123 
after the separation from employment to 
which clause (i) applies. 
‘‘(iii) 
SELF-EMPLOYED
INDIVID-
UALS.—To the extent provided in regula-
tions, a self-employed individual shall be 
treated as meeting the requirements of 
clause (i)(I) if, under Federal or State law, 
the individual would have received unem-
ployment compensation but for the fact the 
individual was self-employed. 
‘‘(E) DISTRIBUTIONS
FROM
INDIVIDUAL 
RETIREMENT PLANS FOR HIGHER EDUCATION 
EXPENSES.—Distributions 
to 
an 
individual 
from an individual retirement plan to the extent 
such distributions do not exceed the qualified 
higher education expenses (as defined in para-
graph (7)) of the taxpayer for the taxable year. 
Distributions shall not be taken into account 
under the preceding sentence if such distribu-
tions are described in subparagraph (A), (C), or 
(D) or to the extent paragraph (1) does not 
apply to such distributions by reason of sub-
paragraph (B). 
‘‘(F) 
DISTRIBUTIONS
FROM
CERTAIN 
PLANS
FOR
FIRST
HOME
PURCHASES.—Dis-
124 
tributions to an individual from an individual 
retirement plan which are qualified first-time 
homebuyer distributions (as defined in para-
graph (8)). Distributions shall not be taken into 
account under the preceding sentence if such 
distributions are described in subparagraph (A), 
(C), (D), or (E) or to the extent paragraph (1) 
does not apply to such distributions by reason 
of subparagraph (B). 
‘‘(3) LIMITATIONS.— 
‘‘(A) CERTAIN EXCEPTIONS NOT TO APPLY 
TO
INDIVIDUAL
RETIREMENT
PLANS.—Sub-
paragraphs (A)(v), and (C) of paragraph (2) 
shall not apply to distributions from an indi-
vidual retirement plan. 
‘‘(B) PERIODIC PAYMENTS UNDER QUALI-
FIED
PLANS
MUST
BEGIN
AFTER
SEPARA-
TION.—Paragraph (2)(A)(iv) shall not apply to 
any amount paid from a trust described in sec-
tion 401(a) which is exempt from tax under 
section 501(a) or from a contract described in 
section 72(e)(5)(D)(ii) of the Internal Revenue 
Code of 1986 unless the series of payments be-
gins after the employee separates from service.
125 
‘‘(4) CHANGE IN SUBSTANTIALLY EQUAL PAY-
MENTS.— 
‘‘(A) IN GENERAL.—If— 
‘‘(i) paragraph (1) does not apply to 
a distribution by reason of paragraph 
(2)(A)(iv), and 
‘‘(ii) the series of payments under 
such paragraph are subsequently modified 
(other than by reason of death or dis-
ability)— 
‘‘(I) before the close of the 5-year 
period beginning with the date of the 
first payment and after the employee 
attains age 591⁄2, or 
‘‘(II) before the employee attains 
age 591⁄2, the taxpayer’s tax for the 
1st taxable year in which such modi-
fication occurs shall be increased by 
an amount, determined under regula-
tions, equal to the tax which (but for 
paragraph (2)(A)(iv)) would have 
been imposed, plus interest for the de-
ferral period. 
‘‘(B) DEFERRAL
PERIOD.—For purposes 
of this paragraph, the term ‘deferral period’
126 
means the period beginning with the taxable 
year in which (without regard to paragraph 
(2)(A)(iv)) the distribution would have been in-
cludible in gross income and ending with the 
taxable year in which the modification described 
in subparagraph (A) occurs. 
‘‘(5) EMPLOYEE.—For purposes of this sub-
section, the term ‘employee’ includes any partici-
pant, and in the case of an individual retirement 
plan, the individual for whose benefit such plan was 
established. 
‘‘(6) SPECIAL RULES FOR SIMPLE RETIREMENT 
ACCOUNTS.—In the case of any amount received 
from a simple retirement account (within the mean-
ing of section 408(p) during the 2-year period begin-
ning on the date such individual first participated in 
any qualified salary reduction arrangement main-
tained by the individual’s employer under section 
408(p)(2), paragraph (1) shall be applied by sub-
stituting ‘25 percent’ for ‘10 percent’. 
‘‘(7) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.—For purposes of paragraph (2)(E)— 
‘‘(A) IN
GENERAL.—The term ‘qualified 
higher education expenses’ means qualified
127 
higher education expenses (as defined in section 
8(b)(2)) for education furnished to— 
‘‘(i) the taxpayer, 
‘‘(ii) the taxpayer’s spouse, or 
‘‘(iii) any child or grandchild of the 
taxpayer or the taxpayer’s spouse, at an el-
igible educational institution (as defined in 
section 8(b)(2)(B)). 
‘‘(B) COORDINATION WITH OTHER PROVI-
SIONS.—For purposes of this subsection, sec-
tion 30 and section 32, qualified higher edu-
cation expenses in any taxable year shall be 
treated as first paid with distributions under 
section 32, next with distributions to which sec-
tion 30(d)(5)(v) (relating to early withdrawals 
from Roth IRAs to pay higher education ex-
penses) applies, and finally from withdrawals to 
which this subsection applies. 
‘‘(8) QUALIFIED FIRST-TIME HOMEBUYER DIS-
TRIBUTIONS.—For purposes of this subsection, the 
term ‘qualified first-time homebuyer distribution’ 
has the meaning given to it in section 30(d)(6) and 
the limits contained in such section shall apply on a 
combined basis to this subsection and section 30. 
Qualified acquisition costs (as defined in section
128 
30(d)(6)) taken into account for purposes of section 
30(d)(5)(vi) shall not also be taken into account sep-
arately for purposes of this subsection. A taxpayer 
may elect to treat distributions from an account 
other than Roth IRAs to which this subsection ap-
plies as a qualified first-time homeowner distribution 
before determining whether a distribution from a 
Roth IRA is a qualified first-time homeowner dis-
tribution. 
‘‘(s) 10-PERCENT ADDITIONAL TAX FOR TAXABLE 
DISTRIBUTIONS FROM MODIFIED ENDOWMENT CON-
TRACTS.— 
‘‘(1) IMPOSITION OF ADDITIONAL TAX.—If any 
taxpayer receives any amount under a modified en-
dowment contract (as defined in section 7702A), the 
taxpayer’s tax under this chapter for the taxable 
year in which such amount is received shall be in-
creased by an amount equal to 10 percent of the 
portion of such amount which is includible in gross 
income. 
‘‘(2) SUBSECTION NOT TO APPLY TO CERTAIN 
DISTRIBUTIONS.—Paragraph (1) shall not apply to 
any distribution— 
‘‘(A) made on or after the date on which 
the taxpayer attains age 591⁄2,
129 
‘‘(B) which is attributable to the tax-
payer’s becoming disabled (within the meaning 
of subsection (m)(7)), or 
‘‘(C) which is part of a series of substan-
tially equal periodic payments (not less fre-
quently than annually) made for the life (or life 
expectancy) of the taxpayer or the joint lives 
(or joint life expectancies) of such taxpayer and 
his beneficiary. 
‘‘Subchapter C—Basis, Business Transactions 
and Nonrecognition Transactions 
‘‘Sec. 71. Gain or loss on the sale of an asset. 
‘‘Sec. 72. Basis. 
‘‘Sec. 73. Basis in business entities. 
‘‘Sec. 74. Gratuitous transfers. 
‘‘Sec. 75. Transactions involving business entities. 
‘‘Sec. 76. Rollover on residence sale. 
‘‘Sec. 77. Other nonrecognition transactions. 
‘‘Sec. 78. Wash sales and straddles. 
‘‘SEC. 71. GAIN OR LOSS ON THE SALE OF AN ASSET. 
‘‘(a) IN GENERAL.—Except as otherwise provided in 
this chapter, the amount of gross income to be recognized 
on the sale, exchange, or other disposition of property 
equals the excess of— 
‘‘(1) the amount realized from the disposition, 
over 
‘‘(2) the taxpayer’s adjusted basis in the prop-
erty.
130 
‘‘(b) AMOUNT REALIZED.—The amount realized from 
the disposition of property shall be the sum of money re-
ceived plus the fair market value of the property (other 
than money) received. See section 122(c) for the treatment 
of installment sales. 
‘‘(c) NONRECOGNITION TRANSACTION.—Subsection 
(a) shall not apply to nonrecognition transactions de-
scribed in this chapter. 
‘‘(d) CONTRACTS MARKED TO MARKET.— 
‘‘(1) IN
GENERAL.—Under regulations pre-
scribed by the Secretary, a markable contract held 
by the taxpayer at the end of the year shall be treat-
ed as sold and reacquired for its fair market value 
on the last business day of the taxable year. The 
regulations shall adopt principles and definitions 
similar to those that applied under section 1256 of 
the Internal Revenue Code of 1986. 
‘‘(2) MARKABLE CONTRACT.—For purposes of 
this subsection, ‘markable contract’ means— 
‘‘(A) any regulated futures contract, 
‘‘(B) any foreign currency contract, 
‘‘(C) any nonequity option, 
‘‘(D) any dealer equity option 
as such terms were defined for purposes of section 
1256 of the Internal Revenue Code of 1986.
131 
‘‘SEC. 72. BASIS. 
‘‘(a) BASIS, SALE, OR EXCHANGE.—Except to the ex-
tent inconsistent with provisions of this chapter, adjusted 
basis and the existence of a sale or exchange shall be de-
termined in accordance with principles applicable under 
the Internal Revenue Code of 1986. 
‘‘(b) DEFINITION OF BASIS.—For purposes of this 
chapter, ‘basis’ means the adjusted basis of property. The 
adjusted basis of property is generally its cost, as adjusted 
for actions or transactions that increase or decrease the 
basis of property. Except as provided in section 73 (relat-
ing to business entities and basis in business entities), the 
taxpayer’s adjusted basis on January 1, 2007, in an asset 
acquired before that date, shall be its adjusted basis as 
of December 31, 2006, as determined under the Internal 
Revenue Code of 1986. 
‘‘SEC. 73. BASIS IN BUSINESS ENTITIES. 
‘‘(a) RULES FOR ALL BUSINESS ENTITIES.— 
‘‘(1) IN GENERAL.—A taxpayer’s basis in an in-
terest in a business entity shall equal— 
‘‘(A) the cost of acquiring the interest, 
‘‘(B) increased by the amount of cash and 
basis of any property contributed to the entity, 
and 
‘‘(C) decreased by the portion of any liqui-
dating distributions from the entity that are
132 
treated as returns of capital in accordance with 
rules prescribed by the Secretary. 
‘‘(2) INITIAL BASIS.—Except as otherwise pro-
vided in this section, a taxpayer’s basis on January 
1, 2007, or any interest in a business entity held as 
of December 31, 2006, shall be the basis of such in-
terest as of December 31, 2006, as determined 
under the Internal Revenue Code of 1986. 
‘‘(3) CROSS REFERENCES.—See section 75 for 
rules relating to the effect of certain business trans-
actions on a taxpayer’s basis. 
‘‘(4) SPECIAL
RULE
FOR
CONTRIBUTION
OF 
PERSONAL USE PROPERTY.—If a taxpayer contrib-
utes personal-use property (as defined in section 
210(b)(3)(B)), the taxpayer’s basis in the property 
shall not be increased by an amount in excess of the 
fair market value of the property contributed. 
‘‘(b) SPECIAL RULES
FOR PARTNERSHIP INTER-
ESTS.— 
‘‘(1) INITIAL BASIS IN OLD PARTNERSHIPS.—A 
partner’s basis in a partnership interest as of Janu-
ary 1, 2007, equals— 
‘‘(A) the partner’s basis in the partnership 
as of the end of the taxable year ending on De-
cember 31, 2006 minus
133 
‘‘(B) the amount of the partner’s share of 
the indebtedness of the partnership taken into 
account in determining such basis. 
‘‘(2) NEGATIVE BASIS.—If the amount deter-
mined under paragraph (1) is negative, the taxpayer 
has a negative basis in the partnership and such 
negative basis shall increase the gain on the sale or 
disposition of the partnership interest (except to the 
extent such negative basis has been adjusted by rea-
son of capital contributions). 
‘‘(3) ADJUSTMENT TO BASIS.—Except as other-
wise provided in this section, a partner’s basis in a 
partnership interest shall be determined in accord-
ance with the general principles of this chapter ap-
plicable to an individual’s basis in an interest in a 
business entity. A partner’s basis in a partnership 
shall not be adjusted by reason of any— 
‘‘(A) distribution from the partnership (ex-
cept to the extent such distribution is treated as 
distribution of basis in accordance with the gen-
eral principles of this chapter applicable to an 
individual’s basis in an interest in a business 
entity), 
‘‘(B) income, earnings, or loss of the part-
nership, or
134 
‘‘(C) any change in the partner’s share of 
the partnership’s indebtedness. 
‘‘(4) SPECIAL RULE FOR TRANSITION DISTRIBU-
TIONS.— 
‘‘(A) EFFECT OF TRANSITION DISTRIBU-
TION.—A transition distribution from partner-
ship to a partner shall— 
‘‘(i) reduce the partner’s basis in the 
partnership, and 
‘‘(ii) not be included in gross income. 
‘‘(B) DEFINITION.—A ‘transition distribu-
tion’ is a distribution by a business entity to an 
individual made during the first three months 
of 2006 but only to the extent that such dis-
tribution, when added to all other distributions 
of the entity to the individual after March 31, 
2006, does not exceed the amount of taxable in-
come allocated by the entity to the individual 
during the taxable year of the entity ending on 
December 31, 2006. 
‘‘(5) PARTNERSHIP.—For purposes of this sec-
tion, ‘partnership’ includes a limited liability com-
pany that was taxable as a partnership under the 
Internal Revenue Code of 1986.
135 
‘‘(c) SPECIAL RULES FOR SHARES OF S CORPORA-
TIONS.—Rules similar to those contained in subsection (b) 
shall apply with respect to the basis of stock of a corpora-
tion that was treated as an S corporation under the Inter-
nal Revenue Code of 1986. 
‘‘(d) SPECIAL RULES FOR PROPRIETORSHIPS.— 
‘‘(1) OLD
PROPRIETORSHIP.—A proprietor’s 
basis in any business activity conducted before Janu-
ary 1, 2007, which is treated as a business activity 
as of such date equals— 
‘‘(A) the proprietor’s adjusted basis in the 
assets of such business entity as of the end of 
the taxable year ending on December 31, 2006, 
minus 
‘‘(B) the balance of any indebtedness the 
interest on which the proprietor had treated as 
business interest under section 163(h)(2)(A) of 
the Internal Revenue Code of 1986. 
‘‘(2) NEGATIVE BASIS.—If the amount deter-
mined under paragraph (1) is negative, the propri-
etor has a negative basis in the proprietorship and 
such negative basis shall increase the gain on the 
sale or disposition of the entity (except to the extent 
such negative basis has been adjusted by reason of 
capital contributions).
136 
‘‘(3) ADJUSTMENT TO BASIS.—Except as other-
wise provided in this section, a proprietor’s basis in 
a proprietorship shall be determined in accordance 
with the general principles of this chapter applicable 
to an individual’s basis in an interest in a business 
entity. 
‘‘(4) 
PROPRIETORSHIP.—‘Proprietorship’ 
in-
cludes— 
‘‘(A) any family business that is not a 
partnership, and 
‘‘(B) any business activity conducted by a 
taxpayer other than as an employee if such ac-
tivity constitutes a business entity. 
‘‘(e) ANTI-AVOIDANCE RULE.— 
‘‘(1) IN GENERAL.—If a pass-through entity’s 
distributions to an individual in its taxable year or 
taxable years ending in 2006 exceeds 125 percent of 
the individual’s distributive share of income for such 
period, the amount of such excess distribution shall 
be treated as a cash distribution to the partner on 
January 1, 2007, and shall not reduce the partner’s 
basis in his partnership interest. 
‘‘(2) PASS THROUGH ENTITY.—‘Pass through 
entity’ means a partnership, proprietorship, or S 
corporation.
137 
‘‘SEC. 74. GRATUITOUS TRANSFERS. 
‘‘(a) IN GENERAL.—If after December 31, 2006, a 
taxpayer receives any property by gift, inheritance, or 
other gratuitous transfer, the taxpayer’s basis in the prop-
erty shall be the lesser of— 
‘‘(1) the fair market value of the property at 
the time of transfer, or 
‘‘(2) the transferee’s basis in the property at 
the time of transfer. 
‘‘(b) PROOF REQUIRED.—A taxpayer’s basis in an 
asset received by gift, inheritance, or other gratuitous 
transfer shall be presumed to be zero unless the taxpayer 
can demonstrate to the satisfaction of the Secretary the 
basis claimed by the taxpayer. 
‘‘SEC. 75. DISTRIBUTIONS FROM BUSINESS ENTITIES. 
‘‘(a) IN GENERAL.—Except as otherwise provided in 
this section or in regulations issued by the Secretary in 
accordance with this section— 
‘‘(1) CASH
DISTRIBUTIONS.—Distributions of 
cash by a business entity with respect to its equity 
ownership shall be treated as dividends and included 
in gross income. 
‘‘(2) DISTRIBUTIONS OF PROPERTY.—If a busi-
ness entity distributes property (other than stock or 
other equity ownership described in paragraph (3) in 
connection with a merger, acquisition or reorganiza-
138 
tion), the fair market value of the property received 
shall be treated as a dividend and included in gross 
income. 
‘‘(3) DISTRIBUTIONS OF STOCK OR OTHER EQ-
UITY OWNERSHIP.—If a taxpayer receives with re-
spect to its ownership interest in a business entity 
stock or other ownership interests in such business 
entity (as reorganized) or in another business entity 
that is controlled by such business entity or is ac-
quiring or merging with such business entity, no 
gain or loss shall be recognized on the distribution. 
‘‘(b) BASIS IN BUSINESS DIVISIONS.—In the case of 
a spin-off, split-off, or split-up of a business entity in 
which a taxpayer has basis, the taxpayer’s basis in the 
original business entity shall be allocated among the new 
and surviving entities in accordance with the relative fair 
market values of the taxpayer’s interests in those entities. 
If interests in the entities are publicly traded, fair market 
values shall be based on public trading prices. In other 
cases, the Secretary shall accept any reasonable allocation 
made by the taxpayer if the taxpayer notifies the Secretary 
of the allocation in an attachment to its tax return for 
the taxable year of the transaction. 
‘‘(c) DISTRIBUTIONS CONSTITUTING RETURN
OF 
BASIS.—
139 
‘‘(1) COMPLETE LIQUIDATIONS.— 
‘‘(A) IN GENERAL.—In the case of a dis-
tribution in complete liquidation of a business 
entity, a taxpayer shall be treated as receiving 
cash and assets of the entity in exchange for 
the taxpayer’s equity in the business entity. In 
such case, the taxpayer shall recognize gain to 
the extent that the sum of the cash and fair 
market value of assets received exceeds the tax-
payer’s basis in its interest in the business enti-
ty or shall recognize loss to the extent that the 
basis exceeds the fair market value of cash and 
assets received. 
‘‘(B) DISTRIBUTION
OF
EQUITY
INTER-
ESTS.—In the case of a complete liquidation in 
which at least 90 percent of the value of assets 
and cash distributed to an equity holder is eq-
uity interests in other business entities con-
trolled by the distributing entity— 
‘‘(i) subparagraph (A) shall not apply, 
‘‘(ii) paragraph (3) of subsection (a) 
shall apply, 
‘‘(iii) the cash and fair market value 
of assets other than equity interests in 
controlled entities shall be applied to re-
140 
duce the taxpayer’s basis in the distrib-
uting entity and gain will be recognized 
only to the extent that the cash and such 
fair market value exceeds the taxpayer’s 
basis in the distributing entity, and 
‘‘(iv) the taxpayer’s remaining basis 
shall be allocated among the distributed 
equity interests in controlled entities in ac-
cordance with the relative fair market val-
ues of such interests. 
‘‘(C) DISTRIBUTION
OF
BUSINESS
PROP-
ERTY.—Under regulations prescribed by the 
Secretary, rules similar to those that applied to 
partnerships under the Internal Revenue Code 
of 1986 shall apply in lieu of subparagraph (A) 
to distributions that include property used in a 
trade or business if such property is contributed 
to a new business entity within 180 days of the 
distribution. 
‘‘(2) TRANSITION RULES.—See subsections (b) 
and (d) of section 73 for transition rules relating to 
partnerships and proprietorships. 
‘‘(d) DEFINITIONS AND SPECIAL RULES.— 
‘‘(1) CERTAIN RULES OF APPLICATION.—
141 
‘‘(A) PRINCIPLES APPLICABLE TO INTER-
NAL REVENUE CODE.—This section shall be ap-
plied without regard to— 
‘‘(i) continuity of business interest, 
‘‘(ii) continuity of ownership interest, 
‘‘(iii) requirements of section 355 of 
the Internal Revenue Code of 1986 for 
spin-offs, split-offs and split-ups, 
‘‘(iv) business purposes for a cor-
porate reorganization or restructuring (ex-
cept if the transaction is potentially abu-
sive), and 
‘‘(v) except as provided in paragraph 
(3), rules treating dividends as returns of 
capital because of the absence of earnings 
and profits. 
‘‘(B) CONSTRUCTIVE RECEIPT.—If a tax-
payer is given the choice of receiving cash or an 
equity interest in a business entity, the tax-
payer will be treated for purposes of this sec-
tion as if he received the cash and purchased 
the equity interest. 
‘‘(C) DEBT
VERSUS
EQUITY.—The prin-
ciples distinguishing debt and equity that ap-
plied prior to the adopt of the Simplified USA
142 
Tax generally shall apply for purposes of apply-
ing this section. An investment in a business 
entity shall not be considered debt unless— 
‘‘(i) it is reflected in the books and 
records of the business entity as debt, and 
‘‘(ii) there is written evidence of the 
investment that treats such investment as 
indebtedness. 
‘‘(2) CONTROL.—For purposes of this section, 
‘control’ of a business entity means— 
‘‘(A) ownership of more than 50 percent of 
the voting power held by equity holders of such 
entity, or 
‘‘(B) ownership of rights to more than 50 
percent of the periodic distributions that the 
business entity may make to its equity holders 
and 50 percent of the distributions if the busi-
ness entity were liquidated. 
‘‘(3) REGULATIONS.— 
‘‘(A) SIGNIFICANT DOWNSIZING AND PAR-
TIAL LIQUIDATIONS.—The Secretary is author-
ized to issue regulations under which distribu-
tions resulting from a significant downsizing of 
a business entity will be treated in part as re-
turn of equity holders’ capital.
143 
‘‘(B) ASSUMPTION AND RELEASE OF LI-
ABILITY.—The Secretary shall prescribe regula-
tions 
addressing 
the 
consequences 
of 
a 
distributee’s assumption of the liabilities of the 
distributor. 
‘‘SEC. 76. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL 
RESIDENCE. 
‘‘(a) EXCLUSION.—Gross income shall not include 
gain from the sale or exchange of property if, during the 
5-year period ending on the date of the sale or exchange, 
such property has been owned and used by the taxpayer 
as the taxpayer’s principal residence for periods aggre-
gating 2 years or more. 
‘‘(b) LIMITATIONS.— 
‘‘(1) IN GENERAL.—The amount of gain ex-
cluded from gross income under subsection (a) with 
respect to any sale or exchange shall not exceed 
$250,000. 
‘‘(2) $500,000 LIMITATION FOR CERTAIN JOINT 
RETURNS.—Paragraph (1) shall be applied by sub-
stituting ‘$500,000’ for ‘$250,000’ if— 
‘‘(A) a husband and wife make a joint re-
turn for the taxable year of the sale or ex-
change of the property,
144 
‘‘(B) either spouse meets the ownership re-
quirements of subsection (a) with respect to 
such property, 
‘‘(C) both spouses meet the use require-
ments of subsection (a) with respect to such 
property, and 
‘‘(D) neither spouse is ineligible for the 
benefits of subsection (a) with respect to such 
property by reason of paragraph (3). 
‘‘(3) APPLICATION
TO
ONLY
SALE
OR
EX-
CHANGE EVERY 2 YEARS.— 
‘‘(A) IN
GENERAL.—Subsection (a) shall 
not apply to any sale or exchange by the tax-
payer if, during the 2-year period ending on the 
date of such sale or exchange, there was any 
other sale or exchange by the taxpayer to which 
subsection (a) applied. 
‘‘(B) PRE-MAY 7, 1997, SALES NOT TAKEN 
INTO
ACCOUNT.—Subparagraph (A) shall be 
applied without regard to any sale or exchange 
before May 7, 1997. 
‘‘(c) EXCLUSION FOR TAXPAYERS FAILING TO MEET 
CERTAIN REQUIREMENTS.— 
‘‘(1) IN GENERAL.—In the case of a sale or ex-
change to which this subsection applies, the owner-
145 
ship and use requirements of subsection (a) shall not 
apply and subsection (b)(3) shall not apply; but the 
amount of gain excluded from gross income under 
subsection (a) with respect to such sale or exchange 
shall not exceed— 
‘‘(A) the amount which bears the same 
ratio to the amount which would be so excluded 
under this section if such requirements had 
been met, as 
‘‘(B) the shorter of— 
‘‘(i) the aggregate periods, during the 
5-year period ending on the date of such 
sale or exchange, such property has been 
owned and used by the taxpayer as the 
taxpayer’s principal residence, or 
‘‘(ii) the period after the date of the 
most recent prior sale or exchange by the 
taxpayer to which subsection (a) applied 
and before the date of such sale or ex-
change, 
bears to 2 years. 
‘‘(2) SALES AND EXCHANGES TO WHICH SUB-
SECTION APPLIES.—This subsection shall apply to 
any sale or exchange if—