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Committee action on Revenue Bill of 1942

June 26, 1942

TABLES OF CONTENTS

Estimated revenue effect of the tax changes tentatively adopted "by the Ways
and Means Committee as of June 2b9 l$k2
Present lawf Treasury proposal, and Committee action on Revenue Bill of I9U2
Page No.
A.

Corporation taxes

........

1

*

1

1.

Normal tax .

2*

Surtax

3.

Relief for corporations with decreased earnings

2

km

Excess profits tax ..
.
a. Excess profits credit
b. Specific exemption .
c. Excess profits tax rates
d. General relief

2
2
2
2
3

.*

1

*
**

.

5. Post-war credit

B.

3

6.

Consolidated returns

..

7.

Nonresident foreign corporations

5

g.

Personal holding companies

6

9*

Capital stock tax and declared value excess profits tax

6

Individual income tax ....,
1.

.

......

5

..

Rates
a. Normal tax
.
.
b. Surtax . *
c. Non-resident alien individuals not engaged in
trade or "business within the United States and
not having a place of business therein

6
6
6
6

6

2. Exemptions *............... *
a. Single person, Married person* Dependent
b. Children 18-21 attending school

7
7
7

3*

7

Earned income credit

„.................

Collection at source • . «*
5. Joint returns
5a. Working Wife Allowance
6. Medical expenses




7

,.

S
8
9

- 2 -

PageNo.

C. Estate and gift taxes
1. Rates
2#

D*

9
9
9

......

Gift tax

9

Excise taxes

2.

3.

E.

*

Exemptions
a* Estate tax
b*

9

9

Recommended increases
*
a* Liquor; . *
b. Tobacco •.,
a
Gasoline •
d. Lubricating oil
e. Photographic apparatus
f» Carbonated soft drinks ... *
g. Candy and chewing gum
h. Communications service
i. Transportation of persons
j. Transportation of oil by pipe line
Recommended for repeal
a. Commercial washing machines
b. Optical equipment
c« Electric signs and advertising devices
d. Rubber articles ...

..
;.
* * 4.

.

,

Submitted by request but not included in Treasury
recommendations
a. Freight and express
b. Pari-mutuel wagers
c• Coin-operated amusement and gaming devices .....
d. Barber and beauty shop services
e. Electrical energy
...
f. Manufactured and natural gas
g. Sugar
h. Coffee .......
.
i. Tea
j. Cocoa
.
k. Radiobroadcasting

State and local tax-exempt securities

.

IF. Percentage depletion and intangible development expenses ..
1. Percentage depletion
a. Oil and gas wells
"b. Sulphur mines and deposits
c. Metal mines
d. Coal mines
e. Fluorspar



9
9
10
11
11
11
12
12
12
13
13
13
13
13
13
13

13
13
lb
lb
lb
lb
ik
lH
lb
15
15
15
l6
16
16
16
16
16
16
16

- 3 Page No»
Percentage depletion and intangible development expenses
(continued)....
.
*
2.
G*

H.

Intangible development expense

Capital gains and losses

l6
16
17

1.

Individuals
a. Classes of gains and losses
b* Percentage of gain or loss taken into account
c« Maximum rate on statutory net long-term gains • *
d. Treatment of losses
e. Loss carry-over

17
17
17
17
17
18

2m

Corporations
„
a. Classes of gains and losses • •
b; Maximum rate on net long-term gains
c. Offsetting of losses
d. Carry-over of losses

IS
18
18
19
19

Insurance companies
1.

19

Life insurance tax base
a* Life insurance business
b. Cancellable accident and health business .

19
19
20

2. Mutual insurance companies other than life
a. Exemptions
b. Tax base

21
21
21

3.

22

Foreign insurance
,
*.
a#. Policies not signed or countersigned in United
States by an officer or agent of the insurer . „
b. Policies signed or countersigned (companies
doing business in the United States)

22
22

I.

Inventory reserves

23

J.

Check list of technical and administrative amendments
tentatively acted upon by the Committee on Ways and
Means

2U




- oOo -

Estimated revenue effect of tax changes adopted "by the Ways and
Means Committee as of June 2k 9 19^2
(in millions of dollars)
Increase (4), decrease (-)
over yield of present law
Income and excess profits taxes:
Corporation;
Income
Excess profits
Declared value excess profits tax
Total corporation income and excess profits taxes
Individual income tax
Total income and excess profits taxes
Miscellaneous internal revenue:
Capital stock tax
Estate tax
Gift tax
Total
Liquor taxes:
Distilled spirits l/
Fermented malt liquors 1J
Wines 1/
Total liquor taxes
Tobacco taxes:
Cigarettes (small) 1/
Tobacco, smoking
Cigars (large)
Cigarette papers and tubes
Total tobacco taxes
Manufacturers1 excise taxes:
Lubricating oil
Photographic apparatus
Rubber articles
Electric signs
Washing machines
Optical equipment
Total manufacturers' excise taxes
Miscellaneous taxes:
Telephone, telegraph, radio and cable facilities,
leased wires, etc.
Telephone bill
Transportation of persons
Coin-operated amusement and gaming devices
Freight and express
Pari-mutual wagers
Total miscellaneous taxes
Total miscellaneous internal revenue
Total internal revenue
Miscellaneous revenues and receipts (postal surplus)
Oross revenue effect
Less: Portion of corporation excess profits tax
refunded in non-interest bearing bonds
Net revenue effect
Treasury Department, Division, of Research and Statistics,
1J

t
-

*
4"

60.6
2,288.9
58.5
2,291.0
2,730.0
5,021.0

51.5
1U.8
7.7
58.6

f
-

266.1

61.8

11.6
339.5

«*

«f
4»

51.k
11.8
15.8
7.8
86.8

4

+
4-

13.8
10.6
8.9

*
-

.1

-

.1
.3
15.0

-

+

4.

+
+

+
+

+
*

26.8
36.8
33-9
U.U
292.0
23.6
M7.5
800.2
5.821.2
102.8
5,92^.0

_

876.7

*

5.047.3

June 2Uf 19U2.

Excluding the revenue effect of floor stocks taxes which, if enacted, are
estimated to yield in the first year only: Distilled spirits, $90,0 millions;
Fermented malt liquors, $2.0 millions; Wines, $2f3 millions; Cigarettes
(small),
millions.

ot*: All estimates show full year effect assuming all proposed changes were
fully reflected in revenue for an entire year. Estimates of income and
excess profits taxes and the gift tax are at levels of inctme estimated
for calendar year 19^2, All other estimates are at levels of income

estimated for fiscal year 19^3t


Present law, Treasury proposal, and Committee
action on levenue Bill of 19^2
Present
law
A.

Treasury
propo sal

Committee
action

Corporation taxes
1. Normal tax
Corporations with net income
of not more than $25,000:
Not in excess of $>5,000
Next $15,000
Next $5,000

1556
17
19

15*
17
19

17
19

Corporations with a net
income over $25,000:

2U

2k

2U

Notch provision:
Alternative tax

$U,250 plus
37ft of excess
over $25,000

Top income to which
applicable
2*

$3M6l.5^

$u,250 plus
31$ of excess
over $25,000
$50,000

1|%

$U,250 plus
31$ of excess
over $25,000
$50,000

Surtax
Corporations with net income
of not more than $25,000
Corporations with net incoma
over $25,000:
first $25,000
Over $25,000
Notch provision:
Alternative tax

Top income to which
applicable

6
?

None (bracket
rates)

16

10

31
31

16
16

$4,000 plus
#2,500 plus
of excess 22$ of excess
over #25,000
over $25,000

$50,000

$50,000

Note: Under the Committee action the normal and surtax rates do not
apply to the balance of adjusted excess profits net income remaining after excess profits tax,




~ 2 ~

Present
law
3*

Relief for corporations with
decreased earnings

None

Treasury
proposal

Committee
action
None

-x-

* Corporations with current year surtax net income less than the
average surtax net income for the base period years 1936-1939 should
be allowed a tax credit of 10 percent of the difference but not to
exceed the smaller of (a) 20 percent of surtax net income or (b) the
exccss of the surtax computed without benefit of this provision over
$4,000. This-provision should apply only to corporations with net income over $25,000 that do not use the alternative rate under the notch
provision. In the light of the Committee's action in adopting a combined normal and surtax rate of 40 percent, the Treasury withdrew its
recommendation.
Excess profits tax
a. Excess profits credit
(l) Invested capital method:
First $5 million of invested capital
Next $5 million
Next $190 million
Balance

o/o
7
7
7

7
7
7

7

95

95

95

$5,000

$5,000

$10,000

6
5

(2) Income method:
Portion of average
earnings in base period
1936-1939
b#
Note:

Specific exemption

The Treasury agreed in advance to the modifications in the excess
profits credit and specific exemption indicated above under
Committee action.

c. Excess profits tax rates
Adjusted excess profits net
income
First $20,000
$ 20,000 to $ 50,000
50,000 to 100,000
100,000 to 250,000
250,000 to 500,000
Over 500,000




35%
40
45
50
55
60

50%
55
60
65
70
75

94$
94
94
94
94
94

- 3 Present
lav

Treasury
proposal

Committee
act ion

c. Excess profits tax rates
continued
Note*

(l) Under the Committee action the normal and surtax rates do
not apply to the balance of adjusted excess profits net income
remaining after excess profits tax.
(2) Under the procedure in the present law corporations with
taxable years beginning after December 31* 19^1 f would be subject to the new and higher income and excess profits tax rates?
This would permit corporations with fiscal years to escape the
full import of the new rates on part of the incomes attributable
to the calendar year 19^2. The Committee voted to follow the
1932 Act or some similar procedure to obviate this results thus
making the new rates applicable to all corporate incomes after
January lt 19^2•

d*

General relief;

(A separate statement is availabLe. outlining the
Treasury1 s proposals tentatively accepted by
the Committee.)

5. Post-war credit
* {a) Statement of Secretaryf March 3, I9U24 "However, it is
recognized that very high top, or so-called 'marginal rates,-* may
leave little incentive for the maintenance of efficiency in business
operation. Furthermore! after the war there may well ba need for a
large volume of expenditure in readjusting industry and maintaining
employment. For these reasons it is believed desirable that in the
ease of any dollar of corporate profits the receipt of which results
in BXi increase in tax "beyond perhaps eighty cents, the additional tax
on such dollar shall be held by the Government to the account of the
corporation and be returnable within a limited period after the warf
in those cases where it is spent for new and additional capital equipment or otherwise is spent in the additional employment of labor."
(b) Proposal made jointly by Mr. Paul, Tax Adviser to the
Secretary of the Treasury, and Mr. Stam, of the staff of the Joint Committee
on Internal Revenue Taxation, on June 18, I9U2:
The amount to be returned shall be lk percent of the
taxpayer1 s adjusted excess**profits net income.
The amounts returned shall not be included in corporarate income subject to tax.




_ 4 n

3. The amounts ahall he set aside in a special fund to he
held by the Treasury to the credit of the taxpayer who shall be given
a non-negotiable, non-interest-befcring certificate as evidence of his
claim.
5. Post-w^r credit continued
n

b. The amounts returned to the taxpayers are intended for
use in the conversion of their businesses to peacetime activity or in
the maintenance of employment in business activity. To this end the
amounts returned shall not be available for the following purposes:
(1) The payment of cash or stock dividends.
(2) Bonuses or salary increases to executives.
(3) The increase of cash reserves unless employed in the business.
(4) The purchase of securities*
M

5. The amounts returned to the taxpayer shall be returned
in the following manner: Firsts-year collections shall be paid within
the third year after the cessation of hostilities; second-year collections within the fourth year; third-year collections within the fifth
year; balance within the sixth year after the cessation of hostilities.n
This specific proposal was rejected by the Committee.
** The Committee adopted the following formula:
1. The amount returned be
percent of the adjusted excess^
profits net income—the base upon which the excess-profits tax is computed. (Giving effect to the proposed refund, therefore, the net
excess-profits tax rate will be 80 percent.)
2. The refund be effected by the redemption of bonds issued to
the taxpayer.
3. The bonds be issued within 3 months after the payment of the
related tax, or the final quarterly installment thereof, for any taxable
year.
The bonds mature, subject to prior call, as follows: One-third
at the end of the second calendar year following the cessation of hostilities; one-third at the end of the third such year; and one-third at the
end of the fourth such year.
5. The bonds shall be callable, upon 3 months * notice, at any time
prior to maturity date.
6. The maturity date of all the bonds be advertised within 30 days
after the cessation of hostilities, and in such a way that the maturity
date of any bond shall be readily ascertainable.




- 5 Present
lav
5. Post-war credit

treasury
. jaroposai ...

Com&lttt*
acjAftft

continued

7. The bonds be issued under the provisions of the Second Liberty
Bond Act, thus payable without the necessity of a special appropriation,
S.

The bonds be nonnegotiable and non-interest-bearing#

9.

The bonds be assignable after the end of the war.

10. The amount of bonds issuable to any taxpayer in consideration
of the tax paid for any taxable year be adjusted for any overage or
shortage in the aggregate amount issued to such taxpayer for the prior
year or years, any overage finally remaining to be adjusted by cancelation or, at the election of the taxpayer, by purchase at face value.
11. No amount be included in gross income for any year by reason
of the receipt of bonds or of amounts paid for their redemption.
12. No amount be available, by reason of the issue of bonds or
their redemption, for any of the following purposes:
(1)
(2)

The payment of dividends in cash or stock.
The payment of bonuses or salary increases
to executives.
(3) The increase of cash reserves unless employed in the business.
(U) The purchase of securities.
13. The amounts refunded to be subject to a "capital gainsH tax
of 15 percent.
Consolidated returns

Not allowed for
normal tax and
surtax (except
for railroads,
etc.,
and cer•»
tain corporations in foreign trade.)

Allow for
both income
and excess
profits tax

Allow for both
income and excess profits tax
imposing, however, a differential tax of
256 of surtax
net income for
the privilege

Allowed for
excess profits
tax.
7.

Nonresident foreign
corporations
Tax rate
Withholding of tax at
source (Sec. ibk)




m

l^bFtf^ir

36*

Not specifiedto be aligned

36*

Present
law

Treasury
proposal

Committee
action

g. Personal holding companies
Not in excess of $2,000

Not

75$

specified
In excess of $2,000

Note:

9.

Not
specified

The Committee action on points 7
suggestion of the Treasury.

85$

8 was taken at the

Capital stock tax and declared
value excess profits tax
$1,25 for
Repeal
each $1,000
of adjusted
declared value

Capital stock tax

Taxes retained
but provision
was made for
the annual
redeclaration
of capital
stock value

Declared value excess
profits tax net income:
In excess of 10$ and not in
excess of 15$ of adjusted
declared value
In excess of 15$ of adjusted
declared value

6.6$

Repeal

6.6*

13.2$

Repeal

13. #

14

6*

Individual income tax
1. Rates
a, Normal tax
b#
Note:

Surtax

(See

a t t a c h e d

The Treasury recommended that the first $2,000 "bracket be
subdivided into four $500 "brackets. Under the Committee
action the first $2,000 bracket is retained.

c. Non-resident alien individuals
not engaged in trade or business
within the United States and not
having a place of business therein




Tax rate

27^$

Not specified to be aligned

T a 1) 1 e

1)

- 7 Committee
action

Treasury
proposal

Present
law
c. Non-resident alien individuals,
etc. Continued
Note:

The 27J9S rate under present law does not apply to receipts
of more than $23tOOO; the 36$ rate under Committee action
does not apply to non-resident alien individuals with
aggregate receipts of more than $22,800.
Withholding of tax at
source (Section 1^3)

27^

Not specified
to be aligned

36^

2. Exemptions
a.

Note:

Single person
Married person
Dependent

$ 750
1,500

koo

$

600

$

1,200
300

500

1,200

Hoo

The original Treasury proposal of March 3? 19^2, recommended
exemptions of $750, $1,500 and $HOO. lira letter to the
Chairman May 6, 19^2, the Secretary recommended the lowering
of exemptions to $600, $1,200 and $300,
Not included
as dependents

Include as
dependents

Not included
as dependents

For normal tax only

10$ of earned
net income but
not in excess
of the entire
net income

Repeal

Retain
without
change

Collection at source

None

Hate 10CM

The plan as
revised bythe Treasury
was adopted

b.

Children 1S-21
attending school

3. Barned income credit

* Collect the income tax at source with respect to salaries and wages,
dividends and bond interest. For salaries and wages^ allow personal exemptions, credit for dependents, and deductions equal to 10 percent of exemptions and credit for dependents.
(Continued on following page)




~ 8 ~
Originally the Treasury recommended that the Secretary have discretion
to collect at source at a rate up to 10 percent, since it -was not known how
soon and to what extent it might be necessary to speed up tax collections to
check inflation* Subsequently, the Treasury asked outright for a 10 percent
rate® On June 19 > 1942, the Treasury submitted a plan to ease the transition
to collection at source by spreading the impact of the 10 percent tax over two
transition years 194-3 and 1944* Under this plan one-half the amount collected
at source during 1943 would be credited against the instalment payments on 1942
liabilities and the balance would be credited against the quarterly payment on
1943 liabilities due in March, 1944« It was suggested further that for the purpose of equalizing the impact of collection at source on persons with sources of
income subject to withholding and persons riot subject to withholding, all taxpayers be required to pay 5 percent of net income plus one-fourth the balance
of the liabilities for 1943 in Iforch, 1944.
In the course of the discussion in the Committee, it was suggested by a
member of the Committee that a simpler method of transition would be to withhold at a rate of only 5 percent in 1943 and have all of the withheld tax
apply as ®art payment of 1943 tax liabilities• The 10 percent rate would be
imposed first in 1944, applicable as part payment of 1944 tax liabilities.
It was informally the sense of the Committee that the Treasury and Joint Committee staffs should study this suggestion and report back to the Committee
for its consideration before the bill is reported.

5»

Joint returns

Present
law

Treasury
proposal

Committee
action

Optional

Mandatory

Optional*

The Committee had tentatively adopted mandatory joint returns, but
subsequently reversed its action®
5a • Working wife allowance




None

**

None

** On March 30, 1942,
the Treasury more specifically recommended an allowance as follows: "Where the wife works outside
the home, additional household expenses usually are incurred which
are not present where the wife is able to devote her full time to
the maintenance of the home# For this reason, it is suggested
that an additional credit be provided as follows*
"There should be allowed as a credit against the tax upon
the family an amount equal to 10 percent of the wifefs earnings *
Such credit, however, should not exceed $100 .
"A similar credit should be allowed where a person occupying the status of head of the family, such as a widow, works."

Present
law
6. Medical expenses

Treasury
proposal

No allowance

Committee
action
No action

* Allow a deduction for extraordinary medical expenses in excess of
a specified percentage of the family1 s net income. The aiaount
allowed should, however, he limited ts sftme specified maximum
amount. (March 30, I9U2J
Estate and gift taxes
1* Bates

See attached Table 2

No increase

2. Exemptions
a. Estate tax

b.

Specific exemption

$40,000

Insurance exclusion

$40,000

Substitute one
$60,000 specific exemption
for the present
specific exemption and insurance exclusion

One $60,000
specific exemption for
the present
specific exemption and
insurance
exclusion

G-ift tax
Specific exemption

$40,000

$30,000

$30,000

Annual exclusion

$4,000 for
each donee

Allow each
donor $5,000
for all
donees

$3,000 for
each donee

Excise taxes
1* Recommended increases
a#




Liquor
Distilled spirits, per gallon
Beer (fermented malt liquors),
per barrel
Still wines, per wine gallon
Not over l4$
Over lk not over 21$
Over 21 not over

$6
30*
65^

$6
$g

$6
$7

15*
50^
$1

10$
$1

- 10 Present
law
D.

Excise taxes

Treasury
proposal

Committee
action

Continued

Recommended increases

Continued

Other wines, per l/2 pint
Sparkling
Artificially carbonated
Liqueurs, cordials, etc.
Imported bitters, per gallon

10^

lit

10<p

*

$6

No excise
tax

* Treasury made no recommendation but concurred in
Committee action.
b.

Tobacco
Cigarettes, per thousand
Small
10/ brands
15/ brands

3.25
3.25

$ 3.50
4.00

$ 3.50
3.50

Large
Hot over
long
Over 6^" long
Smoking tobacco, per pound

7.80

9.60

3.25
18/

4.00
36/

8.4o
3.50

Cigars, per thousand,
retailing atj
A - Not over 2,5 cents
n
4.0
B - 2.6 to
C -(U.l
5.0
"
)
6.0
"
)
(5.1
II
8.0
D - 6.1
it
E - 8.1
11.0
ii
15.0
1 -11.1
t
i
G -15.1
20.0
i
t
H -20.1
30.0
I -30.1 and over
Note!

$ 2.00
2.00
2.00 )
3-00 )
3.00
5.00
5.00
10.50
13.50
13.50

$ 2.50
3.50
5.00

$ 2.50
3.50
5.00

7.00

7.00
10.00
13.50
18.00
25.00

10.00

13.50
18.00
25.00
35.00

Originally, on March 3» 19^2, the Treasury proposed rates
as follows:




35.00

Present
law

Treasury
proposal

Committee
action

Braise taxes Continued
Esaemmended
" ' "* " Continued
> •••
S-J—Cj. " - - "" increases
b.

Tobacco Continued
Not over 2.5 cents, $2.50; 2.6 to 5 cents, $5.00; 5.1 to 2 cents,
$7.50; g.l to 10 cents, $10.00; 10.1 to 15 cents, $15.00; 15.1 to
20 cents, $20.00; 20.1 to 30 cents, $25.00; 30.1 and over, $H0.00.
This schedule was revised upon representations made by manufacturers
and workers in the industry.
Cigarette paper and tubes

c.

Gasoline, per gallon

d.

Lubricating oil, per
gallon

Papers; (per l/20 per 25
pkg.) Not
papers or
over 25
tubes or fracsheets - ex- tion thereof
empt, 26-50
sheets - l/20
each additional 50
sheets or
fraction thereof - l/20
Tubes; 10 per
pkg. of 50 or
fraction thereof

1/20 per 25
papers or
tubes or fraction thereof

1 1/20

1 1/20

k l/20

100

60

10$ of manufacturers r
sales price

25 i

15$

of manufacturers1
sales price

25$

e. Photographic apparatus




Unexposed film and
sensitized paper and
photographic plates

Other photographic
apparatus

25$, exempting
cameras weighing more than
H lbs.

- 12 Present
law
£#

Treasury
proposal

Committee
action

Carbonated soft drinks
Bottle not over 33 fluid
ounces retailing at
Not over 100
Over 10^ not over 200
Over 200
Bottle over 33 fluid
ounces

10 per bottle
20 w
tt
30 «
«

No tax
ti tt
it tt

36% of bottlers1
selling price

tt tt

800 per pound

tt ti

ft ft

15% of manufacturers 1
sales price

it tt

50 tax on
charge of
25 to 500;
additional 50
tax on each
500

20% of total
charge*

No tax
fi it
tt tt
ft tt

Carbonic acid gas used in
unbottled soft drinks
g#

Candy and chewing gum

h«

Communications Service 1/
Telephone and radiotelephone toll service
charge of more than
240

20% of total
charge

* Originally the Treasury proposed a 50 tax on charges of 25 to 39
cents; 10-cent tax on charges of 40-64 cents; 150 tax on charges of 65
to 99 cents; additional 50 tax on each 25 cents or fraction thereof*
This proposal was revised at the suggestion of the industry to simplify
the computation of the tax*
Telegraph, cable and
radio dispatch or
message
Leased wire services
Local telephone service
Public station coinoperated telephone
service charges under
250

1/ Revised Treasury proposal*




10% of charge
10% of charge

M

of bill

Exempt

15% of charge
15% of charge

15%
15%

10%
10% of charge

10%
10% of charge

Exempt*

Exempt

- 13 Present
law
h#

Treasury
proposal

Committee
action-

Communications Service
Continued

* Originally the Treasury recommended a tax of 10 percent of service
charge* This recommendation was changed on representations of the industry
to the effect that the tax could not be shifted to consumers •
Transportation of persons
Transportation charges

5% of amount paid

15%

10%

Seats and berths

5% of amount
paid

20%

10%

Transportation of oil by
pipe line

of amount
paid

lOp

* The Treasury withdrew its proposed increase before the action
of the Committee•
2*

3#

Recommended for repeal
a*

Commercial -washing
machines

10$ of mfrs.1
sales price

Repeal

Repealed

b#

Optical equipment

10% of mfrs.1
sales price

Repeal

Repealed

c* Electric signs and
advertising devices

10% of mfrs,1
sales price

Repeal

Repealed

d«

)% of mfrs# »
sales price

Repeal

Repealed

Rubber articles

Submitted by request but not
included in Treasury recommendations
a#

Freight and express




No tax

5% of amount paid
by either contract or' common
carriers, exempting school
buses

Present
law
Pari-mutuel wagers

No tax

Treasury
proposal

Committee
action
5% of pool

Coin-operated amusement
and gaming devices
10 gaming devices paying
prizes of not more than 50
Other gaming devices
Amusement devices:
Pinball machines
Other amusement devices

Exempt

Barber and beauty shop
services

No tax

Suggested tax
of 10% of
charge was
rejected

Rate

3-1/3$

Suggested increase to 5%
was rejected

Sales by publicly owned
plants

Exempt

Suggested
elimination
of exemption
rejected

Manufactured and natural gas

No tax

Suggested tax
of 5% of
amount paid
rejected

$50
$50

$10

$10

$10
$10

$50

Electrical energy-

Sugar

Coffee




1/2 cent per
pound

No tax

Suggested
increase to
1 cent rejected
Suggested tax
of 5 cents
per pound
rejected

Present
lav

Treasury
proposal

Committee
action

i.

Tea

No tax

Suggested tax
of 10 cents
per pound
rejected

j.

Cocoa

No tax

Suggested tax
of 5 cents
per pound
rejected

Radio broadcasting

No tax

Suggested tax
based on (a)
transmission
power or (b)
net time sales
rejected*

* Suggestion was that tax be higher of (a) or (b):
(a) Transmission power tax at following rates; 100 watts, $100;
250 watts, $250; 500 watts, $250; 1,000 watts, $350; 5,000 watts, $500;
7,500 watts, $750; 10,000 watts, $800; 25,000 watts, $900; 50,000 watts,
$1,000.
(b) Net time sales tax at following rates: Ptrst $50,000 net
time sales in excess of $100,000 exemption, 6 percent; next $350,000,
8 percent; balance, 10 percent.
1. Bank checks

No tax

Suggested tax
of 2 cents per
check rejected

m.

No tax

Suggested tax
of l/lOO of
1$ rejected

Note:

Withdrawals from bank
accounts

(l) The Committee exempted from the tax on business machines cash
registers used in over-the-counter sales of merchandise.
(2) The Committee voted that the rates on second and third class
mail be increased to eliminate deficits.




- 16 Present
law
State and locAl tafr-^xeinpt,
securities

Interest
exempt froai
both normal
tax and
surtax

Treasury
proposal

Repeal present
exemption for
both future
and outstanding securities

Committee
action
Present
exemption
retained

J. Percentage depletion and
intangible development
expenses
Percentage depletion
27i percent
of gross
income

Eliminate

27^ percent
of gross
income

23 percent
of gross
income

Eliminate

23 percent
of gross
income

c. Metal mines

15 percent
of gross
income

Eliminate

15 percent
of gross
income

d*

Coal mines

5 percent
of gross
income

Eliminate

5 percent
of gross
income

e.

Fluorspar

No percentage
depletion

a*

0:11 and gas wells

Sulphur mines
and deposits

Note:

2.

5 percent
of gross
income

Under present law and Committee action percentage depletion is
limited to an amount not in excess of 50 percent of net income
computed without allowance for depletion*

Intangible development
expense

Option to
charge to
expense or*
capitalize*

Caoitaliase

Option to
charge to
expense or
capitalize*

•The Regulations now give taxpayers the option of expensing intangible
development costs rf oil and gas properties. They also permit the expensing
of the development costs of mines except the excess of costs over receipts for
*dnes that have not yet reached the state of production. This excess must be
^arged to capital account to be recovered through depletionf




- 17 Present
law
5*

Treasury
proposal

Committee
action

Capital gains and losses
1.

Individuals
a*

Classes of gains
and losses
(l) Short-tern

Assets held
IS months
or less

Assets held
lg months
or less

Assets held
15 months
or less

(2) Long-tern

Two classes:
Over lg, not
over 2k nos.;
over 2k nos.

One class:
Over 18
months

One class:
Over 15
months

100$

100$

100$

66-2/3

50

50

50

50

50

30

6o

50

b. Percentage of gain
or loss taken into
account
(1)

Short-term

(2) Long-tern
Not over 2k months
Over 2k uonths
c

*




Maximum rate on
statutory net
long-tern gains
Treatment of losses
(l)

Short-tern losses

Allowed solely
against short
gains of the
succeeding year

To he allowed
against short
or long gains
and, together
with long
losses, also
against a
maximum of
$1,000 of
other incone

To he allowed
against short
or long gains
and, together
with long
losses, also
against a
maximum of
$1,000 of
other income

- 18 -

&•

2.

Treasury
proposal

Allowed
against
ordinary
income
in full

To be allowed
against short
and long capital gains andf
together with
short losses,
also against
a maximum of
$1,000 of
other income

Committee
action-

Treatment of losses
Continued
(2) Long-tern losses

e.

Present
law

To be allowed
against short
and long capital gains and,
together with
short losses,
also against
a maximum of
$1,000 of
other income

Loss carry-over
(1) Short-term

One year
Permit 5-year
against
carry-over
short-term
capital
gains

Permit §-year
carry-over

(2) Long-term

No carryover required
because
allowed
against
other
income

Permit 5-year
carry-over

Permit 5~yeax
carry-over

Corporations
a#

Classes of gains
and losses
(l)

Short-term

(2) Long-tern

b. Maximum rate on net
long-term gains




Assets held No distinction
18 months
to be made
or less

Assets held
15 months
or less

Assets held No distinction
over IS
to be made
months

Assets held
over 15
months

Corporate
rat^

25$ in lieu
of corporate rate

Corporate
rate

- 19 Present
law
c.

d#

Note*

H#

Treasury
proposal

Committee
action

Offsetting of losses
(1) Short-term

Allowed solely
against shortterm gains

(2) long-term

Allowed against Allow solely
other income
against short
in full
or long-term
gains

Allow solely
against short
or long-term
gains

Allow against
short or longterm gains

Allow against
short or longterm gains

Carry-over of losses
(l)

Short-term

Carried forward for one
year against
short-term
gains

Permit 5~7ear
loss carryover

Permit 5-year
loss carryover

(2)

Long-term

No carry-forward required
since offset
against other
income

Permit 5~year
loss carryover

Permit 5~year
loss carryover

The modifications in the Treasury recommendations were agreed
to by the Treasury in advance.

Insurance companies
1.

Life insurance tax base

(Only major changes are indicated)

a. Life insurance business




Deductions from taxable investment income (underwriting
income excluded)
Exoenses

Investment expenses, limited
to l/k of 1$ of
assets, if any
expenses
allocated

Investment expenses limited
to l/k of \$>
of assets plus
1jk of excess
of rate of interest actually
earned over
3-3/^, if any
expenses dre
allocated

Investment expenses limited
to 1/k of Vjo
of assets plus
l/k of excess
of rate of interest actually
earned over
3-3/i$f if any
expenses are
allocated

20 Present
law
H.

Treasury
proposal

Committee
action

Insurance companies Continued
Reserve earnings
deduction

3-3/U percent
of mean of
legal reserves,
or actual
assumption
rate, if
higher, "but
not to exceed
H percent; no
adjustment
for reserve
earnings
derived
from taxexempt
income

Percent of
Plat percentage
mean of legal
of investment
reserves equal income after
to weighted
investment exaverage of
penses and tax
3-1/4 percent
exempt interestf
and actual
percentage to
assumption
"be determined
rate, 3-1/H
"by Secretary
percent to he
of the Treasury
weighted 65
so as to yield
percent and
same aggregate
actual assump- deduction for
tion rate,
industry as
35 percent;
under Treasury
adjustment to
formula*
eliminate
double-deduction of reserve earnings
derived from
tax-exempt
interest

•This proposal was made by the industry and the Treasury madeno objections to its acceptance.
b.

Note:




Cancellable accident Same as
and health business life
business

Add 3-1 /k per- Not yet
acted on
cent of reserves on cancellable accident and health
business; unearned premium
reserve to be
not less than
25 percent of
annual premiums written

(l) Treasury originally proposed that cancellable health and
accident business be segregated and treated like insurance other
than life. Modified proposal was suggested by industry and
accepted by Treasury,

- 21 Present
lav
H.

Treasury
proposal

Committee
action

Insurance companies Continued
(2) Treasury recommended that non-cancellable health and
accident reserves be included with life reserves in determining whether a company was a life insurance company.
(3) Treasury recommended that reserves of life insurance
companies be treated as borrowed capital for excess profits
tax purposes, and that the reserve earnings deduction be
treated like interest paid on the borrowed capital.
2. Mutual insurance companies
other than life
a. Exemptions

Section 101
(11) has the
effect of exempting practically all
mutual insurance companies other
than life

Exempt companies with
less than
$100,000 admitted assets
or less than
$50,000 net
income

Exempt companies with
less than
$100,000 admitted assets
or less than
$50,000 net
income

b.

The deduction
under section
207(c)(3) has
the effect of
eliminating
all preniuns
from the tax
base

Eliminate deduction under

Eliminate deduction under

Note:




Tax base

207(c)(3);

207(c)(3);

permit deduction for dividends paid to
policyholders
in excess of
investment
income available for the
payment of
dividends and
for amounts
added to stirplus apportioned to
policyholders

permit deduction for dividends paid to
policyholders
in excess of
investment
income available for the
payment of
dividends and
for amounts
added to surplus apportioned
to policyholders

Treasury recommended that unearned premium reserves of both
mutual and stock insurance companies other than life be included as borrowed capital for excess profits tax purposes.
Ho'adjustment is ,to be made on income because there is no
corresponding explicit interest payment.

- 22 Present
lav

Treasury
proposal

Committee
action

(l) Life insurance

Uo tax

Stamp tax at
rate of
1 percent

Stamp tax at
rate of
1 percent

(2)

Surety and fidelity
bonds, and certain
other types of
casualty income

No tax

Stamp tax
at rate of
4 percent

Stamp tax
at rate of
k percent

(3)

Reinsurance

No tax

Stamp tax
at rate of
1 percent

Stamp tax
at rate of
1 percent

(4) Other insurance

Stamp tax at
rate of k percent

Stamp tax at
rate of
k percent

Stamp tax at
rate of
k percent

(l) Life insurance

Taxed on share
of net income
from all
sources which
reserves on
United States
policies bear
to total reserve

Tax on basis
of United
States business

Tax on basis
of United
States business

(2)

Taxed on United
States business

Tax; on
Tax> on
United States United States
business
business

3. Poreign insurance
a#

b.

Policies not signed or
countersigned in United
States by an officer or
agent of the insurer

Policies signed or
countersigned (companies doing business in the United
States)




Insurance other
than life

- 23 I*

Inventory reserves

The Treasury proposed that taxpayers be permitted to set up reserves against
future inventory losses through price declines, these reserves to be deductible in
computing income and excess profits tax* The Committee accepted the inventory reserve proposal in principle, the provision to be included in the draft if the technical drafting details can be worked out within the time available. (A separate
mimeograph outlining the proposal is available.)




- 2k J.

Check list of technical and administrative amendments tentatively acted upon
"by the Committee on Ways and Means
Hot approved

Income tax amendments
Treatment of pre-March 1* 1913t earnings and profits.
Basis of assets acquired from a decedent for capital gain and loss purposes.
Estate and gift tax amendments
Limitation on deductibility of charitable bequests.
Deferred until later legislation
Income tax amendments
Charitable organization engaged in trade or business
Tentatively approved
Income tax amendments
Taxation of mutual investment companies.
Pension trusts and other retirement plans.
Deductibility of investment expenses (Higgins case).
Treatment of income accruing at date of decedent's death (Bnright case).
Alimony.
Annuity trusts.
Amortization of bond premium.
Treatment of nonbusiness bad debts.
Elimination of charge-off requirements for bad-debt deduction.
Longer statute of limitations for bad debts and worthless stock losses.
Treatment of recoveries of bad debts and previously paid taxes.
Elimination of interim report requirement under last-in first-out
inventory section.
Treatment of improvements by lessee.
Treatment of interest on money borrowed to carry paid-up life insurance.
Extension of 5~ye&r amortization provision to individuals and partnerships, and
to facilities constructed after January 1, 19^0, and before June 10, 19^0.
Personal holding company tax relief to deficit corporations, and allied problems.
Undistributed profits tax relief to deficit corporations.
Eliminating loan and investment companies from taxation under the personal holding company tax.
Supplement R




- 25 Tentatively approved - Continued
Income tax amendments - Continued
Treatment of involuntary conversion problems.
Revisions in method of taxing income from sources without the United States,
Revision of section 107 dealing with compensation for services rendered over
several years
36 months and SO percent.
General procedural relief provision for taxpayers in combat zone or in enemy
territories.
Modifications in the statute of limitations on refunds.
Reciprocal exemption to employees of the Philippine Government residing in the
United States.
Treatment of income placed upon an annual basis,
Modification in treatment of nonresident aliens as respects requirement of office or place of business and definition of commodities.
Treatment of suits against Collectors of Internal Revenue.
Estate and gift tax matters
Treatment of renounced legacies.
Clarification of credit for property previously taxed.
Deduction for charitable pledges.
Disallowance of claims in excess of the gross estate.
Life insurance for the purposes of the estate tax.
Powers of appointment.
Community property for Federal estate tax purposes.
Reversal of gift tax and State death tax credits.
Excess-profits tax
Revision of Supplement A.
Revision of section 751Revision of treatment of liquidations under invested capital credit.
Revision of treatment of earnings and profits on certain reorganizations.
Clarification of computation of basis of property paid in for stock.
Clarification of method of computing deficit under average earnings credit.
Note:




In addition to the above amendments, suggested by the Treasury,
the Committee voted to extend the applicability of section 22 (a) (9),
relating to discharge c£ indebtedness, for 3 years, to 19^5«
and to change the name of the "Board of Tax Appeals" to the
"Court of Tax Appeals."

Table lb
Comparison of individual surtax rate schedule
under present law, Treasury proposal, and
Ways and Means Committee decision

.5
1
1.5
2
3
if
6
8
10
12
l4
16
18
20
22
26
32
38

ik
50
60
TO 80
90
100
150
200
250
300
4oo
500
750
1,000
2,000
5,000 and

Total surtax cumulative

Bracket rate

Surtax net
income
(000)

•5

1
1.5
2
3
4
6
8
10
12
16
18
20
22
26
32
38
44
50
60
70
80
90
100
150
200
250
300
4oo
500
75 0
1,000
2,000
5,000
over

6$
6
6
6
9
9
13
17
21
25
29
32
35
38
4i
44
50
53
55
57
59
61
63
64
65
66
67
69
71
72
73
7^
75
76
77

12$
15
18
20
22
24
27
30
3^
38
42
1*5
48
51
5*
57
60
64
68
72
76
78
80
82
84
86
86
86
86
86
86
86
86
86
86
86

12$
12
12
12
15
15
19
23
27
31
35
39
42
48
51
5^
57
60
62
65
68
71
74
76
78
80
81
81
81
81
81
SI
81
81
SI

Treasury Department, Division of Tax Research




Present
law

Present Treasury]Ways and
proposal \ Means
law

$

30
60
90
120
210
300
560
900
1,320
1,820
2,400
3,o4o
3.7^
4,500
5,320
7,080
9,900
12,900
16,080
19,380
25,080
30 ,980
37,080
43,380
49,780
82,280
115,280
148,780
183,280
254,280
326,280
508,780
693.780
1,443,730
3,723,780
-

Ways and
Means

Treasury
proposal

$

60
135
225
325
545
785
1,325
1,925
2,605
3,365
4,205
5,105
6,065
7,085
8,165
10,445
14,045
17,885
21,965
26,285
33,885
41,685
49,685
57,885
66,285
109,285
152,285
195,285
238,285
324,285
410,285
625,285
840,285
1,700,285
4,280,285
-

$

60
120
180
240
390
540
920
1,380
1,920
2,5^
3,24o
4,020
4,860
5,760
6,720
8,760
12,000
15,420
19,020
22,740
29,240
36,o4o
43,l4o
50,540
58,l4o
91,lkO

137,140
177,640
218,l4o
299,l4o
380,140
582,640
785,l4o
1,595.1^
4,025,l4o
June 20, 19^2

Table la# Amount of individual income tax and
effective rates under present law, Treasury proposal,
and Committee action
Single person - No dependents
Personal exemption:

Net income
before
personal
exemption l/

Present law
- $750
Treasury proposal - 600
Committee action - 500

Amount of tax
Present
law

Treasury
proposal

Effective rates
Committee
action

Present5 Treasury 5 Committee
law 5 proposal : action
•
:

Percent
;

500
600
700
800
900

1,000
1,200
1,500
2,000
2,500
3,000
4,000
5,000
6,000
8,000
10,000
15,000
20,000
25,000
50,000
100,000
500,000
1,000,000
5,000,000

—

—

-

-

-

$

3
11

21
40
69
117
165
221
347
483
649
1,031
1,493
2,994
4,929
7,224
20,882
53,214
345,654
733,139
3,923,124

Normal tax
rate (percent) 4

—

32
48
64
99
156
263
381
509
777
1,069
1,379
2,041
2,777
4>96l
7,555
10,509
27,829
69,757
429,745
879,745
4,479,745

14
32
49
67
84
119
171
258
345
447
651
875
1,119
1,667
2,295
4,221
6,621
9,381
25,316
63,646
409,621
844,621
4,324,621

4

6

16

1

1

—

—

—

—

•4

1.2
2.1
3.3
4.6
5.9
6.6
7.4
8.7
9.7
10,8
12.9
14.9
20.0
24.6
28.9
41.8
53.2
69.1
73.3
78.5

4

Percent

—

2.3
4.0
5.3
6.4
8.3
10.4
13.2
15.2
17.0
19.4
21.4
23.0
25.5
27.8
33.1
37.8
42.0
55.7
69.8
85.9
88.0
89.6

Percent
—

2.3
4.6

6.1
7.4
8.4
9.9
11.4
12.9
13.8
14.9
16.3
17.5
18.7
20.8
23.0
28.1
33.1
37.5
50.6
63.6
81.9
84.5
86.5

4

1/ Maximum earned income assumed for purposes of the earned income credit
under the present law and the Committee action.




6

Table lb
Amount of individual income tax and effective
rate? under present law, Treasury proposal, and
Committee action
Harried person - No dependents
Personal exemption:

Net income
before
personal
exemption 1/

Present law
- $1,500
Treasury proposal - 1,200
Committee action - 1,200

Amount of tax
Present * Treasury
law
'
• proposal

Committee
action

Effective rate
Present : Treasury :
:
;
law
« proposal •
- -

Percent
1,200
1,300
i,Uoo
1 , 5 00
1,600
1,800
2,000
2,500
3,ooo
H,000
5,000
6,000
8,000
10,000
15,000
20,000
25,000
50,000
100,000
500,000
1,000,000
5,000,000

6,86k
20.U39
52,704
3^5,084
732,55^
3,922,524

Normal tax
rate (percent

b

l/

—
—

-

$

6
23
U2
90
138
2U9
375
521
273
1,305
2,739

-

$

12
16 $
28
32
us
45
6k
62
99
97
132
137
2kl
219
306
357
501+
613
889
70s
944
1,193
1,464
1,837
2,064
2,5^9
4,673
3,914
6,26k
7,225
8,982
10.1U3
24,840
27,373
63,072
69,229
U29.205
409,012
S44.012
879.205
4,479,205 4 , 3 2 4 , 0 1 2

b

6

Percent

-

*

Committee
action
-

Percent

-

-

o.4
1.3
2.1
3.6
k.6
6.2
7.5
8.7
10.9
13.1
IS.3
23.1
27.5
Ho.9
52.7
69.0
73.3
78.5

1.2
2.3
3.2
4.0
5.5
6.9
9.6
11.9
15.3
17.8
19.9
23.0
25.5
31.2
36.1
ko.6
5M
69.2
85.s
87.9
89.6

0.9
2.0
3.0
3.9
5.4
6.6
8.8
10.2
12.6
14.2
15.7
IS.3
20.6
26.1
31.3
35.9
49.7
63.1
81.8
84,4
86.5

H

b

6

—

Maximum earned income assumed for purposes of the earned income credit under
the present law and the Committee action.




Table Id. Amount of individual income tax and effective rates
under present law, Treasury proposal, and Committee action
Married person - two dependents
Personal exemption: Present law
- $1,500
Treasury proposal - 1,200
Committee action - 1,200
Dependent credit:

Net income
before
personal
exemption 1/

1,800
1,900
2,000
2,100
2,200
2,300
2,1*00
2,500
3,ooo
Moo
5,000
6,ooo
8,000
10,000
15,000
20,000
25,000
50,000
100,000
500,000
1,000,000
5,000,000

Effective rate

Amount of tax
•

Present
law

;

-

$

—

-

6
12
58
151+
271
397
717
1,117
2,1+75
^,287
6,1+80
19,967
52,160
3^,1+76
731,930
3 , 9 2 1 , 88i+

k

Committee
action

Percent

Percent

Percent

-

16

-

-

-

-

64
80
99
118
219
>+57
721
1,007
1.633
2,321
>+,397
6,895
9,777
26.917
68,701
1+28,665
878,665
i+, 1+78,665

1+

Treasury
proposal

-

}
ks

—

Present
law

-

2

-

$

Committee
action

Treasury^ proposal

-

Normal tax
rate (percent)
1/

Present law
- $ HOO
Treasury proposal 30°
Committee action 400

$

12
21+
1+0
58
75
162
336
51+0
71+U
1,232
1,800
3,586
5,856
8,526
21+.296
62,1+16
1+08,316
Sl+3,316
^,323,316

6

—
—
—

0.3
0.5
1.9
3.9
5.*
6.6
9.0
11.2
16.5
21.1+
25.9
39.9
52.2
68.9
73.2
78.1+

4

-

0.8
1.6
2.3
2.9
3.5
i+.l
7.3
11.1+
1I+.1+
16.8
20.1+
23.2
29.3
3^.5
39.1
53.8
68.7
85.7
87.9
89.6

4

—
-

-

0.6
l.l
1.7
2.1+
3.0
8.1+
10.8
12.U
15.!+
18.0
23.9
29.3
3^.1
1+8.6
62.1+
81.7
84.3
86.5

6

Maximum earned income assumed for purposes of the earned income credit under
the present law and Committee action.




Table lb
Con^arison of estate tax rate schedule
under present law and proposal

Net estate after;
Bracket rate
specific exerap-: Present :
tion 1/
: law 2/ ; Proposal
:
($0007
:
Under $5
5 10 15 20 30 40 50 -

6o -

70 100 -

150 -

200 -

250
300
350
4oo
450
500
600
700
goo
900

-

-

-

1,000 -

1,500 -

2,000 -

10
15
20
30
Ho
50
60
70
100

150

200
250
300
350

Uoo
1+50
500
600
700
800

900

1,000
1,500
2,000
2,500

2,500 - 3,000
3,000 - 4,000
4,000 - 5,000
5,000 - 6,000
6,000 - 7,000
7,000 - 3,000
S,000 - 9,000
9,000 - 10,000
10,000 and over

31
7
11
11
14
IS
22

25
28
28
30
30
30
32
32
32
32
32
35
35
35-37
37
37

39-U2
45
49
53

56-59
63
67
70
73
76
76
77

8$
12
15
18
22
26
30
33
36
40
44
46
48

50

52
54
56
58
60
62
64

66

68
70
72
75
76
78
79
80
80
80
80

80

Total estate tax
cumulative
Present law

$
1
1
3
4
7
9
12
20
35

50
65

81
97
113

129

145
180
215
251
288
325
528
753
998

1,263

1,838
2,468
3,138
3,838
4,568
5,328
6,088

150
500
050
600
000
800
000
500
300
700
700
700
700
700
700
700
700
700

:
:$

7 00

700
700
700
700
200
200
200
200
200
200
200
200
200
200
200

80

Proposal
400
1,000
1,750
2,650
4,850
7,450
10*450
13,750
17,350
29,350
51,350
74,350
98,350
123,350

149,350
176,350

204,350
233,350

293,350

355,350

419,350

485,350
553,350

903,350

1,263,350
1.638,350

2,018,350

2,798,350
3,588,350
4,388,350
5,188,350
5.988,350
6,788,350
7.588,350
-

1/ A specific exemption of $U0,000 and a life insurance exclusion
of $H0f000 are allowed by the present law. The proposal would allow
a single specific exemption of $60,000 but no life insurance exclusion.
2/ Present rates not increased by Ways and Means Committee.