An Act to amend section 1233 and section 542 (a) (2) of the Internal Revenue Code of 1954
PL 84-385 (H.R.6263), enacted 08/12/1955

69 
S T A T . ] 
PUBLIC LAW 385-AUG. 12, 1955 
717 
SEC. 3. The Internal Revenue Code of 1954 is amended by adding 
a new section to chapter 1 of subtitle A immediately following section 
1341 to read as follows: 
"SEC. 1342. COMPUTATION OF TAX WHERE TAXPAYER RECOVERS SUB-
STANTIAL AMOUNT HELD BY ANOTHER UNDER CLAIM 
OF RIGHT. 
"(a) GENERAL EuLE.—If— 
"(1) an item was deducted from gross income for a prior tax-
able year (or years) because it appeared that another person held 
an unrestricted right to such item as a result of a court decision 
in a patent infringement suit (whether or not the taxpayer is 
a party to such suit); and 
"(2) gross income is increased for the taxable year because it 
was established after the close of such prior taxable year (or 
years) that such other person did not have an unrestricted right 
to such item or to a portion of such item because of the subsequent 
reversal of such court decision on the ground that such decision 
was induced by fraud or undue influence; and 
"(3) the amount of such increase in gross income exceeds 
$3,000, then the tax imposed by this chapter for the taxable year 
shall be the lesser of the following: 
"(4) the tax for the taxable year computed with the gross 
income so increased; or 
"(5) an amount equal to— 
"(A) the tax for the taxable year computed without such 
increase in gross income, plus 
"(B) the increase in tax (including interest) under this 
chapter (or the corresponding provisions of prior revenue 
laws) for the prior taxable year (or years) which would 
result solely from the elimination of such item (or portion 
thereof) as a deduction from gross income for such prior 
taxable year (or years). 
"(b) SPECIAL KULE.—For purposes of subsection (a) (5) 
(B) 
' interest shall be computed from the due date of the return for such 
prior taxable year to the due date of the return for the taxable year.*' 
SEC. 4. The amendment made by section 3 of this Act shall apply 
with respect to taxable years beginning after December 31, 1954. 
Approved August 12, 1955. 
Applicability. 
Public Law 385 
CHAPTER 871 
AN ACT 
August 12, 195!i 
To amend section 1233 and section 542 (a) (2) of the Internal Revenue Code 
[
H
« R
« 6263] 
of 1954. 
Be it enacted hy the Senate and House of Representatives 
of the 
United States of America in Congress assembled^ That section 1233 
of the Internal Kevenue Code of 1954 is amended by adding at the 
end thereof a new subsection as follows: 
"(f) ARBITRAGE OPERATIONS IN SECURITIES.—In 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 
Income taxes. 
68A Stat. 327. 
26 u s e 1233. 
Capital gains and 
losses. 
Short sales. 
718 
PUBLIC LAW 385-AUG. 12, 1955 
[69 ST A T 
Applicability. 
Personal holding 
company. 
Stock ownership 
requirement. 
68A Stat. 182. 
26 u s e 542 (a) 
(2). 
68A Stat. 168. 
26 u s e 504. 
6SA Stat. 233. 
26 u s e 681 (c). 
68A S t a t . 168, 
233. 
26 u s e 
504 (a) 
(1), 681 (c)(1). 
Applicability. 
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 bus-
iness 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 posi-
tion shall be deemed to constitute a short sale made on that day; 
"(3) for the purpose of paragraphs (1) and (2) of this sub-
section 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." 
SEC. 2. The amendment made by the first section of this Act shall 
apply only with respect to taxable years ending after the date of 
the enactment of tTiis Act and only in the case of a short sale of 
property made by the taxpayer after such date. 
SEC. 3. Section 452 (a) (2) of the Internal Revenue Code of 1954 
(defining the term "personal holding company") is hereby amended 
by adding at the end thereof the following new sentence: "The pre-
ceding sentence shall not apply in the case of an organization or trust 
organized or created before July 1, 1950, if at all times on or after 
July 1, 1950, and before the close of the taxable year such organi-
zation or trust has owned all of the common stock and at least 80 
percent of the total number of shares of all other classes of stock of 
the corporation, but only if such organization or trust is not denied 
exemption under section 504 or an unlimited charitable deduction is 
not denied under section 681 (c) and, for this j)urpose— 
"(A) all income of the corporation which is available for dis-
tribution as dividends to its shareholders at the close of any taxable 
year shall be deemed to have been distributed at the close of such 
year whether or not any portion of such income was in fact dis-
tributed; and 
"(B) section 504 (a) (1) and section 681 (c) (1) shall also not 
apply to income attributable to property of a decedent dying 
before January 1.1951, which was transferred during his lifetime 
to a trust or property that was transferred under his will to such 
trust." 
SEC. 4. The amendment made by section 3 of this Act shall apply 
only w^ith respect to taxable years beginning after December 31, 1954. 
Approved August 12, 1955.