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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<tt* 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.