Section 213 of the House bill revises the "hobby loss" provisions of present section 270 to provide that losses from an activity will be disallowed if the activity is not carried on with a reasonable expectation of profit. An activity will be presumed to have been carried on without a reasonable expectation of profit if losses exceed $25,000 in any three out of five consecutive taxable years.

Treasury recommends that this provision be amended to make it clear that the reasonably anticipated profit must be an economic profit, not a "tax savings" profit, and that "profit" need not be determined on an annual basis.

It should also be made clear that those deductions which are allowable under the Code without regard to whether they are incurred in a trade or business or for the production of income, such as interest and certain state and local taxes, will continue to be deductible even where incurred in an activity not engaged in for profit. Similarly, it should be made clear that deductions incurred in an activity not engaged

in for profit (other than those described in the preceding sentence) shall be allowable to a proper extent where income is realized from that activity. The amount allowed should be that proportion of the total of such deductions which the income realized bears to the total deductions attributable to the activity, including deductions described in the first sentence of this paragraph. Thus, if the taxpayer with a hobby farm has interest and taxes of $100,000, operating costs of $120,000, and depreciation of $80,000, and if the income from the farm is $30,000, the taxpayer should be entitled to deduct the full $100,000 amount of interest and

taxes plus $12,000 of operating costs and $8,000 of depreciation.

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Sec. 231--Moving Expenses

Under present law certain expenses of moving a taxpayer's family and belongings from one place of employment to another

are deductible.

In general, the deduction applies only if the taxpayer's new place of employment is at least 20 miles farther from his former residence than was his former place of employment. The bill increases the required distance before any deduction is allowed from 20 miles to 50 miles. Treasury recommends that the 20-mile test contained in existing law

be retained.

Sec. 301, 302--Limit on Tax Preferences and
Allocation of Deductions

The House bill treats the following items as preferences for the purpose of the Limit on Tax Preferences:

(a) the

excess of tax-exempt interest on state and local bonds over expenses related thereto which are not allowed as deductions;* (b) the amount (50 percent) of net long-term capital gains which is excluded from income; (c) the untaxed appreciation in value of property contributed to charity; (d) the excess of accelerated depreciation over straight-line depreciation of real property; and (e) the excess of any farm loss over the amount that would be deductible under normal accrual ac

counting rules. For purposes of the Allocation of Deductions rule, the items of tax preference are the same except that: (a) interest on state and local bonds is included only with respect to bonds issued after July 12, 1969 (subject to the same 10-year transition rule); and (b) the preferences for this purpose also include the excess of the deductions for intangible drilling expenses and percentage depletion over

*Under a special transition rule, only 10 percent of such excess is taken into account in 1970, 20 percent in 1971, and, similarly, 10 percent more in each succeeding year so that the full amount is not taken into account until 1979 and thereafter.

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the amount that would be deductible had these expenses been capitalized and recovered through straight-line depreciation

and cost depletion.

1. Tax Preferences

Treasury recommends that the following modifications be made to the group of items treated as tax preferences:

(a) Appreciation in value of property contributed to charity should not be treated as a tax preference for the purpose of either the Limit on Tax Preference or the Allocation of Deductions.

(b) Interest on state and local bonds (without distinction as to when the bonds were issued) should be treated as a tax preference for the purpose of the Allocation of Deductions but not for the purpose of the Limit on Tax Preferences. The 10-year transitional rule should be eliminated.

(c) Intangible drilling expenses and percentage depletion in excess of cost should be treated as tax preferences for both the Limit on Tax Preferences and the Allocation of Deductions, except that a taxpayer 60 percent or more of whose gross income is from oil and gas properties should not treat the intangible drilling expense deduction