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(d) Determination of Taxable Income.--For purposes of
this section, taxable income of the corporation shall be
determined under section 63(a) without regard to--
(1) the deduction allowed by section 172 (relating
to net operating loss deduction), and
(2) the deductions allowed by part VIII of
subchapter B (other than the deduction allowed by
section 248, relating to organization expenditures).
In order for section 1374 to apply, petitioner must have
recognized "net capital gain", which means the excess of net long-term
capital gain over net short-term capital loss, as defined in section
1222. Given that petitioner reported no capital gains or losses on
its 1988 income tax return, in order for section 1374 to apply,
petitioner's distribution of SIC stock to Arnold must have resulted in
a long-term capital gain, exceeding $25,000. This, in turn, requires
that SIC stock be a capital asset in the hands of petitioner and that
petitioner be deemed to have held the SIC stock longer than 1 year.
See sec. 1222(3), as amended by sec. 1402(a), Tax Reform Act of 1976,
Pub. L. 94-455, 90 Stat. 1520, 1731.
The SIC stock was a capital asset in the hands of petitioner.
Arkansas Best Corp. v. Commissioner, 485 U.S. 212, 222-223 (1988).
Petitioner relies on section 1221(3) to argue that the business
records of MIC, which were subsequently transferred to SIC, are not
capital assets, and that the SIC stock received in exchange is
consequently also not a capital asset. Section 1221(3) provides that
the term "capital asset" does not include "a copyright, a literary,
musical, or artistic composition, a letter or memorandum, or similar
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