years beginning 
after Dec. 31, 1976, see section 1901(d) of Pub. L. 94-455, set out as a 
note under section 2 of this title.
    Section 1901(b)(30)(B) of Pub. L. 94-455 provided that: ``The 
amendment made by subparagraph (A)(i) [amending this section] shall 
apply with respect to stock or securities acquired from a decedent dying 
after the date of the enactment of this Act [Oct. 4, 1976].''
    Amendment by section 2005(a)(3) of Pub. L. 94-455 applicable in 
respect of decedents dying after Dec. 31, 1976, see section 2005(f) of 
Pub. L. 94-455 set out as an Effective Date note under section 1015 of 
this title.


                    Effective Date of 1969 Amendment

    Amendment by section 231(c)(3) of Pub. L. 91-172 applicable to 
taxable years beginning after Dec. 31, 1969, see section 231(d) of Pub. 
L. 91-172, set out as a note under section 217 of this title.
    Amendment by section 504(c)(4) of Pub. L. 91-172 applicable with 
respect to exploration expenditures paid or incurred after Dec. 31, 
1969, see section 504(d)(1) of Pub. L. 91-172, set out as a note under 
section 243 of this title.
    Amendment by section 516(c)(2)(B) of Pub. L. 91-172 applicable to 
transfers after Dec. 31, 1969, see section 516(d)(3) of Pub. L. 91-172, 
set out as an Effective Date note under section 1001 of this title.


                    Effective Date of 1964 Amendment

    Amendment by section 203(a)(3)(C) of Pub. L. 88-272 applicable in 
case of property placed in service after Dec. 31, 1963, with respect to 
taxable years ending after such date, and in case of property placed in 
service before Jan. 1, 1964, with respect to taxable years beginning 
after Dec. 31, 1963, see section 203(a)(4) of Pub. L. 88-272, set out as 
a note under section 48 of this title.
    Amendment by section 225(j)(2) of Pub. L. 88-272 applicable in 
respect of decedents dying after Dec. 31, 1963, see section 225(l) of 
Pub. L. 88-272, set out as a note under section 316 of this title.
    Amendment by section 227(b)(5) of Pub. L. 88-272 applicable with 
respect to amounts received or accrued in taxable years beginning after 
Dec. 31, 1963, attributable to iron ore mined in such years, see section 
227(c) of Pub. L. 88-272, set out as a note under section 272 of this 
title.


                    Effective Date of 1962 Amendment

    Amendment by section 2(f) of Pub. L. 87-834 applicable with respect 
to taxable years ending after Dec. 31, 1961, see section 2(h) of Pub. L. 
87-834, set out as an Effective Date note under section 46 of this 
title.
    Amendment by section 8(g)(2) of Pub. L. 87-834 applicable with 
respect to taxable years beginning after Dec. 31, 1962, see section 8(h) 
of Pub. L. 87-834, set out as a note under section 501 of this title.
    Amendment by section 12(b)(1) of Pub. L. 87-834 applicable with 
respect to taxable years of foreign corporations beginning after Dec. 
31, 1962, and to taxable years of United States shareholders within 
which or with which such taxable years of such foreign corporations end, 
see section 12(c) of Pub. L. 87-834, set out as an Effective Date note 
under section 951 of this title.


                    Effective Date of 1959 Amendment

    Amendment by Pub. L. 86-69 applicable only with respect to taxable 
years beginning after Dec. 31, 1957, see section 4 of Pub. L. 86-69, set 
out as a note under section 381 of this title.


                    Effective Date of 1958 Amendment

    Amendment by section 2(b) of Pub. L. 85-866 applicable with respect 
to taxable years ending after December 31, 1957, but only with respect 
to obligations acquired after such date, see section 2(c) of Pub. L. 85-
866, set out as a note under section 75 of this title.
    Amendment by section 64(d)(2) of Pub. L. 85-866 applicable only with 
respect to taxable years beginning after Dec. 31, 1957, see section 
64(e) of Pub. L. 85-866, set out as a note under section 172 of this 
title.


                                 Repeals

    Section 2005(a)(3) of Pub. L. 94-455 and section 702(r)(3) of Pub. 
L. 95-600, cited as credits to this section, and the amendments made by 
those sections, were repealed by Pub. L. 96-223, title IV, Sec. 401(a), 
94 Stat. 299, resulting in the text of this section reading as it read 
prior to enactment of sections 2005(a)(3) and 702(r)(3). See Effective 
Date of 1980 Amendments and Revival of Prior Law note above.


                            Savings Provision

    For provisions that nothing in amendment by Pub. L. 101-508 be 
construed to affect treatment of certain transactions occurring, 
property acquired, or items of income, loss, deduction, or credit taken 
into account prior to Nov. 5, 1990, for purposes of determining 
liability for tax for periods ending after Nov. 5, 1990, see section 
11821(b) of Pub. L. 101-508, set out as a note under section 29 of this 
title.


  Applicability of Certain Amendments by Pub. L. 99-514 in Relation to 
                   Treaty Obligations of United States

    For applicability of amendment by section 701(e)(4)(D) of Pub. L. 
99-514 notwithstanding any treaty obligation of the United States in 
effect on Oct. 22, 1986, with provision that for such purposes any 
amendment by title I of Pub. L. 100-647 be treated as if it had been 
included in the provision of Pub. L. 99-514 to which such amendment 
relates, see section 1012(aa)(2), (4) of Pub. L. 100-647, set out as a 
note under section 861 of this title.


           Plan Amendments Not Required Until January 1, 1989

    For provisions directing that if any amendments made by subtitle A 
or subtitle C of title XI [Secs. 1101-1147 and 1171-1177] or title XVIII 
[Secs. 1800-1899A] of Pub. L. 99-514 require an amendment to any plan, 
such plan amendment shall not be required to be made before the first 
plan year beginning on or after Jan. 1, 1989, see section 1140 of Pub. 
L. 99-514, as amended, set out as a note under section 401 of this 
title.


Change From Retirement to Straight Line Method of Computing Depreciation 
                            in Certain Cases

    Section 94 of Pub. L. 85-866, as amended by Pub. L. 99-514, Sec. 2, 
Oct. 22, 1986, 100 Stat. 2095, provided that:
    ``(a) Short Title.--This section may be cited as the `Retirement-
Straight Line Adjustment Act of 1958'.
    ``(b) Making of Election.--Any taxpayer who held retirement-straight 
line property on his 1956 adjustment date may elect to have this section 
apply. Such an election shall be made at such time and in such manner as 
the Secretary shall prescribe. Any election under this section shall be 
irrevocable and shall apply to all retirement-straight line property as 
hereinafter provided in this section (including such property for 
periods when held by predecessors of the taxpayer).
    ``(c) Retirement-Straight Line Property Defined.--For purposes of 
this section, the term `retirement-straight line property' means any 
property of a kind or class with respect to which the taxpayer or a 
predecessor (under the terms and conditions prescribed for him by the 
Commissioner) for any taxable year beginning after December 31, 1940, 
and before January 1, 1956, changed from the retirement to the straight 
line method of computing the allowance of deductions for depreciation.
    ``(d) Basis Adjustments as of 1956 Adjustment Date.--If the taxpayer 
has made an election under this section, then in determining the 
adjusted basis on his 1956 adjustment date of all retirement-straight 
line property held by the taxpayer, in lieu of the adjustments for 
depreciation provided in section 1016(a)(2) and (3) of the Internal 
Revenue Code of 1986 [formerly I.R.C. 1954], the following adjustments 
shall be made (effective as of his 1956 adjustment date) in respect of 
all periods before the 1956 adjustment date:
        ``(1) Depreciation sustained before march 1, 1913.--For 
    depreciation sustained before March 1, 1913, on retirement-straight 
    line property held by the taxpayer or a predecessor on such date for 
    which cost was or is claimed as basis and which either--
            ``(A) Retired before changeover.--Was retired by the 
        taxpayer or a predecessor before the changeover date, but only 
        if (i) a deduction was allowed in computing net income by reason 
        of such retirement, and (ii) such deduction was computed on the 
        basis of cost without adjustment for depreciation sustained 
        before March 1, 1913. In the case of any such property retired 
        during any taxable year beginning after December 31, 1929, the 
        adjustment under this subparagraph shall not exceed that portion 
        of the amount attributable to depreciation sustained before 
        March 1, 1913, which resulted (by reason of the deduction so 
        allowed) in a reduction in taxes under the Internal Revenue Code 
        of 1986 or prior income, war-profits, or excess-profits tax 
        laws.
            ``(B) Held on changeover date.--Was held by the taxpayer or 
        a predecessor on the changeover date. This subparagraph shall 
        not apply to property to which paragraph (2) applies.
    The adjustment determined under this paragraph shall be allocated 
    (in the manner prescribed by the Secretary) among all retirement-
    straight line property held by the taxpayer on his 1956 adjustment 
    date.
        ``(2) Property disposed of after changeover and before 1956 
    adjustment date.--For that portion of the reserve prescribed by the 
    Commissioner in connection with the changeover which was applicable 
    to property--
            ``(A) sold, or
            ``(B) with respect to which a deduction was allowed for 
        Federal income tax purposes by reason of casualty or `abnormal' 
        retirement in the nature of special obsolescence,
    if such sale occurred in, or such deduction was allowed for, a 
    period on or after the changeover date and before the taxpayer's 
    1956 adjustment date.
        ``(3) Depreciation allowable from changeover to 1956 adjustment 
    date.--For depreciation allowable, under the terms and conditions 
    prescribed by the Commissioner in connection with the changeover, 
    for all periods on and after the changeover date and before the 
    taxpayer's 1956 adjustment date.
This subsection shall apply only with respect to taxable years beginning 
after December 31, 1955.
    ``(e) Effect on Period From Changeover to 1956 Adjustment Date.--If 
the taxpayer has made an election under this section, then in 
determining the adjusted basis of any retirement-straight line property 
as of any time on or after the changeover date and before the taxpayer's 
1956 adjustment date, in lieu of the adjustments for depreciation 
provided in section 1016(a)(2) and (3) of the Internal Revenue Code of 
1986 and the corresponding provisions of prior revenue laws, the 
following adjustments shall be made:
        ``(1) For prescribed reserve.--For the amount of the reserve 
    prescribed by the Commissioner in connection with the changeover.
        ``(2) For allowable depreciation.--For the depreciation 
    allowable under the terms and conditions prescribed by the 
    Commissioner in connection with the changeover.
This subsection shall not apply in determining adjusted basis for 
purposes of section 437(c) of the Internal Revenue Code of 1939. This 
subsection shall apply only with respect to taxable years beginning on 
or after the changeover date and before the taxpayer's 1956 adjustment 
date.
    ``(f) Equity Invested Capital, etc.--If an election is made under 
this section, then (not withstanding the terms and conditions prescribed 
by the Commissioner in connection with the changeover)--
        ``(1) Equity invested capital.--In determining equity invested 
    capital under sections 458 and 718 of the Internal Revenue Code of 
    1939, accumulated earnings and profits as of the changeover date, 
    and as of the beginning of each taxable year thereafter, shall be 
    reduced by the depreciation sustained before March 1, 1913, as 
    computed under subsection (d)(1)(B); and
        ``(2) Definition of equity capital.--In determining the adjusted 
    basis of assets for the purpose of section 437(c) of the Internal 
    Revenue Code of 1939 (and in addition to any other adjustments 
    required by such Code), the basis shall be reduced by depreciation 
    sustained before March 1, 1913 (as computed under subsection (d)), 
    together with any depreciation allowable under subsection (e)(2) for 
    any period before the year for which the excess profits credit is 
    being computed.
    ``(g) Definitions.--For purposes of this section--
        ``(1) Depreciation.--The term `depreciation' means exhaustion, 
    wear and tear, and obsolescence.
        ``(2) Changeover.--The term `changeover' means a change from the 
    retirement to the straight line method of computing the allowance of 
    deductions for depreciation.
        ``(3) Changeover date.--The term `changeover date' means the 
    first day of the first taxable year for which the changeover was 
    effective.
        ``(4) 1956 adjustment date.--The term `1956 adjustment date' 
    means, in the case of any taxpayer, the first day of his first 
    taxable year beginning after December 31, 1955.
        ``(5) Predecessor.--The term `predecessor' means any person from 
    whom property of a kind or class to which this section refers was 
    acquired, if the basis of such property is determined by reference 
    to its basis in the hands of such person. Where a series of 
    transfers of property has occurred and where in each instance the 
    basis of the property was determined by reference to its basis in 
    the hands of the prior holder, the term includes each such prior 
    holder.
        ``(6) The term `Secretary' means the Secretary of the Treasury 
    or his delegate.
        ``(7) The term `Commissioner' means the Commissioner of Internal 
    Revenue.''

                  Section Referred to in Other Sections

    This section is referred to in sections 42, 75, 126, 174, 264, 265, 
291, 312, 616, 818, 1011, 1015, 1053, 1250, 1400I of this title; title 
43 section 1620.
