As pointed out above, one of the characteristics of

"corporate acquisition indebtedness" as defined in the bill

is that it is issued for the acquisition of stock or assets

of another corporation. acquisition, obligations do not fall in this category unless "at least two-thirds of the total value of all the assets" are acquired. Since the focus of asset acquisition transactions is on the operating assets, the two-thirds test might be avoided in those instances where the acquired corporation has more than one-third of its total assets in cash and nonAccordingly, Treasury recommends that

The bill specifies that in an asset

operating properties.

the two-thirds test be applied only to operating assets

Under present law, a taxpayer may elect the installment method of reporting gain on a sale of real property, or a casual sale of personal property where the price is in excess of $1,000, if the payments received by the seller in the year of sale (not counting evidences of indebtedness of the purchaser) do not exceed 30 percent of the sales price. The

House bill would deny installment reporting where the obligations consist of bonds, debentures, notes, or other evidences of indebtedness with interest coupons attached, in registered form, or in a form designed to be readily traded on an established securities market. The House bill also provides that installment reporting is available only where payment of the principal, and interest (if any), of the obligation is required to be made periodically and in such amounts during the calendar year as shall be prescribed under regulations.

The latter provision requiring periodic payments throughout the term of the obligation is a significant departure from existing law and could disrupt the pattern of legitimate commercial transactions where payment is deferred because of lack of ability to make immediate payment. This is precisely the situation that the installment sales provisions were designed to ameliorate. The installment method is consistent with the cash method in not requiring the taxpayer to report income until the income has been assured by receipt of payment by the seller and thus until he has received cash to pay his tax.

Treasury recommends that this periodic payment provi

sion be deleted except that installment reporting should not be available where the obligation is payable on demand. In all events, the periodic payment provision should not be made effective until January 1, 1970, so as to give taxpayers an opportunity to adjust to the new rule. The installment reporting rule had widespread application to many common sales transactions in small as well as large amounts, and many taxpayers may not be aware of this change at the present time. There was no advance warning of this change, and an adjustment period seems warranted.

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Sec. 431, 432--Foreign Tax Credit

1. Foreign Tax Credit Reduction in Case of Foreign Losses

The House bill provides for the carryover of previously deducted foreign losses in computing the foreign tax credit limitation in the case of taxpayers who have chosen the percountry limitation (section 904 (a) (1) of the Code) for the year in which the loss was incurred. Treasury recommends that this section also apply to taxpayers who have elected the over-all limitation (section 904 (a)(2) of the Code) and who have sustained an over-all loss on their foreign operations in a prior year.

Treasury has concluded that the operation of the provision can be improved, and be made more equitable, by some technical changes which we believe consistent with the purpose of the House bill. These technical changes would make the provision inapplicable where loss carryover provisions in the foreign law achieve the same result as recapture; would provide a recapture rule where the taxpayer elects to deduct foreign income taxes; and would make it clear that capital losses, as well as other losses, are intended to be covered.

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The changes would also limit the number of years to which losses must be carried (but at the same time eliminate the annual 50 percent limit on recapture). With respect to the provision providing for an addition to gross income in certain cases where property in the loss country is disposed of, the amount of the addition should be limited to the amount of gain on disposition and it should be made clear that the foreign tax credit limitation is to be computed without regard to such addition.

2. Foreign Mineral Income

The bill provides for the separate computation of the foreign tax credit limitation with respect to foreign mineral income in cases in which it is presumed that the amount of foreign tax in excess of the U.S. tax on the same income constitutes a hidden royalty payment. An examination of the tax and royalty structure in the international minerals industry does not justify such a presumption. Treasury believes that the defect to be remedied in present law is the ability of taxpayers to offset U.S. tax on other foreign income by the use of excess foreign tax credits generated as a result of the fact that the United States

grants a percentage depletion allowance and the foreign country