Union Calendar No.

116
73D CoNGnEISS d Se&sionf
HOUSE OF REPRESENTATIVES j 1

REPO No. 704

THE REVENUE BILL OF 1934

FEBRUARY 12, 1934.-Committed to the Vommittee of the Whole House on the
state of the Union and ordered to be printed

Mr. DOUGHTON of North Carolina, from the Committee on Ways and Means, submitted the following

REPORT
[To accompany H.R. 78351

The Committee on Ways and Means, to which was referred the bill (H.R. 7835) to provide revenue, equalize taxation, and for other purposes, having had the same under consideration, reports itback to the House without amendment and recommends that the bill do pass. The primary purpose of the bill is to increase the revenue by preventing tax avoidance. This is accomplished by a number of changes in existing law. In addition to these changes for the prevention of tax avoidance or tax postponement, some rearrangement of the tax rate structure is provided for, which it is believed distributes the tax burden more equitably. A somewhat lower tax is imposed on earned income and a somewhat higher tax on dividends and partially tax-exempt interest. All these changes in existing law have been the result of careful and mature consideration. A subcommittee of your Committee on Ways and Means has been engaged in studying tax avoidance and the means of preventing such avoidance since last June. Its members have been in consultation with representatives of the Treasury Department, the staff of the Joint Committee on Internal Revenue Taxation, and the Legislative Counsel's Office. The subcommittee on December 4, 1933, rendered a report on the subject to your committee. On December 15, the Secretary of the Treasurpy appeared before the committee and gave his views on the propose changes. He stated:
The changes now under consideration by the committee are specifically designed to prevent avoidance of the income tax, and thereby to increase the revenues therefrom. The Treasury Department is in hearty accord with this objective. * * *

In regard to the details of the proposals made by the subcommittee, the Secretary proposed certain modifications. The committee has

Table: Table I.- Sum ary of receipts and expenditures for the fiscal year 193 , on the basis of daily Treasury statements (unrevised), and estimated receipts and expenditures for the fiscal years 1934 and 1935

Table: Table I .- Detail of receipts for the fiscal year 193 , on the basis of daily Treasury statements (unrevised), and estimated receipts for the fiscal years 1934 and 1935

THEE REVENUE BILL OF 19 3 4

also had the advantage of the suggestions and cricitisms of the public in regard to the proposals, as hearings were held thereon from December 15 to December-21, 1933, and from January 9 to January 11, 1934. Your committee has carefully considered the subcommittee recommendations, the suggestions of the Secretary of the Treasury, and the testimony of the witnesses appearing at the public hearings. The bill now reported has been prepared on the merits of each question after giving due consideration to the facts, recommendations, Anad suggestions before the committee. Before describing the changes proposed in the bill, it is proper to state certain data in connection with the state of the finances showing the vital need of the Government for the additional revenue which should be produced by this bill. Estimates of such additional revenue will also be given. The following table (table I) shows in condensed form the actual receipts and expenditures of the Government for the fiscal year ending June 30, 1933, and the estimated receipts and expenditures for the fiscal years 1934 and 1935. The data is taken from the message of the President transmitting the Budget, from the Budget statements, and from the annual report of the Secretary of the Treasury.
TABLE I.-Sumnmnary of receipts and expenditures for the fiscal year 1933, on the basis of daily Treasury statements (unrevised), and estimated receipts and expenditures for the fiscal years 1934 and 1936
1933, actual
I-v--

1934, estimated 1935, estimated

$3, 333, 100,000 460, 000, 000 175, 565, 479 3,974, 605, 479

Receipts: $1, 604, 423, 956. 66 $2, 63, 600, 000 Internal revenue399,000, 000 250,750, 251. 27 Customs. 197, 338, 750 224, 522, 533. 9 Miscellaneous 2,079, 696, 741. 76 3, 259, 038, 756 Total receipts. Expenditures (exclusive of debt retirement): 3,404, 310, 658. 88 25M30, 720, 267 General .14,800, 000 . Agricultural Adjustment Administration 1,277, 038,167.73 6, 357, 486, 700 Emergency. 4,681,348,826. 61 9, 403,006, 967 Total (as per Budget). Additional expenditures as recommended by the 1, 166,000,000 PresidentTotal expenditures ---- --------- 4,681,348,826. 61 1569,006 , 967 Excess of expenditures over receipts (exclusive 2,601,652,084. 85 7, 309, 0d8, 211 of debt retirement)
----------------

760, 744, 000 723, 286, 500 3,960, 798, 700

2,486, 768, 200

2,000,000, 000
5 6,960, 798, 700

1,986,133, 221

The following table (table II) contains a more detailed statement of the receipts summarized in table I:
TABLE II.-Detail of receipts for the fiscal year 1933, on the basis of daily Treasury statements (unrevised), and estimated receipts for the fiscal years 1934 and 1935
Receipts General and special funds combined Internal Revenue: Income taxes -Miscellaneous internal revenue: Estate tax Gift tax. ---- .-------------------------... Spirits and fermented liquors-. . Tobacco manufactures . .. Dues of clubs (athletic, social, and sporting) -J Admission to theaters, concerts, cabarets, etc...I Stamp taxes, including playing cards. . Oleomargarine, process butter, eto...
1933, actual

jio34, estirnatedi1935, estimated

$74f, 20, 444. 95

v --

$84, 000, 000 1 $1, 265, 000, 000

--

Jo_

29,693,061.89 4, 616, 1.96 43, 174,316.92 402, 739,059. 25 6,679 260.95 14,520,512.30 57, 338, 202.47 1,862 702.42

80,000,060

2,000, o0

243 900,000 423 ,000,060

6, 000,000

15, 600, 00( 72, 400, 000 1, b0o, o

2, 000, (00 310,800,000 446,000,000 7,000, 000

117,000, 000

Q2,800, 000 1,500,000

17,200,000

THE REVENUE BILL OF 1934 4

TABLzII.-Detail of receipt. for the fiscal year 1988, -on the basi, of daily Treasury statements (unrevised), and estimated receipt. for the fiscal years 1984 and 1985Continued
Receipts
. ~

1933, actual 1934, hdimat ' etimated 1M, I ~~I I

~

Automobile trucks. . Other asitomobiles and motorcycles . Parts or accessories for automobiles Radio sets, phonograph records, etcMechanical refrigerators. Sporting goods, cameras and lenses Firearms, shells, and cartridges Candy and chewing gum Soft drinks -. Telephone telegraph, radio, and cable facilities, leased wires, etc ------ ..---. --. Transportation of oil by pipe line Leases of safe-deposit boxes .. Checks, drafts, or orders for the payment of moxiey -.--.National Industrial Recovery Act taxes I 'rotal, miscellaneous internal revenue 858, 217, 611.81 ------. Processing tax on farm products (special fund)Total, Internal revenue 1,604,423,956.56 Customs (excluding tonnage tax): Distilled spirits arid fermented liquors . .. . 250, 760, 251.27 All other I-Total, customs -250, 760,251.27 Misoellaneous receipts: Proceeds of Government-owned securities: From foreign obligations. 98,757,726.20 . 32,090,746. 50 From all other obligations 23, 267,600. 34 Panama Canal tolls, etc. 70,4), 660.80 Other miscellaneous. 224, 622, 33. 93 Total, mi soellaneous --Grand total, receipts ...-- :2,07,898,741. 76
. ... -

General and special funds combined-Continued Internal Revenue: Income taxes-Continued. Miscellaneouis internal revenue-Cont Inued. Miscellaneous Including prohibition and narcotic collections, delinquent taxes under repealed law etcLubricating oils ..-.Brewer's wort, malt, grape concentrates, etc --Matches--Gasoline -Electrical energy .Tires and inner tubes. Toilet preparations, etc. Articles muade of fur Jewelry (watches, clocks, opera and field glasses, etc. )--------------

--

$1, 283, 83890 15, 232, 924, 81 6,70, 904 63 2, 871, M 13 120, 099, 103. 44 20,502, 739.33 13,980 084 62 9 102539.37 7,4, 274.34 3,068,494.24 1,864,040.02 11, 573, 922 08 3,097, 276.24 2, 206,763.39 2,111, 88.70 2, 871,882 37 932,221.91 3,650,227.853,68,447.33 13,64, 75. 17 7, 467, 297 50 2,365,040.83 37,450,493.49

22,90 000 5,400,000 7,000,000 145, 000,000 3, 900,000 25, 500, 000 13,800 000

$41000,000

*1.000,000 25 OM 000
78 00,000

33,500, (MX

5, 2000 1100000

11, i00,0
4

4, 800, 000 3, 200,000 300, 000 4, 200 000 2, 800,000 4,800, 000 3, 700, 000

1,800,900 14,500,000 680000 3,8W,00,0( 34, 400,000

4 4,00,000 OM, ODo 17,200,0%0 10,000,000

2S,000
153,700,000 1, 38, 6 000 403,000,000 2, C3,000, 000
310,000,000

2W,5000

5,300,000 3,400,00 5,700,000 4,300,000 3,100, 000

el100,000 0,100,000

338,000000

,80W,000 44,000,000 80,000,000

21,600, 000 10,000,000

1, 62, 100,000 u4,000, 000 3,333,100,000

89, so, 000,000

399, 000,000 20,000,000 95,439, 315 25,672,424

84,000,000 82, 000, O0 48,00, 000

,*

, 227, 017 197,338, 758 3,259,938, 756

09,952,063
I. =

79,95, 416 26,601,000

_

(4)

175,585,479 3,974,686,479

I Estimated at 1 cent per gallon; i.e., exclusive of 3 cent included under the National Industrial Recovery Act taxes, 2 Receipts for the temporary revenue provisions of the National Industrial Recovery Act are estimated for the periods prior to their termination following the proclamation on Dec. 5, 1933, of repeal of the eighteenth amendment. duties levied by see. 601 of Revenue Act of 1932 (47 Stat. 281). 'Includes receipts from 4 The total amounts owing to the United States on account of obligations of foreign governments are $328,000,000 Bad $3,000,000 for the fiscal years 1934 and 1935, respectively. To the extent that receipts from foreign governments exceed amounts included in the estimates, tbere will be a corresponding increai in total receipts.

It should be observed that the deficits shown in table I do not include the statutory debt retirements, chiefly for the sinking fund amounting to $461,604,800 in the fiscal year 1933 and to estimated sums of $488,171,500 and $525,763,800 m the fiscal years 1934 and

1935, respectively.

Table: Description of change and estimated ad itional an ual revenue1

4.,

THo EIVENUE BILL

OF

1934

ItJis encouraging to note,.:however, that the total receipts estimated for the fiscal years 1934 and 1935 are substantially above the actual receipts -for the fiscal year 1933. Receipts for 1934 are estimated to exceed those of 1933 by $1,180,242,014, or nearly 57 percent, while those for 1935 are estimated to exceed those of 1933 by $1,894,968,737, or over 91 percent. Moreover, these estimated receipts do not take into account the additional revenues which can be expected from the Liquor Taxing Act of 1934, or from the provisions of this bill. There is further cause for encouragement to be found in the fact that total receipts are estimated to exceed by far the general or ordinary expenditures of the Government for both the fiscal years 1934 and 1935. In other words, the large deficit shown in table I for 1934 fandsthe more moderate deficit- for 1935 are in each case entirely due to the emergency expenditures of the Government for projects designed to bring about the early return of Nation-wide prosperity. For the fiscal year 1934, receipts (including processing taxes), are estimated to exceed general or ordinary expenditures (excluding- expenditures of the Agricultural Adjustment Administration), by $729,218,489 and for the fiscal year 1935 by $1,487,897,279. Your committee is of the opinion that it is of the utmost importance to reduce the deficits estimated for the fiscal years 1934 and 1935 as much as possible and to attain the goal of a balanced Budget in 1936. It will also be imperative to begin a program of retirement of the public debt as soon as possible. The interest charges on the debt are estimated at $824,349,000 for the fiscal year 1935. This is the largest single item of expenditure in the Budget for that year, and the Government cannot be operated at a low cost until the public debt is reduced. Moreover, the President indicated to the Congress in his message transmitting the Budget that he expected additional annual revenues over and above what was estimated in the Budget. He estimated $50,000,000 additional from increased taxes on liquors. That sum or more has already been provided for by the Liquor Taxing Act of 1934. But he also expects $150,000,000 from a revision of the revenue laws goveig the income, estate, and miscellaneous excise taxes. That additional revenue, in the opinion of your committee, is fully provided for in this bill and in the administrative methods which the Treasury Detpartment proposes to adopt in carving out its provisions. The additional revenue which will be obtained in a full year of operation of the proposed bill is estimated as follows:
Description of change and estimated additional annual revenue ' 1) Changes in tax-rate structure-$28, 000, 000 2) Admnistration of depreciation allowances.- 85,000,000 3) Capital gains and losses --- 35,000,000 4) Personal holding companies (directly or indirectly) - -25, 000, 000 0(0 56 Exchanges and reorganizations Dividends 6, -000,000 t6} Foreign taxout of pre-March 1, 1913, earnings -10, 000, 000 credit 7S 5, 000, 8) Consolidated returns --20,000,000 9) Partnerships --------------------------- 5, 000 10) Administrative changes in gasoline- and lubricating-oil taxes- 20, 000, 000 (11) Miscellaneous provisions24, 000,000 Totl additional revenue258,000,000 changes are dcfhult as the yield depends on a numsuch IRevenue the most important of which it ber of factorsestimates in respect to technical future business profits. However, it is believed that the total
-

amount shown coIsratie if thereis a reasonable Inree In business Activity.

a I~RUVUT B"ILL 0P 1:984

'Thetreate part of the additioni:lr-evei'ue hoped 'for'will come ofri the revision or administration of the income-tax a wtt h WAin aY will prevent tax avoidance. here the- additional revenue comes from rate changes, it results from moderate increases in thiet burden on those deemed most able to'pay. Whilefall! the changes proposed will be described in the latter part of athisreport in order, a general description of the major changes'proposed will firstt be:given.
(1) TAX RATE BTRUCOTUIRI

(a) Normal tax.-Sectio'n 11 of the Revenue Act of 1932 provides for a normal tax equal to 4 percent of the first $4,000 of the net income in excess of the credits provided in section 25, plus 8 percent of the balance over $4,000. Your committee recommends the use of one normal rate of 4 percent and the adjustment of the surtax rates so that the tax burden on incomes other than dividends and partially tax-exempt interest will remain practically unchanged. The principal -advantages of this change are (1) simplification; (2) increased tax on dividends; and (3) increased tax on partially tax-exempt interest. Our first revenue acts provided for one normal rate and graduated surtax rates. There appears to be no good reason for having both a graduated normal tax and a graduated surtax, since the principle of ability to pay can be adequately taken care of by the graduated surtax alone. Certainly, it is much simpler to have one normal rate of tax. Through adjustment of surtax rates, this change can be made without appreciably decreasing the revenue. It is believed that dividends may be properly subjected to a somewhat greater income tax. Under the Revenue Act of 1932 a single man with a net income from dividends of $50,000 pays a tax of $4,960, while a single man with a net income from salary of $50,000 pays a tax of $8,720. In such a case the man with dividend income, under the recommendation of your committee, will pay a tax of $7,170. In other words, instead of paying $3,760 less tax than the salaried man, he will pay only $1,928 less tax. This is due to the fact that dividends are now subject to an 8-percent exemption from income tax, while under the proposal they will only be subject to a 4-percent exemption. It is the opinion of your committee that this increased tax on dividends can well be borne. In the case of partially taxexempt income a similar result is obtained from the single 4-percent normal rate, since this income is also exempt from normal tax. (b) Surtax.-Section 12 of the Revenue Act of 1932 provides for surtax rates starting at 1 percent on net incomes of more than $6 000 and reaching 55 percent on net incomes of more than $1,000,000. Fifty-three different rate brackets are provided for in this act. In view of the change recommended in the normal rates, your committee recommends changes in these surtax rates to maintain approximately the same tax on ordinary income as at present, and your committee deems it wise to recommend further the reduction in the number of surtax brackets from 53 to 28 for the purpose of simplfication, since the larger number of brackets has been found to be unnecessary. (c) Personal exemption and credits for dependents.-Under section 25 of the Revenue Act of 1932, there are allowed as credits against net income for normal tax (but not for surtax) purposes, dividen s,

Table: Comparison of present and proposed tax

L TH3 AYEIVBIIE .JL01 1934

principle that moderate earned incomes should bear a somewhat lower tax than investment incomes of equal size, changed the form of the relief from a credit against the tax to a credit against net income. The Senate under the demands for more revenue struck out earned income relief entirely. Your committee is of the opinion that a small relief on earned incomes is justified at this time in order that the tax on various classes of income may be proportionate to the ability to pay of the taxpayer having such income. The form of relief proposed in the revenue bill of 1932 as passed by the House is preferred on account of its much greater simplicity. Accordingly, it is proposed to allow a credit against net income subject to normal tax equal to 10 percent of the amount of the taxpayer's earned income. The credit is very substantially limited, however, by providing that earned income in excess of $8,000 shall not be recognized as earned, and by providing that the earned income credit shall not exceed 10 percent of the taxpayer's net income. On the other hand, amounts of net income up to $3,000 are recognized as earned, whether earned or not, for administrative reasons. (e) Effet of rate structure changes.-The changes recommended in paragraphs (a), (b), (c), and (d), above, are interrelated, and it is now necessary to point out the combined result of these changes. The exact results are shown in two tables, which set forth the present and proposed taxes on various amounts and kinds of net income in the case of tooth single and married persons.
Comparison of present and proposed tax
SINGLE MAN
If all earned Income Net inoome
Present law

inte on obligations of the United States, personal exemption, and credits for dependents. To carry out the policy of retaining practically the same tax burden on ordinary income, it is necessary, in connection with the proposed plan to allow the personal exemption and credits for dependents as an offset against surtax as well as normal tax. The personal exemption and credits for dependents would appear to be in lieu of deductions for necessary living expenses. They may well apply to both taxes as do all other ordinary deductions. (d) Earned income credit-The Revenue Acts of 1924, 1926, and 1928 all contained a 25-percent tax credit for earned income. The revenue bill of 1932 as passed by the House, while retaining the

IItf half earned Io I and half dividends

Present
ros Proposed
8 18 28 38 48 108 166 224 282 360

All dividends S
Present law

Proposed

Proposed
0 0 0 0 0 0 0 0 0 0 0 40 80 12t 16( 21( 320

$32 .. $2,000. ,$40 68 80 $3,000 .... . 86 $3,600-10 .. 8..... .. 104 000 .... ................... ,120 _ 122 , 140 ,5 $6,000140 '160 240 216 $6,000 .... 292 380 7,000 368 420 $8,.0.0..0 .448 r000.---------610 1,000 .60 638 728 12,000 .-800 938 14,001,020 ..-.0..
........................
.

..

20 30 40 60 00 80 110 140 170 200 320 40

$0

$0

$0

$0

10 20
40 80 140
30

4-96

682

40

$16.00. .
$16,000-$2
0,000
-

18,000 ....................
.---

$25,0 00....

4---F
TM
SINGLE

wVE'UE -BflL

1F.

i9$4

7n.
Al dividends
Present law

Comparison of prosnt and.proposed tax-Continued

MAN-Continued
If half eared income and halt dividends
Present law
800 1,000 1, 640
*620

If all earned income

Net income

Present law

Proposed

Proposed
$848

Proposed
$800 780 1,000 1,720 58
7, 170

----

--

$1,2600

1,620
1,800

----

--

.--

--

--

2,640
6,920

$1, 188 1,428 1, 728 2, 48

3,600

3, 78

1, 068 1,328 148

108
6,348 8,008

$20.
820

$60 000.... $ 00,000

---

-....-....-.-.-..
--

6,148
9, 098
68

--

$70,000

....

$100,000 $200,000 $500,000. $1,000,000

$80,000................... ..

.................... .................

30,220 86,720 20, 720

671, 220

12, 020 15,820 20, 120

8,720

12,

20, 948
284,608
572,088

16,498

31,168 87, W8

2,220'
243,720
78,720

9,020 13,020 16,l92

2,400 4,820 8, 720,

11, 38
15,008

5l1,220

264, 608 652,088

83,638

29,168

19,348

440 1,444) 2 960 4,9 7,460 10,460 13,960 22,460 70,900 223,960 491,40

4,620

13,770 17 820 27,240 79,710 244,68A 532,160

10,280

MARRIED MAN, NO

DEPENDENTS
$0 0 0 0 0 20 60 .. 80 1 10 140 220 340 600 680 880

$3,000 _, 00,.-'----0 $20 '-'-40 ..-.-.-. .-_-. $3,500 -00 $4,000 500. 80 $4, ..... ..-.-.-. _ 100 $5 _-----------------,000 140 00.... $6,000 0 ... 210 $7,000 -.... 300 -..--------------.-$8,000390 -....--------.$9,000. $10,000-4. 0 $12 000-8 .0.---900 $14,000-_---1,140 $16,000 --------------,-----1,400 $18,000 1,080 $'20,000$25,000. -2- 20 ..3,480 $30,000 800 $40,0008,600 $50,000-oo. 11,900 $60,00015, 700 $70,000 ---------------20, 000 $80,0 $100,000 -8-30,100 80,600 $200,000 ..-.. 203, 000 $500,000 -.....-. b71, $1,000,000-6 100
.. --

..........

80 116 172 .... 248 328 408 683 778 993 1,228 1,498 2,348 3, 378 6,743

26 44 62

$8

16,88

8,633 12,003

20, 258 30,358

16,800

203,708 671,168
fees,

86,783

12, 900 26,100

78,6(0

2,280 4,200 6,600 W 9,600

1,f20

7,633 10,803
82,783

1,098 1, 848 2,778 4,943

0 8 46 104 162 220 351 602 673 868

$0 0 0 0

$0 0 0 0 0 0 10 20 30 40
80

*0 0 0 0

18, 8 28,368

14,468

243,600

531, 100
other

253,7C8 561,168

223,960 491,460

10,460 13,960 22,460 70,960

4,90 7,460

880 1,440 2,
90

220 320 440

140

60 100 ,236r
140

0 0 20

486 m4) 830 1,480 2,310 4, 275 6,768 9,735 13,200 17, 190 26 490 78,916 243,840 531. 29
services

3.50

Earned Income

meanss

wages, salaries, professional

corporations.

or

actually rendered.

2 Dividends from

tax-exempt

stock of domestic Government bonds.

Same

treatment

Is

Interest

from

partially

An examination of these two tables reveals that the tax on ordinary income is not changed to a consequential extent, except that very moderate reduction in tax is given to taxpayers with small amounts of earned income. On the other hand, the tax on income derived dividends and partially tax-exempt Government bonds is substantially increased, although the tax on this class of income will still be materially less than on earned income of equal size. It believed this increase can well be borne both in the case of dividend income in the case of income frompartially tax-exempt securities. It is believed that the changes in the tax-rate structure of the come tax proposed by your committee will result in substantial tional revenue, and at the same time distribute the tax equtably.
a from

is

and

in-

addi-

burden more

Table: Depreciation taken on corporate returns

CRIB

BBVrgUs W"~ 01~d

1984

(2) DEPRUCIAitION Your committee and its subcommittee gave careful consideration to the question of depreciation allowances, Such deductions are of alarming size and show continuous increases as are shown by the following figures for corporations:
19241925 1926 -_--1927 -

Depreciwtion taken on corporate returns $3 598 916 546 $2,683 415,617 1928 3, 870,924, 234 2, 857, 710, 739 1929 3, 270, 429, 583 1930-3, 986, 208, 883 -- 4, 002, 508, 000 3, 346, 379 298 1931

The depreciation deduction in 1931 is larger than the total taxable net income of all corporations. In addition to the depreciation taken by corporations, the amount taken by individuals cannot be estimated at less than 1% to 2 billion dollars. The subcommittee came to the conclusion that in many instances the present allowances were excessive. Moreover, where composite rates of depreciation are used, it is administratively difficult to prevent allowances of more than 100 percent of the cost of the property. Although the subcommittee recognized that this problem could be more equitably handled by administrative action, nevertheless, in the absence of any definite assurances of this kind, they recommended an arbitrary reduction of 25 percent in the depreciation allowances for a 3-year period. Later your committee was advised by the Secretary of the Treasury of the plan for attacking this matter by administrative action. The plan proposed is completely set forth in the following communication from the Secretary to the chairman of your committee:
THE SECRETARY OF THE TREASURY, Washington, January 26, 1984. Eon. ROBERT L. DOUGHTON Chairman Committee on Ways and Means, House of Representatives, Washington, D.C. MY DEAR MR. CHAIRMAN: In connection with the consideration now being given by the Ways and Means Committee to the inclusion in the pending revenue bill of some provision limiting or restricting the amount of deductions that may be allowed for depreciation, I believe it important that your committee should be informed regarding the action now proposed by the Bureau of Internal Revenue with respect to that subject. Section 23 (k) of the Revenue Act of 1932 grants as a deduction "A reasonable allowance for the exhaustion, wear, and tear of property used in the trade or business, including a reasonable allowance for obsolescence." In interpreting this section, article 205 of Treasury Regulations 77 provides that: " While the burden of proof must rest upon the taxpayer to sustain the deduction taken by him, such deductions will not be disallowed unless shown by clear and convincing evidence to be unreasonable." Acting under these provisions and the corresponding provisions of prior acts and egulations, the Bureau has attempted to check the amount of depreciation deductions taken in income-tax returns by an investigation through its field officers of the records of taxpayers and by the preparation of detailed and often burdensome depreciation schedules which are ordinarily necsary before judging the reasonableness of the deduction. In proceeding in this manner the Bureau has been. handicapped in at least two important respects. First, the volume of this work has been such as to preclude the preparation of proper schedules in many cases Second the Bureau has been placed in the position of having to show by clear and convincing evidence that the taxpayer's claim was. unreasonable, a particularly difficult matter since the determination of the useful life of assets and the consequent rates of depreciation is largely within the taxpayer's experience. The Bureau has for several months had under consideration more effective mean of administering the depreciation provisions. This study has shown that

aI RW

UR I'B

Or'' 19 4

through past deprectn diductions mnsyi pyors.;hive,(ass iby its now known to exit built p reserves for deprction which are out of proportion to -the prior exhaustion, wear, and tear of their depreciable assets. I past mOthOQd are continued1 the amount representiAngthe bal of the sset ill be completely' recovered though depreci tob deductions bore the actual useful Ulif of the asets hstermlate4 :-- , 9;,-;..f''; ..;'.a'''!' ';' In order to overcome this condition the Bureau propose to reduce substantlpUy the deduction for depreciation with respect to many taxpayers In variou' industries, so that -for the remining life of the assets depreciation i11 -be In effect reduced to the etent tht it may have benexesive in prior years. It is intended that this end shall be accomplished, first, by requiring taxpayers to furnish the detailed schedules of deprecation (heretofore prepared by the Bureau), containing an the facts necessary to a proper determination of cepreation* second, by specifically requiring that all deductions for depreciation shall be limited to such amounts as may reasonably be considered necessary to recover during the remaining useful life of any depreciable asset the unrecovered basis of the asset; and, third, by amending the Treasury regulations to place the burden of sustaing tle deductions squarely upon the taxpayers so that it will no longer be necessary for the Bureau to show by clear and convincing evidence that the taxpayers' deductions are unreasonable. These changes will inverese the revenue substantially, and, although difficult to estimate records indicate that the amount of the increase In revenue will equal that whhihi would result from the proposal of the Ways and Means Committee. Although the studies of depreciation made- in the Bureau bear out the conclUsion of the Ways and Means Committee that as a whole'the deductions taken for depreciation in the past have been excessive when considered in the light of the facts now known to exist, it is the opinion of the present Bureau officials that the situation can be more equitably remedied through proper admlni trafive measures than through legislation which would arbitrarily reduce each and every taxpayer's depreciation allowance by a certain percentage, whether or not the allowance may have been excessive for past years. I concur in this opinion, and I therefore urge that the matter be rested on proper administration rather than on legislative action. Very truly yours, R. MORGENTXAlu, Jr., Secretary of the Treasury.

Your committee believes that the plan of the Secretary will be the best course to pursue. It will give greater equity and increase the revenue by as great an amount as the subcommittee plan. Consequently, no changes in the existing law are recommended. It should be observed that it is proposed not only to reduce the rates where they may be excessive, but also to reduce the allowance by spreading the unrecovered basis of any asset over the remaining useful life. This method of applying the depreciation rate to the cost of the asset reduced by depreciation previously allowed has long been used in Great Britain. In the opinion of your committee, it will automati.. cally effect large reductions in these allowances.
(8) CAPITAL GAINS AND LOSSES

Existing law provides in section 101 for a special treatment of the gains and losses resulting from the sale'of capital assets held over 2 years. The. tax on gains on such sales is limited to 12% percent, with a corresponding limitation in case of losses. In the case of assets held less than 2 years, the gains are taxed in full and the losses allowed in full except in the case of stocks and bonds, losses from which are limited under section 23 (r). Our present system has the following defects: Firt. It produces an unstable revenue-large receipts i pro perous years, low receipts in depression yer.

1le

mere increase monetaryvali;ie resulting-from the depreciation of the dollar instead of on a real increase in value.Third. Taxpayers take their losses within. the 2-year period and get full benefit therefrom, and delay taking gains until the 2-year period has expired, thereby reducing their taxes. Fourth. The relief afforded in the case of transactions of more than 2 years is inequitable. It gives relief only to the larger taxpayers with net incomes of over $16 000 Fifth. In some instances, normal business transactions are still prevented on account of the tax. Your committee has examined the British system which disregards these gains and losses for income-tax purposes. The stability of the British revenue over the last 11 years is in marked contrast to the instability of our own. In that period the maximum British revenue was only 35 percent above the minimum, while in our own case the percentage of variation was 280 percent. Your conmittee, however, has been unable to reach the conclusion that we should adopt the British system. It is deemed wiser to attempt a step in this direction without letting capital gains go entirely untaxed. Your committee recommends the following plan: First. To measure the gain or logs from the sale of property by an individual according to the length of time he has held the property, only the following percentages of the recognized gain or loss are taken into account for tax purposes: One hundred percent if the capital asset has been held for not more than 1 year; Eighty percent if the capital asset has been held for more than 1 year but not more than 2 years; Sixty percent if the capital asset has been held for more than 2 years but not more than 5 years; and Forty percent if the capital asset has been held for more than 5 years. Second. In the cases where the losses taken into account as above exceed the gains so taken into account, the excess losses are entirely disallowed. Third. In the case of corporations the graduated percentage reduction of gains and losses does not apply. However, capital losses sustained by corporations are allowed only to the extent of capital gains. Under the present law corporations are allowed to offset capital losses against ordinary income. Fourth. The plan outlined above is not made applicable, for obvious reasons, to stock in trade or property which is included in the taxpayer's inventory. It is believed that the adoption of this plan (see see. 117 of the bill) will result in much greater stability in revenue, will give all taxpayers equal treatment, will encourage normal business transactions, and wil yield substantially greater revenue. The method proposed is safe from a revenue standpoint, inasmuch as capital losses cannot be used to reduce ordinary come, while gains are taxed in full or in part in proportion to the time for which the property has been held. The existing method which has been in force since 1921 can be defended only on the ground of expediency.

TH'RZVEUBD ByL 0F 1984 Second:. In imany instances- the capital-gaiiisitax is imposed on the

THR RV"NURE ;BILLAOW 1934

i1b

(4) PERSONAL HOLDING COMPANIE

Perhaps the most prevalent form of tax avoidance practiced by individ~als with large incomes is the scheme of the "incorporated pocketbook." That is. an individual forms a corporation and exchanges for its stock his personal holdings in stock, bonds, or other income-producing property. By this means the income from the property pays corporation tax, but no surtax is paid by the individual If the income is not distributed. For instance, suppose a man has $1,000,000 annual income from ax underexistinglaw will be $571,100. Howtaxbl ever, if he forms a holding company to take title to the bonds and to receive the income therefrom, the only tax paid will be a corporate tax of $137,600 as long as there isno distribution of dividends. Thus. a tax saving of $433,600 has been effected.. It is true that section 104 of the existing income-tax law puts a 50percent penalty on this accumulation of profits to avoid surtaxes, but' nevertheless, there seems no doubt that this form of avoidance is still practiced to a large extent. By making partial distribution of profits and by showing some need for the accumulation of the remaining profits, the taxpayer makes it difficult to prove a purpose to avoid taxes. Your committee; therefore, recommends that the present section 104 be divided into two parts, one dealing with the personal holding company and the other with all other corporations which accumulate unreasonable surpluses. The part dealing with personal holding companies is new, while the present law has been retained with a few modifications to reach the other companies. (See secs. 102 and 103 of the bill.) In regard to personal holding companies, your committee recommends that they be defined as any corporation 80 percent of whose gross income for the taxable year is derived from rents, royalties, dividends, interest, annuities, and gains from the sale of stock or securities, and whose voting stock to the extent of more than 50 per. cent is owned by not more than five individuals at the close of the taxable year. In computing the number of individuals who own the majority of the voting stock of a corporation it is proposed to count as one all members of a family in the direct line as well as -the spouse and brothers and sisters. It is recommended that a tax of 35 percent be levied on the " undis. tributed adjusted net income" of such corporations. This undistributed adjusted net income is determined by adding to the net in. come of a corporation the amount of dividends received from other corporations and the amount of partially tax-exempt interest and by subtracting therefrom Federal income taxes paid, contributions or gifts not otherwise allowed for income-tax purposes, and actual losses from the sales or exchanges of capital assets to the extent to which they are disallowedd by the new provision of the bil limiting the deductibility of capital losses to the amount of the capital gains. From the result of this computation, which gives what is called the "adjusted net income'", there is to be subtracted an arbitrary allowance of 10 percent of the adjusted net income and the dividends paid to stockholders during the taxable year. The purposes of the two last-named deductions are (1) to allow such corporations a reason.

2P 2 T=

ABVBENUE :DL OF 1i34

able reserve for contingencien, aud (2). to preventthe additional tax from applying to sums actually distributed. Thus, a corporation .which falIls within this section, because of the nature of "its business and the number of its stockholders can always escape this tax by distributing to its stockholders at least 90 percent of its adjusted net income. The stockholder will, of course, be subject to the graduated surtaxes upon such distributions. Thus, the section should work-no real hardship upon any corporation' except one which is being used to reduce surtaxes upon its shareholders. The effect of this system recommended by your committee is to provde for a tax which will be automatically levied upon the holding company without any necessity for proving a purpose of avoiding surtaxes. It is believed that the majority of these corporations are in fact formed for the sole purpose of avoiding the imposition of the surtax upon the stockholders. In regard to the tax on other corporations which improperly accumulate surpluses for the avoidance of surtaxes, two important changes are made. First, it is recommended that the rate of tax on these other corporations be reduced to 25 percent. The 50-percent rate now imposed is too high to be readily enforceable. Generally, it represents a tax of more than would have been imposed if the surplus had been distributed. Moreover, such surplus, even after the payment of tax, is still subject to the surtax in the hands of the individual when ultimately distributed. Second, the present law imposes the tax upon the entire net income; that is, the tax is the same whether 60 percent of the net income was distributed or whether none of it was distributed. It is, therefore, recommended that the tax be applied to the net income after the amount of such net income has been diminished by the amount of dividends paid during the taxable year. * The subject of corporations which are formed or availed of for the purpose of preventing the imposition of surtaxes upon stockholders, is a difficult one. Instances of such corporations have recently been developed in connection with the investigations of the Senate Committee on Banking and Currency. It should be pointed out that this 25 percent tax is applicable whether the corporation is used to prevent the imposition of surtax upon its own shareholders or upon the shareholders of any other corporation; for example, the shareholders of a parent corporation. Your committee believes that its recommendation in respect to these companies is of the utmost importance, and furthermore, that it will result, directly or indirectly, in substantially increasing the annual revenue of the Government.
(5)
EXCHANGES AND REORGANIZATIONS

The subcommittee, and later the committee, made a careful study of the provisions governing exchanges and reorganizations, since it appeared that these sections had frequently been used as a means of tax avoidance. One suggested solution was the complete elimination of the provisions with the expectation that in the course of time, by means of court Aecisions and perhaps new legislation, a more desirable method of treatment could be-built up. The Treasury believed such a procedure might result in some immediate loss of revenue, as well as in a severe handicap upon legitimate exchanges and reorgani-

THI RUVENUN BhL9i. 19*1

la

zatiozs. Moreover, reorganization# ue now being consummatedl in the majority of cases in order to reduce the capitalMtructure and quite! generally show a loss. In the past, the verse W te, and reorgaiization8 -were earned out to expand the capital structure and generaiy showed a gain. The comniiittee decide that, unde present condi. tions, the wiser policy, is to amend the, provisions drastically to stop the known cases of tax avoidance, rather than to eliminate the sections, completely. This decision will further avoid the period of litigation and uncertainty which would necessarily follow a complete reversal of the established policy. The law has provided for 12 years that gain or loss is recognize on exchanges of property having a fai market value, such s stocks bonds, an d negotia le instruments; on exchanges of property held primarily for sole; or on exchanges of one kind of property or another d of property; but not on other exchanges of property solely for property of like 'kind. In other words profit or loss is recognized in the case of exchanges of notes or securities, which re esntia4y like money; or in the case of stock in trade; or in case the taxpayer exchanges the property comprising his original investment for a different kind of property; but if the taxpayer's money is still tied up in the same kind dof property as that in which it was originally invited, he is not allowed to compute and deduct his theoretical loss on the exchange, 4or is he charged with a tax upon his theoretical profit. The calculation of the profit or loss is deferred until it is realized in cash, marketable securities, or other property not of the same kind having a fair market value, The Treasury Department states that its experience indicates that this provision does not in fact result in tax avoidance. If all exchanges weremade taxable, it would be necessary to evaluate the property received in exchange in thousands of horse trades and similar barter transactions each year, and for the time being, at least claims for theoretical losses would probably exceed any Profits whicl could be established. The committee does not believe that the net revenue which could thereby be collected, particularly in these years, would justify the additional administrative expense. Consequently, the exchange provisions have not been changed. The reorganization provisions have been in effect for many years, having been adopted in substantially their present form in 1924. They state in detail how each step of a reorganization should be treated for tax purposes. The policy was adopted of permitting reorganizations. to take a wide variety of forms, without income-tax liability. As a result, astute lawyers frequently attempted, especially during the prosperous years, to take advantage of these provisions by arranging i the technical form of a reorganization, within the statutory definition, what were really sales. A number of these cases have been carried to the courts, with results on the whole favorable to the Government. The courts have shown a commendable tendency to look through the mere form of the transaction into its substance. The Supreme Court has indicated that the broad principle underlying these sections is that no taxable profit is realized from a reorganization, if no money passes and if the changes in corporate organization are essentially changes only in form, with the stockholders continuing their former interest in the original enterprise.
H. Repts., 78-2, vol. 2-28

tion may distributed to its shareholders stock or securities in another corporation a party to the reorganization without any tax to the shareholder. By this method corporations have found lit possible to pay what would otherwise be ta able dividends, without any taxes upon their shareholders. The committee believes that this means of avoidance should be ended. In the second place, the definition of a reorganization has been restricted so that the definition will conform more closely to the general requirements of corporation law and will limit reorganizations to (1) statutory mergers and consolidations; (2) transfers to a controlled corporation, "control" being defined as an 80-percent ownership; and (3) changes in the capital structure or form of organization. By these limitations the committee believes that it has removed the danger that taxable sales can be cast into the form of a reorganization, while at the same time, legitimate reorganizations, required in order to strengthen the financial condition of the corporation, will be permitted. Furthermore, the retention of the other reorganization provisions will prevent large losses from being established by bondholders and stockholders who receive securities in a newly reorganized enterprise which are substantially the same as their original investments. A few examples will bring out the reasons for the action of the committee. Thus, as a result of the Emergency Banking Act, a n-amber of banks have found it necessary to strengthen their confditiou by merging or consolidating. These mergers have materially aided the banking situation in these various communities. The provisions of the bill will enable these plans to be carried out without the recognition of gain or loss for income-tax purposes, whereas if the provisions were omitted entirely, the participating shareholders would be entitled to large losses for tax purposes. Likewise, many corporations have defaulted upon the dividends on their cumulative preferred stock, or upon the interest on their bonds These corporations, in order to obtain necessary credit from the bunks, are arranging with their preferred stockholders to accept new common stock, and with their bondholders to accept noncunmulative Preferred stock in place of preferred stock or bonds now held. If the reorganization provisions were omitted from the bill, these stockholders and bondholders could take large losses, although they still retain an interest in the

1'414qua~f RflVE f AtLL 0P 19-4 The committee propose to limit the application of the reorganizaI tion provisions by two principal changes. In the first place, the committee recommends that setion 112 (g)be omitted frm the bill. This paragraph provides that a corporation by means of a reorganiza-

Although the losses in the cases given would be subject to the new limitations the committee has placed upon the deduction of capital losses, the net result, during the next year or more, of omitting the reorganization provisions might be a loss of taxes to the Treasury. The committee, therefore has decided that the reorganization provisions should be retained, but with restrictions to make tax avoidance impossible.

corporation.

TEn HBV"W2UE

to;

18

(6) DIVIDENDS OUT OF PRE-MARCH 1 1913, EARNINGS

The present law, in section 115, provides that if a corporation pays a dividend out of earnings or profits Iaccumulated before March l, 1913, or out of increase in value of property accrued before March 1, 1913, the dividend in either case is not taxable to the stockholder. Your committee recommends that these dividends be subjected to the surtax in the hands of the stockholder as in the case of any other dividends received. Such action was recommended by the Committee on Ways and Means and approved by the House in connection with the prothe Revenue Acts of 1928 and 1932, but the Senate discussed posed change. The subject, therefore, has been fullyrejected inthe past. Although it is true that these accumulations or accruals were part of the corporate assets before the effective date of the first income tax act, nevertheless they do not become a part of the stockholder's income until he receives them as a dividend. The present proposal is to tax them to the shareholder like other dividends, and, so far as the shareholder is concerned, there is no difference between these dividends and any other dividends. This method of treatment was approved by the Supreme Court in Lynch v. Ilornby (247 U.S. 339), under the 1913 law. The present system is equivalent to allowing a large volume of dividends from the stock of domestic corporations to go entirely tax free and to swell the already large total of tax-exempt income from Federal, State, and local obligations. This change will eliminate some administrative work now required in distinguishing the different types of dividends, and will also result in some increased revenue.
(7)
FOREIGN TAX CREDIT

Section 131 of existing law provides for the crediting of foreign paid against the Federal income tax under certain limitations Practically this works out so that a domestic corporation with a foreign branch or foreign subsidiary pays no tax to the United States oil the income earned abroad wherever the foreign income tax rate is greater than our own rate, which is usually the case. The present credit does not operate to reduce the tax on income actually earned in the United States, but does prevent, to a considerable extent, the double taxation of the foreign income of an American company.. Under the Revenue Acts of 1913, 1916, and 1917 a taxpayer was not entitled to any credit for taxes paid to a foreign country. These early acts permitted taxes paid to a foreign county to be deducted only from gross income, which was also the rule applied in the case of State, county, and municipal taxes. Our subcommittee recommended the elimination of the foreign tax credit and a return to the deduction system permitted under the early revenue acts, which system, of course, returns substantially greater revenue than the present method. The Treasury Department, however, was of the opinion that the present method was fair and should be continued, pointing out that "the United States, to avoid burdensome double taxation and to encourage foreign trade, should there. fore allow an offsetting credit against its own income tax."
taxes

B 16 T6XHE, NU BeL

OF

1984

On further consideration of the matter, your committee came to the conclusion that the Federal Government should receive some tax on income earned abroad. Oin the other hand, realizing that much of this foreign income arises from the sale of American products, it also reached the conclusion that such foreign income should not be taxed in full where the income had already been subjected to a foreign income tax. Your committee therefore recommends that the amount of the foreign tax credit shall not exceed the same proportion of the Federal tax on the entire income, which one half the taxpayer's net income within a foreign country bears to his entire net income. The practical result of this plan is to secure for the Federal Government a tax on one half of the foreign income earned in countries where the income-tax rates are not less than one half of our rates. In other cases, the Federal Government will secure a tax on a still greater proportion of the foreign income. Your committee believes the change proposed in existing law is fair to both Government and taxpayer and will return a substantial amount of added revenue.
(8) CONSOLIDATED RETURNS

Section 141 of existing law permits corporatious, which are affiliated through 95 percent stock ownership, to fle consolidated returns. The subject of consolidated returns has long been in controversy. The revenue bill of 1918, as passed by the House, prohibited the consolidated return which had been previously allowed under the regulations of the Treasury Department. The bill as passed by the Senate and finally enacted specifically provided for the consolidated return. The revenue bill of 1928, as passed by the House, denied the right to file consolidated returns, but this provision was eliminated in the Senate. During the consideration of the revenue bill of 1932 a compromise was effected resulting in the levying of an additional tax of three fourths of 1 percent on the consolidatednet income. This additional tax was increased to 1 percent by the National Industrial Recovery Act. It cannot be denied that the privilege of filing consolidated returns is of substantial benefit to the large groups of corporations in existence in this country. This is especially true in depression years, for the effect of the consolidated return is to allow the loss of one corporation to reduce the net income and tax of another, and during a depression more losses occur. Another effect of the consolidated return may be to postpone tax. This is because there is no profit recognized for tax purposes on intercompany transactions, and profits on a product of the consolidated group, passing through the hands of the different members of the group, are not taxed until the product is disposed of to persons outside the group. In the past, when any corporation could carry forward a net loss from one year to another, the consolidated group did not have such a great advantage over the separate corporation. Now that this net loss carry-over has been denied, the advantage of the consolidated return is much greater on a comparative basis. The importance of the matter may be seen from the following figures which show the relation between the gross income of all corporations and corporations filing consolidated returns:

Table: [No Caption]

THS -RBUV3991MIL e B

1fl4

it'
ross in-i a Consoldated m on nsoliX turns datedW turws Per"Mu 9 82 9 48 44 72,450327,976 4L 1 85, 90,147,487 47.8 46. 80,244,118,910

Gross Incorowme

Year

AU crpte r
turns

1 99 . 1930 930... ------- -----_ 1 931 _ -.

.

1928_ ...... $157, 2 _

107,51X,29,037

97,731 160,021, Mg,181 138,312,05908

Your committee considered at length the question of abolishin the consolidated return. Our subcommittee originally recommendedthis action. The Treasury believed this policy undesirable. The Treasury pointed out that the one way to secure a correct statement of income from affiliated corporations is to require a consolidated return, with all inter-company transactions eliminated. Otherwise, profits and losses may be shifted from one wholly owned subsidiary to another, and their separate statements of income do not present an accurate picture of the earnings of the group as a whole. For all practical purposes the various subsidiaries, though technically distinct entities, are actually branches or departments of one enterprise. For these reasons, consolidated statements of income have been the rule for ordinary business purposes, and for 16 years, the income tax law has provided for consolidated returns. The administration of the incomne tax law is simpler with the consolidated return since it conforms to ordinary business practice; enables the Treasury to deal with a single taxpayer instead of many subsidiaries; and eliminates the necessity of examining the bona fides of thousands of intercompany transactions. Consequently, after careful consideration of the question, the committee decided that it would be undesirable to abolish the consolidated return at this time. It appeared in the hearings that such action would be especially burdensome to many corporations, such as the railroads, which are frequently obliged to maintain separate corporate structures in the several States in which they operate, although for all ordinary business and accounting purposes, the subsidiaries form a single operating system. Moreover complete data are not yet available as to consolidated returns for 1932, when the 1 percent differential was first imposed upon corporations filing such returns. In view of the advantages obtained by corporations exercising the privilege of filing consolidated returns, however the committee concluded that an additional tax of 2 percent should be levied on corporations availing themselves of this option, instead of the 1 percent provided by the present law. The Treasury estimates that under present conditions this plan will bring in more revenue than the abolition of the consolidated return.
(9) PARTNERSHIPS

The subcommittee and the committee have made a careful study of the taxation of partnerships. It has been strongly contended that many large partnerships, particularly those engaged in the banking and security business, have been the vehicle of wide-spread tax avoidance. It has been pointed out that wealthy partners have applied

^18

THE REVENUE DIM 0F 184

partnership losses against their individu al incomes, with -the result that in some of the past few years they have paid no individual income taxes . If any- avenue of escape from the income tax through the use of the partnership provisions has been left open ini the past, it Is important that it should be completely closed at this time. The committee found that the principal loss of revenue from partnerships in the last few years had occurred by reason of the fact that the partnerships in question had realized losses from the sales of securities which the individual partners were permitted to deduct against their income from other sources. Of course, these partners were compelled to pay nornial taxes and surtaxes upon tihe partnership profits in -its prosperous years; and in most cases, these taxable profits have far exceeded the deductible losses recently allowed. The revenues will be safeguarded in the future, however, by the application of the new capital gain and loss provisions to partnerships. Under the bill, the partnership will be permitted to deduct losses on the sale of capital assets onlv to the extent of gains from such sales (sec. 117 (d)). Thus the partnership can have no capital net loss and therefore the partner can have no deduction on account of any capital loss of the partnership. In this way the main source of the tax avoidance by banking and security partnerships in the past can be eliminated. The committee also proposes two important changes in connection with the basis provisions, for the purpose of making it entirely certain that there can be no use of the partnership as a medium of tax avoidance in cases of sales of property which has appreciated in value. The result of the provisions of section 113 (a) (13) is that if property is purchased by a partnership the basis of such property to the partnership shall be its cost; but if the property is paid in by a partner then the basis to the partnership shall be the cost or other basis to the partner. The committee believes that this provision simply makes specific the correct interpretation of the general provisions of the present law. Paragraph (13) further provides that if property is distribSuted in kind by a partnership to a partner, the basis to the partner shall be a proper proportionate part of the cost or other basis to him of his interest in the partnership. An example will make the operation of this proposal clear. Suppose that a partner, A, paid $10,000 for hisinterest in partnership. Suppose that thepartnership distributes to the partners property in kind representing one half of its assets. Irrespective of the value of this property at the time of its distribution, the basis to A of the property distributed to him will be $5,000, and he will be taxed on any amount for which he thereafter disposes of the property in excess of $5,000. The committee believes that this provision embodies merely the correct interpretation of the present law but it appears desirable to have an express statement of the rule in the statute. By means of these changes in the partnership provisions, the committee believes that a considerable amount of additional revenue will be obtained by the Treasury directly and indirectly without any injustice to the numerous small partnerships which exist throughout the country. On the other hand, the committee believes that it has eliminated the opportunities for tax avoidance which its investigations and the investigations of other congressional committees have disclosed.

TM

IRUVIWUB BN ill

1A4

(10) ADMINISTFUATIVE CHANGES IN GASOLINE AND LUBUICATING OIL

TAXES

A new section (sec. 603) has been added to the bill which amends the provisions of the Revenue Act of 1932 with respect to taxes on lubricating oils and gasoline. The provisions allowing tax-free sales under certificate, of articles for further manufacture and articles to be resold to States have been much abused in the case of these two commodities because of the irresponsibility of many of the purchasers. A manufacturer is now allowed to return no tax on a sale to another manufacturer who gives a certificate that the article is to be resold by the second manufacturer or used in further manufacture. A large tax loss results from failure of the second manufacturer, who may be a dishonest or fly-by-night concern, to pay the tax. A similar situation exists under the provision allowing dealers to purchase taxfree for resale to another manufacturer, or to a State or municipality. The amendment made by the bill provides that the first manufacturer may take credit against his return, or may be allowed a refund, of tax on any oil or gasoline when a second tax has actually been paid on the oil or gasoline or any article into which it entered. Under existing law a credit or refund is provided for when a dealer resells an article to a State, and a manufacturer's direct sales to a State are not taxed. In any case, the credit or refund is conditioned on a satisfactory agreement between the manufacturer and the vendee. The change in the law means, in effect, that relief from the tax to avoid double taxation or burdening State or municipal business, depends on proof that the second tax has actually been paid or that the article has actually been sold to a State, and not on a mere anticipation of such a second payment or sale. The change will result in increased revenue and it is not believed that it will impose any burden on legitimate transactions comparable to the benefit which the legitimate manufacturers and dealers will get from the elimination of the unfair competition of products that have evaded the tax. It should be pointed out that ordinarily the manufacturer can have his proof for the credit before the time for returning and paying the tax on his sale, and the tax, if it has been charged by him to the purchaser, can be credited to the purchaser either before his account is payable or on a current transaction so that the only real additional burden is the extremely reasonable requirement of conclusive proof of the right to relief from the tax. As a further safeguard against the operations of the dishonest and Irresponsible concerns which have appeared in the gasoline and lubricating oil trade, taxpayers are required to register and post bond. The definition of "gasoline" is changed by eliminating the test of whether the commodity is chiefly used 'as fuel for motor vehicles, motor boats, or airplanes, and making the term inclusive of all commodities sold or used for that purpose. Lack of proof of quantities used for different purposes has made the "chief use" test impossible of satisfactory administration. A change in the phrasing of the clause imposing the gasoline tax makes certain the ineffectiveness of a device which certain concerns have resorted to in an effort to avoid the tax. A producer with large stocks will transfer title to his plant, and claim that he is no longer liable as " a producer " for tax on his sales. It seems desirable to clarify the section on this point by including sales by "the producer."

on

20TAX BZzVEzNB BILL OF lo4

TECHNICAL AND AMINTRAVTIVibPRaoIONs
TITLE I. INCOME TAX

Section 1. Application of title: The bill follows the general plan and Arrangement of the Revenue Act of 1932. The income-tax title is made applicable to taxable years beginning after December 31, 1933. This represents a change in policy in respect to fiscal-year returns. Under the Revenue Act of 1932, the income-tax title was made applicable to fiscal-ear returns ending during the first calendar year (1932). Under sections 14 and 105 of the Revenue Act of 1932, the tax on such returns was first computed under the provisions and rates of the Revenue Act of 1928 and then under the provisions and rates of the Revenue Act of 1932. The final tax imposed for a fiscal year of 12 months was then found by taking the sum of (1) the same proportion of the tax computed under theRevenue Act of 1928 as the number of months falling in 1931 was to 12 'months, and (2) the same proportion of the tax computed under the Revenue Act of 1932 as the number of months falling in 1932 was to 12 months. This complicated rule has been eliminated in the proposed bill for the purpose of simplicity and ease of administration. The proper changes have been proposed in other sections of the bill to effectuate the new plan, which applies the provisions of the bill to all taxable years (whether calendar or fiscal) beginning after December 31, 1933. Section 11. Normal tax on individuals: The change made by this section is one of those necessary in order to carry out the general plan for an improved tax-rate structure as already described under iterni (1) of the first part of this report. This particular change provides for one normal rate of 4 percent upon the net income (in excess of the allowable credits) of every individual in lieu of the graduated rates of 4 percent and 8 percent provided in existing law. The apparent loss of revenue occasioned by this change is offset by increases in surtax rates. j Section 12. Surtax on individuals: The changes made by this section are also necessary in order to carry out the general plan for an improved tax-rate structure as already described in the first part of this report. The existing surtax table containing 53 brackets is replaced by a new surtax table containing only 28 brackets. The rates are approximately 4 points higher than under existing law to make up for the elimination of the 8 percent normal rate and the use of one 4 percent normal rate on all amounts of income. It should also be observed that the new surtax rates apply to "surtax net income" instead of net income as at present. Surtax net income is defined as net income less the personal exemption and credits for dependents. However surtaxes will start at $4,000 under the proposed schedule instead of at $6,000 as under existing law, which compensates for this change. The remaining changes made by the section are in connection with cross references, which will be described when the sections referred to are reached. Section 13. Tax on corporations: These are inerely clerical changes. The first is made necessary by the action taken in striking out section 26 of existing law. The other changes are made in cross references occasioned by the action taken in subsequent sections.

41 4:,7 1*a4 Section 14.. (Revenue Act of .1932.) Taxable period. embracing .years with different lawns: inc he licy of, t ig fiscal years has, been changed in section 1, this section is no longer necessary.. Section 22(a). GrossirLcome-general definition: This is merely a clerical change. It is made necessary to carr out the policy adopted in the Revenue Act of 1932 of taxing the salaries of Presidents and judges taking office after June 6, 1932, the date of. the enactment of that act. Section 22(b) (1). Life insurance: This change makes it clear that the proceeds of a life-insurance policy payable by reason of the death of the insured in the form of an annuity are not ineludible in gross income. Section 22 (b) (2). Annuities, etc.: The-present law does not tax annuities arising under contracts until the annuitant has received an aggregate amount of payments equal to the total amount paid for the annuity. Payments to annuitants are, in fact, based upon mortality tables which purport to reflect a rate of return sufficient to enable the annuitant to recover his cost and in addition thereto a low rate of return on his investment. The change continues the policy of permitto recoup his ting the annuitantgross income aoriginal cost tax-free but requires him to include in his portion of the annual payments in an amount equal to 3 percent of the cost of the annuity. Whde the percent used is arbitrary, it approximates the rate of return in the average annuity. Statistics show that an increasing amount of capital is going into the purchase of annuities, with the result that income taxes are postponed indefinitely. The change merely places the return of this form of investment on the same basis as other forms of investment by taxing that portion of each payment which in fact constitutes income. Section 22 (b) (4). Tax-free interest: This is merely a clarifying change. Under the language of this section, as contained in existing law, interest on securities issued under the Federal Farm Loan Act, or such act as amended, is expressly excluded from gross income and thereby made exempt from the income tax. Other acts have been enacted which also exempt the interest on obligations issued thereunder from tax. In order to bring the section into accord with the adts authorizing such exemptions and to avoid the necessity of referring to all such acts, a general provision has been inserted excluding from gross income the interest upon the obligations of a corporation organized under act of Congress if such corporation is an instrumentality of the United States; subject to the limitation, however, that the interest is exempt only to the extent provided for in the acts of Congress authorizing the issiaance of such obligations. Section 22 (e). Determination of gain or loss: This is a clerical change. The computation of gain or loss is provided for in section 111 only. The references to sections 112 and 113 are, therefore, unnecessary. Section 23 (b). Deductions from gross income-interest: Section 23 (b) of existing law prohibits the deduction of interest on indebtedness incurred or continued to purchase or carry tax-exempt securities. Thus, indebtedness injured by a bank on its deposits is not treated under existing law as indebtedness incurred or continued to purchase or carry tax-exempt securities. Therefore, a taxpayer carrying on

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the banking business may deduct all the interest paid on deposits even though such deposits are invested in tax-exempt securities. For instance, suppose a bank pays interest of $16,000,000on deposits. It receives from investing these deposits $20,000,000, of which $8,000,000 represents tax-exempt interest and $12,000,000 taxable interest. Since it is allowed to deduct the entire interest paid, namely, $16,000,000, it escapes tax entirely on the taxable interest of $12,000,000. This section of the bill provides that if the proceeds of indebtedness, such as bank deposits, are actually used to purchase or carry tax-exempt securities, no deduction shall be allowed for the interest incurred on such indebtedness. This will force the taxpayer in the example given to pay a tax on $4,000,000, instead of escaping tax entirely. A similar course has been adopted in the case of indebtedness incurred or continued to purchase an annuity. If the proceeds of the indebtedness are actually used in purchasing or carrying the annuity, no deduction is permitted for the interest incurred on such indebtedness. Section 23 (c). Taxes generally: Paragraph (1) involves no change of policy, but restates the present law more clearly. Paragraph (3) of the bill denies the deduction allowed under existing law for estate, inheritance, legacy, succession, and gift taxes. These taxes constitute expenses which are not incurred in the production of income, and liability for them attaches regardless of whether there is any income. They constitute, in fact, mere charges imposed upon the transfer of capital. Sections 23 (e) and (f). Losses: These subsections are the same as existing law except for clerical changes. Section 23 (g). Wagering losses: Existing law does not limit the deduction of losses from gambling transactions where such transactions are legal. Under the interpretation of the courts, illegal gambling losses can only be taken to the extent of the gains on such transactions. A similar limitation on losses from legalized gambling is provided for in the bill. Under the present law many taxpayers take deductions for gambling losses but fail to report gambling gains. This limitation will force taxpayers to report their gambling gains if they desire to deduct their gambling losses. Section 23 (h). Basis for determining loss: The present law provides that the basis for determining the deduction for losses sustained under subsection (e) or (f) shall be the adjusted basis for determining gain or loss from the sale or other disposition of the property. Inasmuch as under the bill the adjusted basis for gain on disposition of the property may be different from that for loss, the bill provides that the basis for losses under subsection (e) or (f) shall be the adjusted basis for determining loss from the sale or other disposition of property. Section 23 (j).- Capital losses: This provision is an important part of the new policy recommended for the treatment of capital gains and losses from the sale or exchange of property, as already described. It makes it clear that individuals and corporations are entitled to deduct capital losses only to the extent of capital gains. Section 23 (m). Depletion: The proposed bill states specifically that the deduction for depletion is allowable under this section instead of under section 114 (b). Section 23 (o). (Revenue Act of 1932.) Future expenses in case of casual sales of real property: The present law permits an individual

4 0f tHE RZVEuts Brie 1984

who makes a casual sale of real property to reduce his gin from sACh sale by expenditures which he has contracted to make but which cannot be determined until a later year. The Treasury interpret section 22 as authorizing the application of this principle to any sale of real estate regardless of whether it is a casual sale. Under such an interpretation, a special rule is unnecessary and this subsection is, therefore, omitted as surplusage. Section 23 (p). Dividends received by corporations:. Section 23 (p) (2) and section 25 (a) (2) of existing law treat dividends from a foreign corporation in the same manner as dividends from a domestic corporation, provided such foreign corporation receives more than 50 percent of its gross income from sources within the United States. Your committee is of the opinion that all dividends received from foreign corporations should be treated alike, regardless of whether such foreign corporation has income from sources within the United States. Accordingly, the proposed bill omits section 23 (p) (2) and section 25 (a) (2). The effect of this omission is to deny a deduction to a domestic corporation for all dividends received from foreign corporations, and to deny to any individual receiving such dividends the exemption from normal tax. Section 23 (q). Pension trusts: This subsection makes it plain that any deduction allowable under the corresponding subsection of the 1932 act and apportioned under that act to any year or years beginning after December 31, 1933, may be allowed for a taxable year covered by the proposed bill. Section 23 (r), (s), and (t). (Revenue Act of 1932.) Limitation on stock losses: These subsections are omitted from the bill because of the new policy adopted in the treatment of capital gains and losses, as already described in the first part of this report. Section 24 (a) (5). Disallowance of deductions attributable to tax-exempt income: This paragraph has been added to the bill to eliminate as deductions from gross income expenses allocable to the production of income wholly exempt from the income tax. Under the present law interest on State securities, salaries received by State employees, and income from leases of State school lands are exempt from Federal income tax, but expenses incurred in the production of such income are allowed as deductions from gross income. Section 24 (a) (6). Family loss: The bill adds to existing law a paragraph which will deny losses to be taken in the case of sales or exchanges of property between members of a family, or between a shareholder and a corporation in which such shareholder owns a majority of the voting stock. The term "family" is defined to include brothers and sisters, spouse, ancestors, and lineal descendants. Experience shows that the practice of creating losses through transactions between members of a family and close corporations has been frequently utilized for avoiding the income tax. It is believed that the proposed change will operate to close this loophole of tax avoidance. Section 25. Credits of individual against net income: The provisions of this section have been fully described under item (1) of the first part of this report in connection with the new tax-rate structure proposed. It will be noted that this particular section provides that the personal exemption and credit for dependents shall be allowed as a. credit against net income for both normal and surtax purposes. An earned income allowance is also provided for. Earned income

24

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does not include any- amount not included in gross income. For example, a taxpayer whose entire earned income consists of a salary which is exempt from tax is in no case entitled to an earned-income credit in excess of $300. The maximum credit in all cases under the bill is limited to $800. Section 26 (Revenue Act of 1932). Credits of corporation against net income: This section is omitted as surplusage, since the interest upon obligations of the United States received by corporations is excluded from gross income under the provisions of section 22. This is due to the fact that the surtax is not imposed upon corporations and no normal tax is levied upon the interest from such obligations. Section 33. Credit for overpayments: The differences from existing law are merely clerical, made necessary by the change in the treatment of fiscal years described under section 1. Sections 42 and 43. Income accrued and accrued deductions of decedents: The courts have held that income accrued by a decedent on the cash basis prior to his death is not income to the estate, and under the present law, unless such income is taxable to the decedent, it escapes income tax altogether. By the same reasoning, expenses accrued prior to death cannot be deducted by the estate. Section 42 has been drawn to require the inclusion in the income of a decedent of all amounts accrued up to the date of his death regardless of the fact that he may have kept his books on a cash basis. Section 43 has also been changed so that expenses accrued prior to the death of the decedent may be deducted. Section 44 (b). Sales on installment basis: Under the present law, the instalment method of reporting income may be used where the initial payments do not exceed 40 percent of the selling price. The percentage has been changed to 30 percent, since it is believed that the 40-percent limit results in an unreasonable postponement of tax in cases where such tax can well be paid in the year of the sale. In case of sales consummated in any taxable year prior to January 1, 1934, the ercent prescribed in the law applicable to the year of sale is retained. Section 45. Allocation of income: tinder section 45 of the existing law, the Commissioner has authority to allocate items of income or deductions between trades or businesses which are owned or controlled by the same interests, when such allocation is necessary to prevent evasion of taxes. While it is believed that the language of the present law is broad enough to include "organizations", this word is added to remove any doubt as to the application of this section to all kinds of business activity. Section 47 (d). Earned income: This section has been made to conform with the change in the method of treating capital gains and losses, as already described. Section 48 (a). Definitions--taxable year: This section conforms with the policy of treatment of fiscal-year returns as provided in section 1. Section 56 (h). Income-tax receipts: This section is stated differently than the corresponding provision of existing law for the purpose of uniformity and simplicity and now corresponds to the more concise language used in connection with the provisions of the giftand estate-tax provisions governing the issuance of receipts. Sections 63 and 64: These sections contain clerical changes in respect to existing law.

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Section 65 (Revenue Act of 1932): This section is omitted from the bill as the effective date of the income-tax title of the bill is tiake care of in section . Section 101 (Revenue Act of 1932). Capital net gains and losses: This section has been omitted on account of the change in' policy in the treatment of capital gains and losses, which has already been described under item (3) of the first p art of this report. The new provision covering this subject will be found in section 117 of the bill. Section 102 (Revenue Act of 1932). Sale of mines and oil or gas wells: This section is omitted from the bill. It provides that in the case of a sale of mines and oil or gas wells where the principal value of property has been demonstrated by prospecting or'discovery done by the taxpayer, the tax attributable to such sale shall not exceed 16 percent of the selling price. This provision apparently was inserted in the law to encourage the development of new mines and oil wells. In the present state of overproduction there is no need to continue this provision. Section 101 (15). Exemption from tax on corporations: This section conforms with the policy explained under section 22 (b) (4). Section 102. Tax on personal holding companies: This section of the bill provides for a tax of 35 percent upon the "undistributed adjusted net income" of personal holding companies. The purpose of the provision and the necessity therefornave already been described under item (4) of the first part of this report. Due to the fact that the provision is new, however, it is deemd proper to show the application of the provision by means of a hypothetical case. Assume a corporation has income of (1) $100,000 from dividends, (2) $200,000 from rents, (3) $300,000 from interest on mortgages, (4) $50,000 interest from partially tax-exempt Government bonds, (5) $250,000 gain from sale of securities, and (6) $60,000 gain from sale of real estate. Its gross income is equal to the sum of items (1),(2), (3), (5), and (6), or to $910,000. Items (1), (2), (3), and (5) total $850,000, so that more than 80 percent of its gross income is derived from the sources specified in section 102 (b) (1) (A) of the bill. If the voting stock of the company is owned in equal amounts by Mrs. and Mrs. Doe and their 10 children, the voting stock under section 102 (b) (1) (D) and (E) is all considered to be owned by one individual, and the company meets the test of a personal holding company as defined in the bill. Assume the company paid cash dividends of $500,000, and paid a corporate tax of $111,375. The 35-percent tax on the personal holding company would then be computed as follows:
Gross income-$910, 000 Subtract dividends received-_ 100, 000 Net income -810,000 100, 000 Add dividends received..--------------Add partially tax-exempt interest -_-___-_-__-_-_50, 000 Sum -_ 960, 000 Subtract corporate income taxiii,375 Adjusted net income-88, 625 Subtract 10 percent adjusted net income-84, 862 Subtract dividends paid 500, 000 263, 73 Undistributed adjusted net Income__--92,-317 Tax, at 35 percent ---

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1934

erly this report i corporationsmprop part of accumulating Section Taon n surplus: As alreadystated under item (4) of this section of the bill takes the place of section 104 of law and into the is designed to take care of those corporations which do not but which, nevertheless, accucategory of personal holdingthe companies, of lus toprevent imposition mulatesurp he provision is changed in two surtaxes on their stockholders.T principal respects from to and more readily existing law ratemake itadded tax is enforceable 50 percent equitable; changed from may be to 25 pernamely, the of the and dividends year cent, the net income paid during the taxable rate applies. deducted from to which the 25-percent Section 104. Tax on citizens and corporations of certain foreign countries: This section is new in the bill. Its purpose is to prevent foreign countries from levying discriminatory taxes against American citizens and corporations. To accomplish this, an additional income if tax is imposed upon citizens and corporations of a foreign the President finds that such foreign country isirnposing discriminaThe tory taxes against citizens or corporations of the United the tax is equal to 50 of the income tax additional of foreign corporation is required to pay. This addicitizen foreign tax is collected in the same manner as the ordinary tax. If the tional President finds that the foreign country has removed the he shallso tory taxesand the additional tax will not corporations, taxable year against American citizens and apply to any proclaim after the date of such proclamation. beginning 105 (Revenue Act of 1932). Taxable period embracing Section years with different laws:ofThis section is omitted from the bill. This is necessary on account the change in treatment of fiscal year returns as explained in section 1. Section111 (a).- Computation of gain or loss: The words omitted from existing law are surplusage, since there are no exceptions to the rule stated. The new matter is made necessary, because section 113 of the bill in some instances provides one basis for gain and a different basis for loss. Under existing law the basis for gain and the basis for loss are always identical. Section 112 (c) (2). Recognition of gain or loss: This section differs in respect to existing law by reason of the change made in section 115 (b). Act of 1932). Section 112 (g) (Revenue of the RevenueDistribution ofis stock on This section Act of 1932 reorganization: Under this section, if corporation A organizesomitted a subfrom the bill. part of its assets corporation stock which sidiary, for all of the B, to of it transfersand distributes the in exstock corporation B, change of corporation B as a dividend to its stockholders without the surrender by the stockholders of any of their stock, then such a dividend is not subject to income tax. By omitting this section, the stockholders must pay a tax upon receipt of such dividends. This change is further explained in the first part of the report under the subject of Exchanges and Reorganizations. Section 112 (h) (Revenue Act of 1932). Effect on future distributions: This section has been incorporated in section 115 (h) of the bill with such changes as are necessary to bring the language in accord with that section. It provides that a distribution by a corporation in connection with a reorganization of stock or securities in another

103.

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T1g3 CONSVXX B" '0F 1084

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corporation, a party to the reorgaition, shall not be considered a distribution of earnings or profits for the purpose of determining the taxability of subsequent distributions by the corporation. While such distributions are no longer tax-free, because of the omission froni the bill of section 112 (g) of existing law, it is necessary to continue this provision with respect to distributions made before January 1, 1934, the effective date of the new bill. Section 112 (g). Definition of reorganization: This section of the bill is explained under the heading of "Exchanges and Reorganizations", contained in the first part of this report. Section 112 (i). Foreign corporations: This is a clerical change made necessary by the action taken in omitting section 112 (g) of existing law. Section 113. Adjusted basis for determining gain or loss: Under section 113 (a) (2) of the present law, if a taxpayer acquires property by gift he is required to use as his basis the basis the property had in the hands of the donor. This section has been utilized to transfer losses from one person who has little income to another person with a large income. For instance, a taxpayer has property which cost him $100,000 but which is now practically worthless. If he sells the property himself, the loss on the sale will not do him any good, due to the fact that he has no income against which to offset it. He transfers such property by gift to a relative or close friend with a large income, and such relative or close friend makes the sales and reduces his income by a $100,000 loss. To prevent such avoidance, this section of the bill requires the donee to use, for the purpose of determining loss, the donor's basis or the market value of the property at the time of the gift, whichever is lower. The last sentence of section 113 (a) (4) of the Revenuie Act of 1932 has been omitted from the bill., The sentence prescribes the basis for gain or loss in the case of property passing under a general power of appointment exercised without consideration by will or deed in coIntemplation of death. Property transferred in this manner is included in the decedent's gross estate for estate-tax purposes. If such property passes under a general power of appointment exercised by will, its basis for gain or los should be the same as that prescribed in the case of other property passing by bequest, devise, or inheritance. On the other hand, if the property passes under a power of appointment executed by deed without consideration and in contemplation of death, it represents a gift and should be subject to the same basis rule which a pplies to other gifts in contemplation of death. This result is accomplished by omitting the last sentence of section 113 (a) (4) of existing law and by providing in section 113 (a) (5), that property passing under a general power of appointment exercised by will shall be deemed to be property passing from the individual exercising such power by bequest or devise. Under section 113 (a) (5) of the Revenue Act of 1932, the basis for determining gain or loss, for income-tax purposes, on the sale or other disposition of property transmitted at death, is, in the following cases, the fair market value thereof at the time of the death of the decedent: (1) Where personal property was acquired by specific bequest; (2) Where real property was acquired by general or specific devise, or by intestacy; (3) Where the property, real or personal, was acquired by the decedent's estate from the deceased,

THU 2828 RUVUNul BitJ

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acquired In all other cases, if the property will or intestacy, the basis is the fair market aue the the time of distribution to the taxpayer. Included within the phrase "all other cases" is personal property acquired by general or residuary bequest; Thus, where a trustee acquires personal property by general bequest, the basis of the property on a sale by him, is the value at the time of distribution him. The basis to the executor, in all cases, is the value of the property at the date of the decedent's death. Oftentimes, the executor and trustee under a will are one and the same person. Thus, in the case of a general bequest of personal property, he is in a position to make use of one basis of valuation or the other according to which will most benefit the estate. The trustee, of course, may use a later basis than the executor, and where it is desired to sell personal property subject to a trust during the period of administration, the executor-trustee may determine whether it would be most advantageous to sell-as executor or as trustee. Where the personal property has increased in value in the hands of the executor, under a general bequest, the property may be distributed to the trustee, who may use the higher basis in computing gain or loss on the sale, thereby diminishing the taxable increment and greatly reducing or entirely avoid the income tax; Section 113 (a)(5) of theRevenue Act of 1932 is a reenactment of a similar provision contained in the 1928 act. The change in the 1928 act was made because there was some doubt as to the meaning of the term "date of acquisition", which was the term used under the Revenue Act of 1926. Since the 1928 act was passed, the Supreme Court has defined "the date of acquisition" to mean the date of death in the case of all property passing by bequest, devise, and inheritance, whether real or personal. (Brewdter v. Gage, 280 U.S. 327.) Section 113 (a) (5) of the bill conforms to the language contained in the Revenue Act of 1926, so that a uniform basis rule may be required in the case of property passing at death, whether real or personal. The section also includes a provision relating to general powers of appointment exercised by will, which was explained in connection with section 113 (a) (4). Section 113 (a) (9)of existing law is omitted, this being made necessary by striking out section 112 (g) of the present law. Subsection (a) (12) is a new provision inserted to make it clear that taxpayers who have acquired property in any taxable year beginning prior to January 1, 1934, under tax-free exchanges, where the basis is provided for in section 113 (a) (6), (7), and (9) of the present law, must retain such basis for under the bill. Subsection (a)(13) (basis forpartnership property) is a new propurpose is explained vision which is declaratory of existing law. Its under the heading of "Partnerships in the first Part of this report. Under section 113 (a) (14) of existing law, the basis for determining gain or loss in the case of property acquired prior to March 1, 1913, is its cost or fair market value as of that date, whichever is greater. This rule when applied to losses in some instances grants the taxpayer a loss when no loss has been actually sustained. For instance, suppose a taxpayer bought property for $20,000 prior to March 1, 1913, which was worth $75 00( on that date. If he sells such property in 1933 for $60,000, he is allowed a loss of $15,000, although in,
property
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THE REVENUE BILL OF 1934

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fact sold it for more than he paid for it. Your committee is of the opinion that no loss should be allowed in any case where the selling price exceeds the taxpayer's investment in the property. Section 114. Basis for depreciation and depletion: Subsections (a) and (b) (1) prescribe as the general basis for computing depreciation and depletion allowances, the basis for determining gain upon the sale or other disposition of property. Since in some cases the basis for determining gain differs from the basis for determining loss, it is necessary to specify definitely which of these bases is to be used for depreciation and depletion purposes. Subsection (b) (2) and (3) contain clarifying changes to make it plain that depletion is actually allowed under section 23 instead of section 114. Section 114 (b) (4). Percentage depletion for coal and metal muies and sulphur: Under the Revenue Act of 1932, percentage depletion was first allowed in the case of coal, metal, and sulphur mines. That act icqluired the taxpayer to make in his 1933 return an election, binding for 1934 and subsequent years, as to whether the depletion deduction in such cases was to be computed upon a percentage basis. To avoid. administrative complexity, your committee is of the opinion that the taxpayer making his first return under the bill should be entitled to a new election as to whether he will compute his allowance for depletion in the case of coal, metal, and sulphur mines upon the percentage basis. This section of the bill so provides. Section 115. Distributions by corporations: Subsection (b) omits the exemption from income tax of dividends distributed out of earnprofits or appreciation accrued prior to March 1 1913, provi ed for by existing law. The reason for this omission is explained in the first part of this report under the heading of "Dividends Out of pre-March 1, 1913, Earnings." Subsections (a), (d), and (g) of this section conform to the new policy. Subsection (c). (Distribution in liquidation): Under existing law, a distribution in liquidation of a corporation is treated in the same manner as a sale of stock. This rule has serious objections, as it permits wealthy stockholders to escape surtax upon corporate earnings or profits distributed in the form of liquidating dividends. For instance, a corporation may have a surplus of $1,000,000. If the surplus is distributed as an ordinary dividend it is subject to the surtax rates in the hands of the shareholders; If it is distributed as a liquidating dividend it is subject only to the flat capital gain rate of 12Y2 percent in case the shareholder has held his stock for more than 2 years. Your committee recognizes that liquidating dividends do contain some of the elements of a sale in that the shareholder is relinquishing in whole or in part his investment in the corporation. On the other hand, they also contain some of the elements of an ordinary dividend insofar as they represent a distribution of corporate earnings or profits. The bill retains the principle of the present law of taxing to the share holder only the amount by which the liquidating dividend exceeds the basis of the stock with respect to which the dividend is paid. However, to prevent avoidance of surtax through liquidating dividend, the gain to the shareholder is made subject to both normal and surtax. This is accomplished by taxing the gain in the same manner as if it were a gain from a sale or exchange of a capital asset held for not more
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than l year, even though the shareholder ma have actually held the stock upon which the dividend is paid for a longer period. But if a loss results from a liquidation of stock, the loss is treated as a loss resulting from a sale or exchange of a capital asset and is therefore subject to the provisions of section 117 of the bill. Accordingly, in giving at his deductible loss, the shareholder must first ascertain what percentage of the loss may be taken into account under section 117(a) (which depends upon the length of time he held the stock surrendered upon liquidation), and then take as a deduction from gross income only that part of the loss taken into account which, together with his other capital losses, does not exceed his gains from sales or exchanges of capital assets. The following examples illustrate the differences i the method of treating liquidating dividends under the 1932 act and under the bill:
Distnbution in liquidation-Stock held S years Case 1: Cost of stock to shareholder --$10, 000 1, 000 Amount distributed to shareholder in complete. liquidation -Gain to taxpayer -------------------------------------- 5, 000 Taxable at capital gain rate of 12% percent (under 1932 law) -.5, 000 Taxable at normal and surtax rates (under the bill) - -5, 000
tion X lion Y Case 2: Cost of stock to shareholder -$10, 000 $10, 000 Amount distributed in liquidation8, 000 15, 000 Gain (loss) on liquidation -5, 000 (2,000) Shareholder pays tax of 12% percent of capital net gain of $3,000 (under 1932

Corpora-

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law.) Shareholder includes $5,000 (full gain on liquidation) in gross income, and is entitled to a deductible loss of 60 percent of $2,000 (108 on liquidation) (under the bill).
Cost of stock to shareholder -$10, 000 $10, 000 Amount distributed in liquidation-- 12, 000 5, 00() Gain or (loss) on liquidation 2, 000 (5,000) Shareholder reduces tax by 12% percent of capiatl net loss of $3,000 (under 1932 act). Shareholder includes $2,000 (full gain on liquidation) in gross income and is entitled to a deductible loss of $2,000 (60 percent of $5,000 loss Is $3,000, or $1,000 more than gain; amount of loss only up to amount of gain is allowed) (under the bill). Section 115 (h). Distribution of stock on reorganization: This
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section has been explained in connection with the omission of section 112 (g) of existing law. Section 116 (a). Earned income from sources without the United States: The definition of earned income is already set forth in section -25-of the bill and to avoid repetition it is omitted from this section. Section 116 (b). Teachers in Alaska and Hawaii: The Revenue Act of 1932 repealed section 5 (b) of the act of April 30, 1900, relating to salaries of Territorial employees of Hawaii. In order to prevent section 5 (b) of that act from being repealed twice, the language ropealn such section is omitted from this bill. Section 117. Capital gains and losses: This section provides for the new treatment of capital gains and losses already described in general terms under item (3) of the first part of this report. It should be borne in mind that this new treatment supersedes the 123 percent capital

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Tqu

f. B

0F 1984

31

gain and loss system of present law, as well as the system of limiting short-term losses to the amount of short-term gains as provided for under section 23 (r), (s), and (t) of the Revenue Act of 19321 The following propositions are essential to the consideration of the new treatment: 1. The determination-of the amount of gain or loss from each sale or exchange of property, the recognition of such gain or loss, and the basis for determining gain and loss, are all provided for in sections 111, 112, and 113 of the bill. These sections correspond to the same numbered sections of existing law. 2. Section 117 of the bill deals with the manner of taking into account in computing ret income these gains and losses which have been determined under section 111 and have been recognized under section 112. 3. Subsection (a) provides for all taxpayers, other than corporations, a series of percentages which must be used in arriving at the amount of the recognized gain or loss which shall be taken into account in computing net income. The theory is that the gain or loss should be somewhat reduced in proportion to the time for which the capital asset has been held. 4. Subsection (b) defines capital assets. It will be noted that the definition, includes all property, except as specifically excluded. 5. Subsection (c) provides the necessary rules for determining the period for which a capital asset has been held. 6. Subsection (d) provides the very important limitation, affecting all taxpayers (including corporations), that capital losses shall be allowed only to the extent of capital gains. 7. Subsection (e) provides that gains or losses from "short sales", and certain other transactions shall be considered as gains or losses from sales or exchanges of capital assets held for 1 year or less. 8. Subsection (f) provides that amounts received upon the retirement of corporate bonds and similar evidences of indebtedness shall be considered as amounts received in exchange therefor. To illustrate the application of the new capital gain-and-loss system in the case of an individual, the following example is given:
1

Gain Item
see. 112

under

reog-

u under sec. 112

Lois reog-

Time held

Gain Prettaken appli cont cable under

.

taken

Los

incount sounder 117 . ee. 117

9 months 100 Corporate stock $5,000 -$5,000. Bonds -------------------------- $4,000 1.4 years 80 - $3,200 2 yes -. Government bond-s 60 ------------600 .... 1,000-Real estate . 3, 000 6 years -40 -1,200 Short sales ......... -. 100 . -.---2, 000 2,-000-.-.. .. Total7...., ... .. 7, ON0 4,400 _
-

------

In the above case, the taxpayer would include in gross income subject to tax $7,600 in gains and be allowed to deduct $4,400 of losses. The net increase in his income will, therefore, .be $3,200. If, however, in another case, the total shown in the last column' of the example had been $7,600 (loss) and the total in the preceding column, $4,400 (gain), then the taxpayer would be allowed to deduct from his

THE 3232

BILL OF 19 8 4

gross income only $4,400 out of his $7,600 of losses. Practically speaking, in such a case the. gains and losses would, therefore, have no effect on the tax paid by the taxpayer. Section 119. Income from sources within United States: Subsection (a) (1) of the present law has been construed by the courts to exempt nonresident aliens and foreign corporations from Federal income tax on any interest paid by the United States, the Territories, or the District of Columbia, on their obligations, tax refunds, or judgments. While it is not believed Congress intended to exempt such income from tax, the proposed change is made in order to remove any doubt as to the future. Section 131(b). Foreign tax credit: This section is fully explained in the first part of this report under the heading "Foreign tax credit." Section 132 (Revenue Act of 1932). The omission of this section is necessitated by the change in the policy of treating fiscal year taxpayers as explained in connection with section 1 of the bill. Section 141. Consolidated returns corporations: The changes made in this section have been fully explained in the first part of this report under the heading of "Consolidated returns." Section 143. Withholding of tax at source: Section 143 of the present law provides for withholding by a corporation or other obligor of an amount equal to 2 percent of the amount of interest paid on bonds or other obligations which contain a provision by which the obligor agrees to pay any portion of the income tax imposed upon the obligee. The tax withheld is paid over to the Government and the obliged on furnishing proof is credited with the amount of tax withheld. Under this section of the bill, the first sentence of paragraph (a) (I) discontinues the requirement of withholding as to bonds issued after January 1, 1934. The remaining changes in paragraph (a) (1) are clerical in nature and are made necessary by reason of the change in the normal tax rate in section 11. Section 143 (g) of existing law is omitted as unnecessary in view of the fact that the normal tax rates are not increased, and a portion of section 144 of existing law is also omitted for the same reason. Section 148 (b). Profits of taxable year declared: This subsection is entirely rewritten, not with any view to a change in policy, but with the intent to set forth in more definite language-the present policy. Section 164. Different taxable years: The present law requires a beneficiary of an estate or trust to include in his income amounts allowed as a deduction to the estate or trust under section 162 (b). In order to continue this policy, it is necessary in view of the policy adopted in section 1 to add additional language to provide for cases where the estate or trust has a taxable year beginning in 1933 and ending in 1934. Section 168 (Revenue Act of 1932). Capital net gains and losses: This section is omitted from the bill in view of the change of policy in taxing capital gains. Section 182. Tax on partners: This section represents a change in section 182 of existing law in two respects: First, because of the change in the policy of treating fiscal-year returns, a new section (see. 188) is carried in the bill to provide specifically a. method of taxing the distributive shares of the net income of a partnership for a fiscal year beginning in 1.933 nnd ending within the taxable year of a partner whose taxable year begins on or after January 1, 1934.

THB REVENUE BILL OF 19 3 4

.33

This change is discussed under section 188 of the bill. Second, the provisions of existing law which prohibit the partners from using stock losses disallowed to the partnership in computing their individual net incomes have been omitted from the bill This change was necessary because such provisions applied only to losses on stocks and bonds held for not more than 2 years. The bill, in section 117, treats all capital losses alike whether from stocks, bonds, or other property. Under the proposed method of treating capital gains and losses, a partner will not be permitted to reduce his income by any capital losses disallowed to the partnership. The subject of partnerships is further discussed in the first part of this report under the heading " (9) Partnerships." Section 183. Computation of partnership income: This section represents a change in existing law so as to allow a partnership a deduction for charitable contributions up to 15 percent of its net income. In such cases, the individual members of the partnership will not be entitled to a deduction in their individual returns for charitable contributions made by the partnership. Section 184. Credits against net income: The change made by this section is declaratory of existing law. Under existing law a partner is entitled to a credit against his net income for his proportionate share of dividends and partially taxed interest received by the partnership. These credits are allowed to the partners because they can not be utilized by the partnership. However, the partners should not be entitled to receive these credits if the partnership has sustained a net loss or has no net income. The change makes it clear that the individual partners are only entitled to such credits to the extent that they do not exceed the net income of the partnership. Section 186 (Revenue Act of 1932). Capital net gains and losses: This section is omitted on account of the change in policy in taxing capital gains and losses. Section 188. Different taxable years of partner and partnership: Subsection (a) applies the same general rule for computing the net income of a partner whose taxable year is different from that of the partnership as the rule contained in existing law. However, it is necessary to provide a special rule for the computation of the net income of a partner whose taxal)le yeAr begins after December 31, 1933, if the partnership of which he is a member has a fiscal year beginning in 1933. The net income of the partnership for the fiscal year beginning in 1933 is computed under the Revenue Act of 1932, except that the capital gain and losses of the partnership are computed in accordance with section 117 of the bill, but without regard to the limitation on capital losses. Section 203 (a) (1). Tax-free interest: The change in this section is a clarifying change made to bring the language of the section in accord with the language of section 22 (b) (4). Section 203 (a) (3). Dividends: This paragraph contains a clarifying change made necessary to carry out the policy expressed in section 23 (p) of the bill. Section 203 (a) (8). Interest: This paragraph contains a clarifying change made necessary to carry out the purpose of section 23 (b). Section 204. Insurance companies other than life or mutual: The additional language in subsection (c) (5) is added to carry out the policy adopted to give effect to the policy of limiting losses from capital assets to gains from similar transaction.
W

34

THE REVENUE BIDL OF 19 3 4

The additional language "to a corporation" in subsection (c) (8) is merely a clarifying change. The language omitted "and the amount of interest allowed as a credit under section 26", is made necessary because of the omission of section -26 from the bill. Section 211. (Revenue Act of 1932.) Normal tax-nonresident. alien individuals: This section of existing law has been omitted from the bill. This is a clerical change, since section 11 of the bill provides only one rate of normal tax. Section 214. Allowance of deductions and credits: The change made in this section is necessitated by the omission of section 211 of existing law from the bill. Section 261. Credit against net income: Since section 26 of existing law has been omitted from the bill, a reference to that section is superfluous. Section 272. Procedure in general: The present law allows the taxpayer in case of a deficiency a period of 60 days within which to file an appeal with the United States Board of Tax Appeals. Experience has shown this is not sufficient time in case of involved assessments, or in case of taxpayers living a very great distance from Washington. It is believed that lengthening this period to 90.days will not slow up collection of revenue, but wil facilitate the closing of cases without the necessity of litigation. Moreover, the additional time allowed may give sufficient time for the Commissioner and taxpayer to reconcile their differences, and thus eliminate in such cases the necessity for filing a petition before the Board. Section 274. Bankruptcy and receiverships: The present law provides for immediate assessment in cases of bankruptcy or receivership regardless of the restrictions imposed by section 272 (a). The result of bankruptcy or receivership is, therefore, to take the case from the jurisdiction of the United States Board of Tax Appeals in cases of deficiency. There is no specific provision, however, requiring the trustee in bankruptcy or the receiver to give notice to the Commissioner of his appointment. As a result, the statute of limitations frequently runs against the Government through inability of the Government to ascertain the status of the taxpayer. To correct this situation, a change has been made in this section requiring the trustee in bankruptcy or the receiver to notify the Commissioner of the adjudication or the appointment of the receiver, and the running of the statute is suspended for a period of 30 days after the date of receipt of the notice by the Commissioner. Section 275. Period for assessment and collection: The present law limits the time for assessments to 2 years from the date the return is filed. Experience has shown that this period is too short in a substantial number of large cases, resulting oftentimes in hastily prepared determinations with the result that additional burdens are thrown upon taxpayers in getting ill-advised assessments removed. In other cases, revenue is lost by reason of the fact that sufficient time is not allowed for disclosure of all the facts. Subsection (a), therefore, increases the period of 2 years to 3 years. In the case of estates of decedents or of corporations contemplating dissolution, the tax must be assessed under existing law within 1 year after written request therefor by the person representing the estate or corporation. Subsection (b) creases the period for assessment in such cases from 1 year to 18 months.

Tfl REVENUE BILL 0P 19 34

.85.

The present law imposes upon the Government the burden of keeping a record of the date of expiration of the period of asessment in each separate return. Inasmuch as many returns are filed before the date prescribed by law, it is necessary for tht Goveonnint to maintain an accurate record of expirations in order'to prevent t4.e loss of revenue. The change in subsection (c) eliminates a subsatia portion of this burden by providing that the beginning of the period for assessment in all cases shall be the last day prescribed by law for filing of the return, regardless of the fact that the return may be filed before such date. Section 276 (a). No return or false return: The present law permits the Government to assess the tax without regard to the statute of limitations in case of failure to file a return or in case of a fraudulent return. The change in this section continues this policy, but enlarges the scope of this provision to include cases wherein the taxpayer understates gross income on his return by an amount which is in excess of 25 percent of the gross income stated in the return. It is not believed that taxpayers who are so negligent as to leave out of their returns items of such magnitude should be accorded the privilege of pleading the bar of the statute. Section 322. Refunds and credits: The present law provides that no refund shall be made after 2 years from the time the tax was paid, unless claim therefor is filed within such period. Inasmucb as section 275 is changed so as to permit assessments for a period of 3 years from the date the return is filed, section 322 (b) (1) is changed so as to permit refunds to be made where claims are ified within 3 years from the date the return is filed. However, the present law permits a longer period for refunds than for assessments in cases where thetaxpayer has paid his tax by installments. To correct this inequality, the period for refunds is fixed as 2 years from the time the tax was paid or 3 years from the date the return was filed. A clerical change is made in subsection (b) (2) to carry out the policy in subsection (b) (1). Under the present law, if the Board finds there is an overpayment instead of a deficiency, the case is returned to the Commissioner for determination as to whether the overpayment is barred by limitation. If the Commissioner finds that the overpayment is barred by limitation and the taxpayer questions the correctness of such finding, it is necessary for the taxpayer to resort to the courts. The provision of subsection (d) enlarges the-Board's jurisdiction by giving it authority to decide the limitation question and thus to terminate the litigation
in one proceeding.
TITLE II. AMENDMENTS TO ESTATE TAX

Section 401. Revocable trusts: This section amends section 302 (d) of the Revenue Act of 1926 relating to the inclusion in the gross estate of a decedent of property transferred by him but as to which he retains the right to alter, amend, or revoke. In such cases the decedent is for practical purposes the owner of the property which under existing law is required to be included in his gross estate. For example, where A transferred property to a trustee but retained the right at any time to alters amend, or revoke the trust, there is Lo question as to the includibility of the property in A's gross estate.

36

THE BEVENUE BILL OF 1934

However, if the retained right to alter, amend, or revoke could be exercised onIly after a precedent notice of, say, a year, or if the alteration, amendment, or revocation would become effective only after a lapse of time &fter A performed the act which gave rise to the alteration, amendment, or revocation, it might be contended thatunder exstin~g law the property is not includible in the decedent's gross estate. While it is believed that such contention would not be well founded, your committee believes it desirable to clarify the law so that under such circumstances it will be entirely clear that all the property of which the decedent at the date of his death has to all intents and purposes practical, if not technical, ownership, is to be included in his gross estate. This section clarifies the existing law on the subject and expressly provides that, although a notice may be required as a condition precedent to exercising the right to alter, amend, or revoke nevertheless the full value of the property at the date of the decedent's death must be included in the gross estate, less only the outstanding estate (measured by the period required to elapse between the giving of the notice and the taking effect of any alteration, amendment, or revocation) which at the decedent's death is irrevocably beyond his control. This section also establishes, in certain cases involving material amounts, a prima facie presumption that the relinquishment of any power to alter, amend, or revoke such as has been described, if made within 2 years prior to the decedent's death, was in contemplation of death. The presumption is made rebuttable, since a conclusive presumption, the Supreme Court has held, would be unconstitutional. Section 402. Prior taxed property: This section amends section 303 of the Revenue Act of 1926 so as to restrict the estate-tax deduction granted to a decendent on account of prior taxed property. The amendment makes it clear that no deduction will be allowable for prior taxed property, unless it appears not only that the property was included in the gross estate of the prior decedent from whom the property was acquired, but also that the estate of such prior decendent was not entitled to a deduction for such property mi determining the value of the net estate of the prior decedent. For example, if A dies and leaves a piece of property to B, and the inclusion of that property in A's estate results in increasing the estate tax over what otherwise would have been payable, then, if B dies within 5 years of A, B's estate is entitled to a deduction on account of such prior taxed property. However, if upon B's death the property passes to C, who dies within 5 years of B, C's estate is not entitled to a deduction on account of the property acquired by C from B, because, while the value of the property was included in B's gross estate, a deduction for such property was allowable to B's estate on account of B's having received the property from A who died less than 5 years prior to B. Section 403. Citizenship and residence of decedents: This section amends section 303 and section 304 of the Revenue Act of 1926 and section 403 of the Revenue Act of 1932 in order that Federal estate taxes will be imposed in the case of United States citizens, irrespective of whether they are residents or nonresidents, and in the case of all residents, irrespective of whether they are citizens, as to all of their gross estate, whether it is situated within the United States or without the United States and whether, if property is situated in foreign countries, it is real property or personal property. The result is that

THE REVENUE BILL OF 19 3 4

37

all residents of the United States and all United States citizen, irrespective of where they reside, will be fully subject to Federal estate taxes, while nonresidents who are not citizens of the United States will be subject to such taxes only with respect to the value of that part of their gross estate which is situated within the United States. This rule is similar to that applied in the imposition of the Federal gift tax by section 501 of the Revenue Act of 1932 and is analogous to that applying to the Federal income tax, which in the case of residents and citizens of the United States applies to all income without regard to its source, but in the case of nonresident aliens applies only to income from sources without the United States.
TITLE III. AMENDMENTS TO PRIOR ACTS AND MISCELLANEOUS

Section 501. Period for petition to board under prior acts: This section will result in giving taxpayers who receive deficiency notices from the Commissioner of Internal Revenue mailed after 30 days after the enactment of the present bill 90 days instead of 60 days to petition the Board of Tax Appeals for the redetermination of deficiencies asserted for years covered by the Revenue Acts of 1926, 1928 and 1932. The amendment will bring the acts referred to into accord with the present bill (see sec. 272) insofar as the period granted taxpayers to petition the Board of Tax Appeals is concerned. Section 502. Recovery of amounts erroneously refunded: This section amends section 610 of the Revenue Act of 1928 so as to give the United States 5 years to bring suit to recover amounts of internal revenue taxes erroneously refunded where any part of the refund was induced by fraud or misrepresentation of the material fact. In all other cases the period is 2 years which is the period provided by existing law without regard to the circumstances under which the refund was made. Section 503. Statute of limitations on suits for refund: This section amends section 608 of the Revenue Act of 1928. Under existing law the Commissioner is authorized to allow refunds after the period for filing suit for refund has expired, if the taxpayer and the Commissioner agree in writing before the expiration of such period to suspend the statute until applicable cases pending in the courts have been decided. Some question has arisen as to whether such an agreement extends the period for filing suit in cease the Commissioner refuses to allow the refund. The amendment makes it clear that the eriod for filing suit by the taxpayer is suspended in accordance witU the terms of the agreement. Section 504. Overpayments found by the Board of Tax Appeals: This section amends sections 322 (d) and 528 (d) of the Revenue Act of 1932, section 322 (d) of the Revenue Act of 1928, and sections 284 (e) and 319 (c) of the Revenue Act of 1926 to bring those acts into accord with the present bill insofar as the bill relates to the right of the Board of Tax Appeals to determine when an overpayment found by the Board is refundable to the taxpayer. Confusion has resulted under existing law due to the fact that the Board may find an overpayment of taxes but is not authorized to determine whether the overpayment is refundable, it being incumbent upon the Commissioner to determine whether or not an overpayment determiined by the Board is barred by the running of the statute of limita-

38

THE REVENUE BLL OF 19 34

tions on refunds. The amendment made confers jurisdiction upon the Board of Tax Appeals to determine not only that the taxpayer has made an overpayment of tax, but also whether such overpayment is refundable, so that the proceeding before the Board may result in a complete disposition of the tax case being considered. Section 505. Bankruptcy and receiverships: This section amends section 274 (a) of the Revenue Act of 1932 and the Revenue Act of 1928 and section 282 (a) of the Revenue Act of 1926 relating to the procedure to be followed in bankruptcy and receivership cases, so that the running of the statute of limitations against the Government on the making of assessments will be suspended for the period (not to exceed 2 years) from the date of adjudication in bankruptcy or the appointment of the receiver to a date 30 days after the date upon which notice is received by the Commissioner from the trustee or receiver of the adjudication in bankruptcy or tho appointment of the receiver. This amendment will bring the 1926, 1928, and 1932 revenue acts into accord with the provision in the present bill relating to the same subject, and will protect the rights of the Government. Under existing law, unless the Commissioner discovers that a taxpayer has been adjudicated bankrupt or that a receiver has been appointed for a taxpayers he is unable to protect the rights of the Government in assessing income taxes. This is due to the fact that in case of bankruptcy or receivership the running of the statute of limitations on assessment is not suspended, as in the ordinary case by the Commissioner's sending of a 60-day letter, since the usual restrictions upon assessment are automatically suspended. In many such cases the Commissioner will have no way of knowing that such restrictions have been suspended, unless the law roviNdes, as this section does, that the Commissioner is to be notifiedA of the adjudication in bankruptcy or the appointment of the receiver. Section 506. Retroactivity of rulings: This section amends section 1108 (a) of the Revenue Act of 1926, as amended, so as to permit the Secretary, or the Commissioner with the approval of the Secretary, to prescribe the extent, if any, to which any regulation, Treasury Decision, or ruling relating to internal revenue taxes shall be applied without retroactive effect. The amendment extends the right granted by existing law to the Treasury Department to give regulations and Treasury Decisions amending prior regulations or Treasury Decisions prospective effect only, by lowing the Secretary, or the Commissioner with the approval of the Secretary to prescribe the exact extent to which any regulation or Treasury decision, whether or not it amends a prior regulation or Treasury Decision, will be applied without retroactive effect. The amen ent furthermore permits internal revenue rulings as well as regulations or Treasury Decisions to be applied without retroactive effect. Regulations, Treasury Decisions, and rulings which are merely interpretive of the statute, will normally have a universal application, but in some cases the application of regulations, Treasury Decisions, and rulings to past transactions which have been closed by taxpayers in reliance upon existing practice, will work such inequitable results that it is believed desirable to lodge in the Treasury Department the power to avoid these results by applying certain regulations, Treasury Decisions, and rulings with prospective effect only. Section 507. Examination of books and witnesses: This section is a companion section to section 1104 of the Revenue Act of 1926, as

THE RYXENITI bIL 01 19343

3S:

amended by section 618 of the Revenue Act of 1928, and gives to, the right to examine books, to ascertain the liability of transferees may law, ifnothe tax liability of a taxpayer is to determine have authority to examine the books who the transferees are, or to examine the records which have fallen into the hands of other persons after the liquidation of to discover who the transferees of the corporation are. This section makes it clear that the has the power to make examina'tions in such cases. Section 508. Sale of personal property under distraint: This section amends section 3192 of the Revised Statutes so that officers of the United States selling personal property which has been seized under distraint may purchase such property for the United States if the amount bid for such property by outsiders is not equal to the minimum law, the colUnder price for whichin.the property is offered. is subject existingsuch as oleoto tax lector can bid only an article which buy for the United States He cannot margarine,bond or a spirits, etc.note offered at a distraint sale. If no a Liberty Treasury tise and offer again bid was made he would be compelled to for sale the security seized under distraint. If an entirely inadequate bid was made for such security the collector would be compelled to a miniaccept it. If it were in the power of the collector to mum price for personal property offered by him for sale under the is with respect realty, of processthe distraint (as itUnited States, ittowould beR.S. 3197), and to possible at every in same for the bid sale of personalty to close the whole proceeding without the expense a a resale, and without the necessity of of nominal and inadequate bid for the property offered for sale. section of the present bill will completely remedy the defect referred to. Section 509. Discharge of liens: This section amends section a pro3186 (c) of the Revised Statutes, as amended, by cedure not expressly sanctioned by existing law whereby a taxpayer who desires to sell a portion of his property tinder a lien for Federal taxes may obtain a release of the lien on the property he desires to sell toward satisfacby paying over to the collector of internal revenuethe Commissioner tion of his tax liability an amount determined by to be equal to the market value of the part of his property to be value of which must sold. The property referred to, the fair be determined in each case, is the taxpayer's property, which in the case of property subject to prior liens is only the taxpayer's interest or equity in the entire property. Section Section 510. Jeopardy immediate collection of1105 of the Revenue miscellaneous taxes, Act of 1932, providing for has proved so cumbersome operation that it has been ineffective for its purpose, the assertion of taxes in cases where delay would endanger collection. The section has been simplified and worded similarly to the provision for jeopardy assessment of deficiencies of income tax. Under it, when it appears that may result in failure to collect the tax immediate assessment may made by the Commissioner, and unless the taxpayer makes payment or gives bond for payment immediately. This oIL the due date, theofcollector may distrainpayment is necessary immediate discretionary method enforcing

the Commissioner

and o existing records,Under their d ata of property. the Commissioner certain,transferors of the a-corporation Comnmissioner

tobacco,

readvc4:

establish

advertising

accepting This providing

fair

market

assessments: prompt in

delay be

40 0THE REVENUE BIL

OF

9 34

because the character of some of the businesses taxed under existing law makes it possible for taxpayers. to disappear before the due date. Section 511. Gifts of property subject to power: This section repeals section 501 (c) of the Revenue Act of 1932, since the principle expressed in that section is now a fundamental part of the law by virtue of the Supreme Court's decision in the Guggenheim case (53 S.Ct. 369). Section 512. General Counsel for the Treasury: At the present time a number of the bureaus and divisions of the Treasury have separate legal staffs, operating independently of each other. Although the law provides for a Solicitor of the Treasury, he is vested with power only over a limited field, not assigned to other legal officers in the Department. There is no responsible legal officer in the Treasury with power to coordinate the legal work of these separate groups of lawyers and to prevent waste and duplication of effort among them. On the recommendation of the Secretary of the Treasury your committee decided that provision should be made for a General Counsel for the Department, to be appointed by the President with the advice and consent of the Senate. The General Counsel will be the chief law officer of the Treasury, with power to coordinate and supervise the legal activities of the Department. The bill further provides for the appointment by the Secretary of the Treasury of not to exceed six Assistant General Counsels, who, it is contemplated, will be in immediate charge of the legal activities of certain bureaus and divisions of the Treasury, such as the legal activities relating to internal revenue, customs, banking, public debt, monetary matters, etc. The General Counsel will be paid $10,000 per year, and the Assistant General Counsels will receive compensation fixed by the Secretary of the Treasury at not to exceed $10,000 per year. In each case the compensation will be subject to the reduction generally applicable to Federal officers and employees. As a result of this reorganization with respect to the legal activities of the Treasury, it is possible to abolish the offices of General Counsel for the Bureau of Internal Revenue, Assistant General Counsel for the Bureau of Internal Revenue, Solicitor of the Treasury, and Assistant Solicitor of the Treasury. The powers and duties of these offices are transferred by the bill to the General Counsel for the Treasury, and will be performed by himself and his assistants. Your committee believes that these changes in organization will make economies possible, will improve the efficiency with which the legal activities of the Treasury are handled, and will enable the Department better to perform the many new duties placed upon it __by the emergency legislation. the Section 513. Assistants in Treasury: The various emergency laws recently adopted by Congress impose a great number of new duties and functions upon the Secretary of the Treasury. For example, the recent monetary legislation requires the Secretary to direct the operations of the stabilization fund of $2,000,000,000 over a period of at least 2 years, which may be extended to 3 years by Presidential proclamation. Accordingly, your committee has includbd in the bill, on the recommendation of the Secretary of the Treasury, a section authorizing the appointment by the Secretary, for the period of the emergency of 10 assistants at salaries of not to exceed $10,000 per year. It is provided that these appointments may be made without regard to the Classification Act and civil service

.41 laws. This section will enable the Secretary to obtain the best qualifled men to advise and assist him in the performance of the important emergency functions placed upon him by recent legislation. Section 514. Penalties and awards to informers with respect to illegally produced petroleum: This section of the bill imposes a civil penalty of $500 plus $50 for each day of violation if any person liable to income tax willfully fails to make a return showing the income from any petroleum produced in violation of any State or Federal law. The penalty applies only if the return showing such income is not filed within the time prescribed by law or witin 30 days after the enactment of this act, whichever is later. To aid the Government in the collection of the tax on such income, a reward of one half of the penalty recovered may be awarded and paid by the Commissioner to any person not an officer of the United States fuirinformation of such nishing originalPostal rates: leading to the recovery extends topenalty. This section of the bW Section 515. July 1, 1935, the increased rates on first-class mail matter which would otlerwise exire on July 1, 1934. It also extends to July 1, 1935, the power granted to the President under existing law to modify the rates on all mail matter, except drop letters. The increased rates on the advertising portion of any publication entered as second-class matter are not extended under the bill and will accordingly expire on July 1, 1934, unless the President proclaims otherwise.
TH

RlVBNUE BILL OF 19 8 4

TITLE IV. EXCISE TAXES

Section 601. Fruit juice tax: This section amends section 615 of the Revenue Act of 1932 so as to eliminate the tax on grape juice and other fruit juices. No change is made in the tax on imitations of fruit juices and on other soft drinks. Section 602. Tax on coconut and sesame oils: This section imposes a processing tax on coconut oil and sesame oil. "Processing" is defined as the first use of the oil in manufacture or production of an article for sale. The tax applies to processing in the United States including the territories, but not the possessions. To prevent avoidance of the tax by the performance of preliminary processing outside of the United States, the tax is likewise imposed upon the first processing in the United States of mixtures or combinations in chief value of coconut or sesame oil, or of both oils. Section 603. Taxes on lubricating oil and gasoline: This section amends the provisions of the Revenue Act of 1932 with respect to taxes on lubricating oils and gasoline. As to the reasons for the amendment, see the discussion in the first part of this report under the heading " (10) Administrative changes in gasoline and lubricating oil tbxes." Section 604. Tax on production of crude petroleum: This section imposes a tax on the production of crude petroleum at the rate of one tenth of 1 cent per barrel. The tax is to be paid prior to removal of the petroleum from the premises where produced (or, in case it is not so removed, prior to refining on the premises, or other disposition of the petroleum). As a check on the producer's records, the tax is made payable by stamp, and the first transportation of the petroleum from the place of production is required to be made under a stamped run ticket, bill of

42 2THE REVENUE BILL OF 1934

lading, or other document. Penalties and forfeitures are provided for transportation in violation of the section and for receiving petroleum from such transportation. Provisions are included for payment of a proportionate share of the tax by any person other than the producer, e.g. a royalty owner, having title to a share of the petroleum at the time of production, and for passing on the tax burden to purchasers of crude petroleum wheeri under existing contracts the tax is not permitted to be added to the contract price. Producers are required to keep records and make monthly reports of their daily crude-oil production. These records and reports are made subject to inspection by internal revenue officers and also by Federal and State officers enforcing laws with respect to the production of crude petroleum. In this way it is believed the imposition of the tax, in addition to providing revenue to offset the cost of enforcing the code of fair competition for the petroleum industry, will be of assistance in enforcing State production quotas. Provision is made for payment of the tax by return until stamps can be made available. Section 605. Tax on refining of crude petroleum: Section 605 imnposes upon the first refining or processing of crude petroleum a tax of one tenth of 1 cent per barrel of crude petroleum refined. A like tax is imposed upon gasoline produced or recovered from natural gas. Refiners are required to keep records of daily receipts, stocks, and disposals of crude petroleum. Persons handling, transporting, storing, or dealing in crude petroleum likewise may be required to keep records. As in the case of records under section 604, these records are made subject to inspection by Federal and State officers. The records so required under the two sections will tie in together and afford a check on the enforcement of the tax and also will be valuable in assisting the administration of State laws with respect to crudepetroleum production. Provision is made for passing on the tax burden when gasoline taxed under this section or any product of crude petroleum taxed under this section, is sold whereunder an existing contract the tax is not permitted to be added to the contract price. Section 606. Termination of bank-check tax: Under existing law, the tax of 2 cents imposed upon bank checks will expire on June 30, 1935. It is believed that this tax has a detrimental effect on business recovery. However, in view of the present condition of the Government finances, it is the opinion of the conunittee that it is not advisable to terminate the tax immediately. On the other hand, it is felt that the Government finances will justify the termination of this tax on December 31, 1934. This section of the bill will result in the termination of the tax on that date.

ADDITIONAL VIEWS OF JAMES A. FREAR For separate views on the committee tax report, I respectfully submit that the subcommittee of seven members appointed last session met with Treasury and committee tax experts early in November and worked on various tax propositions there presented, with the announced purpose of closing income-tax loopholes which enabled great wealth to escape payment of proper Federal income taxes. No public hearings were had by the subcommittee, and information of extreme technical character often came from these tax experts, who differed radically in their opinions. No Treasury recommendations were received by the subcommittee. Before the full committee, witnesses from the Treasury Department, including Secretary Morgenthau, appeared at the hearings, expressing in a printed pamphlet and orally, opposition to portions of the subcommittee report and disagreement with many-of its findings. Serious losses and mistaken results in part, were predicted, with Treasury spokesmen voicing opposition. Reorganizations of corporations, disapproved by the subcommittee, Treasury experts believed unwise to eliminate, and responsibility was placed upon the Treasury Department which stated: "The Departminet believes that the proposal would not only yield no additional revenues but would result in a net loss. " Differences were compromised. Of personal holding companies reported against by the subcom1nittee, the Treasury unqualifiedly differed. Phe Department report stated it is open to the same criticism the subcommittee addressed to reorganization provisions, that "it is overspecific legislation, which not only complicates the revenue law and allows no flexibility in administration, but also facilitates evasion." Differences were again compromised by the withdrawal of Treasury objections. The proposed taxation of dividends out of corporation profits accrued prior to March 1913, brought many protests of unjust and unwarranted treatment from witnesses who appeared before tbe full committee. The Treasury and subcommittee reports agreed, although tax experts before the full committee, and others representing recent heavy losses in timberlands and other property, declared it a capital tax on property acquired prior to the enactment of the law and fundamentally wrong. Action so taken is believed to have been unjust and should be corrected.
COMMUNITY RETURNS

bers. On this proposition, also reported adversely by the subcommittee majority over the minority, the Treasury report saysa husband and wife living together should not be

Joint returns of income of marital communities recommended to prevent evasion in high surtaxes were rejected by majority memThe Treasury Department recommends that the committee consider whether required to file a single joint 43

44

THE REVENTJE BMIT4 OF 1934

return each to pay the tax attributable to his share of the income. Such pro vision has long been in force in other countries.

The report further says:

Our estimates indicate that, on the present rates, the suggested change would directly account for an additional $40,000,000 of revenue besides discouraging innumerable colorable transactions and eliminating present inequalities.

Subcommittee experts estimated the Government is losing from 50 to 60 million dollars annually on that proposal, which provided that States with community property laws be brought under a general Federal tax law, equitable to all. The Treasury and subcommittee both agreed as to large tax avoidance quoted. Efforts to prevent this avoidance should have been taken by the committee. On foreign tax credits, depreciation, rPartnership losses, and other matters contained in the subcommittee report, the Treasury Department also differed from the subcommittee, a situation that challenges further consideration from the committee, and from Congress.
TAX-FREE SECURITIES

A controversial problem in Federal income tax returns again was presented by subcommittee experts on Government, State, and municipal tax-free securities. T'a'x-free bonds are held by taxpayers who accept a lower rate of internist for the tax-free privilege. Issuance of Treasury certificates reaching billions of dollars or of tax-free bonds to afford a better market il the Government's financing program confront Congress, and it is argued that in a. great sea of tax-free securities the Federal Government competes with State and municipal bonds now tax free. Congress has a distinct duty to perform in overcoming this recognized weakness in ou,- tax problem. These views propose that Congress squarely face the issue by appropriate constitutional amendment to cover all future tax-free bowl issues and register its legislative decision so that every income-tax payer will be taxed on actual income received and ability to pay. This change would shift the income tax load from the great middle class to those holding tax-free securities, best able to pay. The committee, postpones action at this time. These matters, it is believed, were incorrectly, decided, but the committee did provide that hearings should be held on bills involving the subject.
PUBLICITY OF INCOME-TAX RECORDS

More vitally important is the fact that, called together to stop tax evasions, the committee is confronted by secrecy in ta.x returns that enable income taxpayers to cover up evasions from public knowledge. Senate investigations disclose astounding results that can only be met by public inspection of records. An amendment offered in committee to extend full publicity of income-tax returns, as now exists among several of the States failed in passage. Publicity of tax returns would have prevented evasions discIosedI by the Senate. Wisconsin has an income tax publicity l'Aw helpful in preventing evasions. Publicity of income-tax records, with reasonable restrictions only as to hours and methods of inspection, is urged as part of these views. Public tax records should be public in fact. Tta.x evasions will continue with present secrecy methods.

THE REVENUE BILL- OP 1984

.45

Section 55 of the Revenue Act of 1932 now provides:

And all returns made under this act after the date of enactment of the National Industrial Recovery Act shall constitute public records and shall be open to public examination and inspection to such extent as shall be authorized in rules and regulations promulgated by the President. The prior law is surrounded with restrictions and inoperative.

This law is of no value because among thousands of other duties presumably the President is unaware of the authority conferred or necessity for publicity, and the Treasury Department, ever opposed to such publicity, has probably forgotten to advise the President of his unexercised power. It is now of no value because no publicity is permitted. In committee an amendment, without prevention strings, was offered, as follows:
Section 55 of the Revenue Act of 1926, 1928, and 1932 is amended to read: "All returns made under this act shall constitute public records and shall be open to public inspection without restriction by ally otflcial excepting as to reasonable hours for inspection."

This publicity provision should be accompanied by penalty requirement that every inspection application will be in writing and no person shall divulge or circulate for compensation any information derived from an income-tax return, but not to prohibit publication by any newspaper of information derived from the records. Additional requirement should prevent agents or attorneys known as "ambulance chasers" from using information for financial gain. Protective provisions usual in States accompany an income tax publicity act that by 10 years' experience, in Wisconsin have justified their passage. These were offered in committee but rejected.
EXCISE TAX ON IMPORTED OIL

Action by the committee in placing a 5-cent excise tax on 600,000,000 pounds annual importation of coconut oil and of copra was reconsidered but retained by a close vTote. Soap manulfactullaers, shipping that may enjoy mail contracts now under fire, with others, opposed the tax. Trhe committee's action protects great dairy interests of the country against unjust competition. A racketeering procedure prevonts shipping of mailk and creanm into our largest cities due to "milk slheds " that by an embargo restrict receipts to a limited class and area. T'Lhis racketeering compels surplus milk to be manufactured into butter and cheese with alleged destructive competition now forced by coconut oil manufactured substitutes. The tax would reach free imports prodluced by foreign cheap labor and bring a sul)stantial income to the 'Treasury. Dairy interests aggregating enormous investments unanimously urged imposition of the tax.
EXCESSIVE FIRST-CLASS POSTAL RATEIS ARE' CONTINUED
BY

COMMITTEE

Without sufficient hearings or evidence offered, the committee at its last nleetilig February 8 approved a request of the Postal Departmient for continuance of 3-cent letter postage to July 1935, and it was inserted in the bill. Last session 1 urged aniendment in committee for a 2 cent instead of 3 cent postage rate, based on the 1932 fiscal year postal report . That motion wias renewed. Probability of increased
H1. Hepts., 73-2, vol. 2-30

46

TNa RIVBXUIX BULe 0 1984

first-class mail revenues through a reduction would have occurred, and thereby every household relieved from an existing unjust rate. A brief word as to effect of the present postal policy. The Federal Government received in round numbers from its fst-class mail in the fiscal year 1932 (excepting air mail) $310,000,000. Expense of handling that mail was $276,700,000. Annual profit, first-class mail, $33,300,000. Department report also inserted in the Record of May 10, 1983. Entire departmental loss $206,000,000 for 1932. The Post Office report for the fiscal year 1933, page 85, discloses net profits in "first class" mail (excluding air mail) of $104 860,190.06. LoSS from air mail $16 917,414. No valid reason exists for charging air mail losses to first-ciass mail, more than for congressional or other governmental expenditures. From the 1933 report it further appears that the loss from second-class mail is apportioned at $88,202,962; loss from third-class mail at $28,296,562; and loss from fourth-class mail at $32,006,000 or a total loss from all classes of mail excepting first-class letter postage of $165,422,938. These figures are significant because they both slow up business through overcharging lettermail service and by patent injustice create widespread resentment. Increases with justice might be proposed on undercharged mail items contributing to the $165,422,938 deficit, but no justification was offered before the committee for continuing an excessive firstclass mail 3-cent postage rate. Further proof of this mistaken policy is furnished from increased profits reported by reducing local "drop letter" rate from 3 cents to 2 cents, which increased $20,800,000 profits in drop letters from 1932 to $37,551,927 in 1933, or~practically 80-percent increase under the lower rate. If followed in proportionate receipts from first-class mail, 2-cent postal-rate profits of 80 percent would have reached $120,000,000 instead of $67,000,000 profits reported on the 1933, 3-cent rate, a loss through overcharging first-class mail of more than $40,000,000 in 1933. More important, the Postal Department is maintained for public service, not revenue, and any deficit, not subject to increased rates in carriage, should in all fairness be borne from Treasury funds and not by placing an unjust and unwarranted burden on first-class mail.
EXTRAVAGANCES NOW PAID BY FIRST-CLASS MAIL

Steamship mail contracts and air mail contracts now under fire with other postal extravagances or undercharges create a. deficit in that Department. No other Department attempts to balance its receipts and debits. This Government's Naval Department, for illustration, within 60 days had Congress appropriate or authorize greater naval expenditures in, 1934 than England, Japan, France, and Italy, or all of the remaining great naval powers combined. Whether spending a billion dollars to lead a mad naval race is a Government credit, or war liability to be balanced, history will decide. Several times the estimated annual committee savings from this bill will be thus absorbed in 1 year for eventual obsolete targets. Scandalous air and ship mail contracts, having no legitimate relation to first-class mail rates, an outgrowth of excess charges in letter postal rates, are now carried by the bill. The President's power to correct postal injustice, first urged, was squarely ignored when the majority so willed.

TM RBEVEUEU BeL OF 1984

47

Committee action in refusing reduction on first-clas mail that brought $104,000,000 profits to the Federal Treasury, n 1933, an alleged extortionate charge affecting everybody, found a striking contrast when at the same session action was taken reducing secondclass advertising mail rates to 1932 rates. The total loss in secondclass mail for 1933 was $88,202,962, notwithstanding which fact such action was taken. Motion to reduce first-class mail rates from 3 cents to 2 cents to take effect July 1, 1933, ws defeated by a vote of 13 to 10 in committee. The policy of requiing first,-class postal earnings andi profits to cover postal departmental experiments and extravagances or to meet other deficits is without possible defense and the committee's hurried endorsement of that proposal is diametrically opposed to its close scrutiny of income-tax evasions and usual fairness In pointing out omissions, alleged mistakes, or changes that properly ut the limited should have been inserted when seeking to ca purposes of a revenue bill, directed more particularly against tax evasions, these views express unstinted praise for the arduous and faithful work performed by the committee and subcommittee that offered many desired recommendations found in the report. Further consideration is urged for legislation specifically set forth in these views.

ADDITIONAL VIEWS oF FRANK CROWTHER In general terms I approve H.R. 7835 the subject of this report, which is probably the best compromise that we can secure at this time. If we are to make a real effort to balance the Budget in view of the tremendous drain upon the Federal Treasury, it is evident that the income-tax rates should be raised all along the line. The rates S-iggested, together with the closing of loop holes that have hitherto aided in loss of revenue by "legal avoidance" rather than "illegal evasion" will probably raise sufficient revenue to offset the loss sustained by the repeal of the special taxes enacted in the 1933 act for amortization of the bond issue of $3,300,000,000 for the promulgation of National Recovery Administration activities. These taxes were repealed automatically upon the issuance of the President's proclamation on the adoption of the twenty-first amendment repealing the eighteenth amendment.
SALES TAX VERSUS NUISANCE TAXES

The people of this country were advised by public speakers addressing audiences in person and by radio that when the eighteenth amendment was repealed the nuisance taxes could also be repealed as the revenue from beer and hard liquor would be ample to balance the Budget. In my opinion these taxes will be extremely disappointing so far as revenue is concerned. I regret that the committee declined to accept the manufacturers' excise tax as a substitute for the nuisance taxes collected under present law and continued in this proposed measure. A manufacturers' excise tax of 234 percent with the evil of pyramniding guarded against by the licensing system and with all food and clothing and all medicine exempt, would raise some $450,000,000 under present conditions. The chief objection against this plan is, not that it is a bad tax, but that it is so good a tax that it probably would be substituted for the income tax and the rates raised from time to time to effectuate that purpose. The income tax is recognized as an integral part of our taxing system and if "ability to pay" is still the test, then it is sheer nonsense to recommend or expect that it will be discontinued either now or at any other time. Why should the follc wing industries be singled out to carry the burden of taxation under the title in the present law of "manufacturers' excise taxes" and thousands of other industries escape? Here is the List of those who now are singled out to carry this load:
48

THE REVENUE BILL OF 19 3 4

49

Auto trucks Automobile Motorcycles Automobile parts and accessories Cameras and lenses Clocks, etc. Candy and chewing gum Brewers' wort Furs (articles made of) Firearms, shells, and cartridges Electrical energy Gasoline

Lubricating oils Jewelry, watches Phonographs Mechanical refrigeration Matches Pistols and revolvers Soft drinks Radio sets Sporting goods Tires and inner tubes Toilet preparations

In addition we have the tak on admissions and a host of miscellaneous taxes. The list is comparable to the taxes enacted during the World War period which we finally succeeded in repealing. Just so long as we lay these excise taxes on a specified group of our industries, just so long will it constitute an element of unfairness in our tax program. May I call attention to the fact that the nuisance taxes have not been repealed in spite of the frequent promises that were made during the campaign for repeal of the eighteenth amendment.
0

Union Calendar No. 116

73D CONWIMS 2d Semion l HOUSE OF REPRESENTATIVES 5 Rir. 704 5 Part 2

THE REVENUE BILL OF 1934

FEBRUARY 12, 1934.-Committed to the Committee of the Whole House on the state of the Union and ordered to be printed

Mr. DAVID J. LEWIS, from the Committee on Ways and Means, submitted the following

SUPPLEMENTAL AND DISSENTING REPoRr

[To accompany H.R. 78351
TEST OF REVENUE BILL

The test of a revenue bill is presented in the question, Does it provide revenues adequate to achieve its important purpose; namely, the payment during the fiscal year of the current debts and expenditures of the Government? Does this bill meet this test? Unhappily it does not; The revenues expected of it, in combination with the customs revenues, amounts to $3,974,655,479. The debts and expenditures for the fiscal year 1935 to be met by such revenues amount to $4,486,562,500. Here then is a failure of the bill to meet its annual liabilities, already fixed, of $511,897,021. (See appendix no. 1.)
MOUNTING DEFICIT

But the above deficit of $511,897,021, is not all inclusive. Preeinptory obligations to relieve ffhe distress of millions already have committed the Government to a program involving the issue of $7,000,000,000 of bonds. The interest on these bonds at 4 percent will be $280,000,000, of debts annually. The payment of this interest must be assured if the bonds are to be successfully marketed. What provision has been made by the committee in. the bill for the payment of this interest? No provision whatever. The administration, due to this default on our part, will have to market additional bonds to pay this interest when it falls due. How far will this method go? Will it go at all?
expenses with current revenues, here in the richest of nations in the
WHY THE DEFICIT? And why, this failure on the part of the committee to match current

history of the world? It is the depression-the world-wide depression

Table: Table 1.- Comparison of death taxes United States, Great Britain, France, and Germany- Estate of mar ied persons, no dependents, al pas ing to widow

THE REVENUE BILL OF 19 34

they say. Why should the Treasury of the United States be left to run in the red, year after year? It is the depression, the depression. But the depression is world-wide; it afflicts England; it afflicts Germany and France as well as our own country. But their treasuries nre not in the red-have not been left to run in the red, year after year. Again they say the United States expended $3,300,000,000 (luring the current year to relieve social distress. But Great Britain is expending annually its 3% billion dollars and Germany 3 billions, in terms of our population for social relief, that is, to take care of the aged, the helpless, and thle unemployed. And the treasuries of these countries are nIot in the red. Now frankly, why is our Treasury in the red and theirs not.? It is because their parliaments provide the necessary revenues, and this Congress does not. Those parliaments go to their citizens who are able to pay and assess them according to their ability to pay. This Congress does not. Here is the proof. It is found in part in two tables which compare the income tax-rates levied in the United States with those levied in Great Britain, France,
and Germany.
TABLE 1.---Coniparison of death toxes United Sttes, Great Britain, France, and Germany-EHstate of married persons, no dependents, all passing to widow
United NetNet exemption estat before estate before xemptionStates

Great Britain

Germany France 2(3

-- $10 $70. 24 $30 --$1,000 . -,---------- )Creont -. 0 7. 02 3. 0 Death taxes. ,-. . $506. 19 $250 $.. 1. . $160 $5,000-. 3.0 10. 12 percent - Death taxe-3 .-.-.-- 5. 0 $600 $10,$3O $1, 562. 01 .--16.62 .. 6.0 Death taxes .. -:percent- : . 3.0 e-$975 $150 $2,629 $16,000 - - percent -0 3. 0.6 17. 53 Death taxes ---$1,000 $1,875 $6,504 $2b,000 - - percent25 --. 0 7. 6 I)eath taxes ---$2, 500 -----$5,000 $50,000 0 10. 0 25 o Death taxes . -- -Percent-$11,000 $9, f00 ---$100,000 ----- ---$1,-500 1. 6 - - percent 9. 0 11. 0 25 I)eath taxes - - -$5,000 $18, 000 -$16, 00 $150,000 - -percent 3. 3 25 12.0 il 0 l)eath taxes 000 -----$23, ------------------------ -$ $24, 000 $200,000 --500 4. 8 - - percent. 14 0 25 12.0 Death taes - - -$1, bOO $3, 000 $51, 000 -$300,000 - - percent 6. 5 25 17. 0 13. 0 Death taxes ----$56, 000 $76, C $30, 500 $400,000 0 6 t). 7. 14. 0 25 Death taxes --percent. --$500,00( -$75, 000 $42, 500 $105, (00 - - percent 8. 6 21. 0 25 15. 0 Death taxes - - -$55,500 $13S. 000 . $0, 000 $600,000 0. 3 25 23. 0 15.0 Death taxes percent -- ---- - $84, 00 $200,000 ---------$120,000 $900,000 25. 0 10. 5 25 15. 0 percent-Death taxes .------ $270,000 -. ... ---l-- - $117,500 $150,000 $1,000,000 11. 8 27.0 25 15. 0 percent.. Death taxes - $315, 500 $300,000 $600, W $2,000,000 ....----..----15). 8 33.0 25 15. 0 percent... Death taxes --------.-.--- $ 553, 500 $1, 110,000 -----$450, 000 $3,000,000 -----------------------------18. 5 15. 0 25 Death taxes poicent. 37. 0 -------... -$1. 140, 6500 $2, 050, 000 -$750,000 $5.000,000 ....-23. 0 41. 0 25 15. 0 percent. Death taxes..-.-60) $3, 094,31. 0 $5, 100, 000 --- 25 $1, 500.000 $10,000,000 ------------------------------ -percent_ 51. 0 Death taxes 15. 0
. -

...............

..........

............

-------

--

It will be noted in the above comparison of rates that an estate of $100,000 pays $1,500 in the United States, pays $9,000 in Great Britain, $11,000 in Germany and $25,000 in Firance. A $200,000 estate here pays $9,500, in Great Britain $28,000, in Germany $24,000

Table: Table 2.- Comparison of income tax and percent of tax to net income United States, Great Britain, France, and Germany- mar ied person, no dependents, and al income from salary

THE

EVENUL. BeIL OF 1934

.3

and in France $60,000. It is not until the estate reaches $2,000,000 in the United States, and pays $315,500, that our estate taxes equal those of Germany and about one half equal those of Great Britain and France. To the figures in the above table showing the taxes in the United States should be added the estate and inheritance taxes levied by some 23 of our States. If such State taxes be added to the Federal estate tax it would be increased by 26 percent or about one fourth.. (See appendix no. 2.) Taking State and Federal estate taxes together, $180,000,000 was derived from this source in 1930. If we had levied the same rates as the British the total revenue here would have been $755,000,000. (See appendix no. 3.) Another part of the proof is found in the failure to enact adequate income tax rates in the United States. I am here inserting a comparison of such rates; which again includes the United States, Great Britain, France, and Germany.
TATBL13 2.-Comparison of income tax and percent of tax to net income United States8 Great Britain, France, and Germany-married person, no dependents, and all income from salary
Net income Net income

States ~~~~~~(present rates)

United

Great Britain

Franc
$34 $170 8.6 $366 12.2 $857 17.0 $1,651 22.0 $2,625 25. 3 $4, 688 31.3 $9, 510 38.0 $23,716 47.4 $63. 651 53. 7
3. 4

Germany

--$0 $1,00 .--- 0.0 Income tax .----)rent $2,000 .------ ---$0 0.0 Income tax.-.-- percent$20 $3,00-. . - percent . 0.1 Income tax .--$100 ,0.ooo erce nt.0 Incomno tax2$I,500- --$255 - percent3. 4 tax -------Income --$40 $10,000 4.8 Income tax ....----- pareont--- $15,000 $1,020 6.8 Income tax -----------percent-. - -$2, 520 $25,000 - - percent 10.1 Inconie tax --$8, 600 S50,00 - -percent17.2 Incomeio tax - - -$30,100 $100,000 30. 1 perveiL. Income tax --- . $263, 600 $500,000- -52. 7 event InConie !ax -$571, 100 -S1,000-,--- percent 67. 1 Income tax --------

$0 0.9 $111 5.6 $311 10.4 $711 14.0 $1,222 16.3

$69 6.9 $.305

$529
16. 3

$1,057 21.0

17. 6

$307,910
61.6

29.6 $19, 654 39.3 $48, 101 48. 1

$1,862 18.6 $3,444 22.9 $7, 369

$1,918 25.6

$269, 651

$630, 160 63. 9

more

$539, 651 54.0

54. 0

29.6 34.2 $9, 900 40.0 $22, 399 45. 0 $47, 308 47. 4 $247, 391
$5, 130

$2,950

$497, 383 49. 7

49. .5

NOTE.-In the case of Frauce, the tax is computed for a man married children. (It nmrrie(d less than 2 years, lie gets a lower rate.)

than 2 years, and having no

leaving a. net income of $3,000 pays $20 in the United States, $311 in Great Britain, $366 in France, and $529 in Germany. With an incomie of $7,500, pays $255 here, in England, $1,222, in France, $1,661, and in Germany, $1,918. It is not until his income reaches $50,000 here that he pays approximately one half the tax he would pay in Enigland ($19,654), and approximately one third the payment in France and Germany of $23,716 and $22,399, respectively. When his income is $500,000 here, and not until then, is lie called upon to meet the great social obligations involved in the same measure as the citizens of these other countries. State income taxes are also imposed by a number of States, which in the year 1932 amounted to 12

It will be noted that in the case of a married man without children

Table: [No Caption]

THE

REVENUE BILL OF 1934

percent of the income taxes levied by the Federal Government. So that 12 percent may be added to our income tax rates in making the above comparison. (See appendix no. 2.) Had we imposed the British income taxes in the United States the receipts in 1930 would have amounted to approximately $3,860,000,000 as compared with actual receipts here of $476,700,000. (See appendix no. 3.) Compare these rates with the rates paid by the farms of the country on the net income of the farms. The Bureau of Agricultural Economics of the Department of Agriculture in a review of this subject reports the proportions of the farms' net cash income which went to taxes. (See appendix no. 4.) Pcreftt

1929
1932

--20
73

--

The average income tax collected in 1932 was about cent on the net income reported.

4, (4.7) per-

MIDDLE CLASS VIRTUALLY EXEMPT FROM TAXATION

The above comparisons justify the statement that in our income and inheritance taxes we are virtually exempting the middle class from the payment of taxation. Apparently the thought has been that the taxation of skyscraper fortunes would alone suffice. The millionaires alone are to support the Government. But taxes restricted to skyscraper fortunes, even when we can collect them, are utterly inadequate to maintain the Government-the middle class must also do its duty. If we may regard the married couple without dependents as entering the middle class when the net income reaches $3,000 a year and as emerging into opulency when the net income reaches $25,000, then) so trivial are the income-tax rates imposed that a dutiful attitude requires me to repeat that the middle class is virtually exempt from the payment of these taxes, while a large part of the wealthy people of the country as well are paying much less than their due. What is the explanation of all this, especially when we are facing a now solvent Treasury? The6a4nswor is that there is such a thing as unconscious class discrimination in this world, and 1 fear that the human material which composes our Congress has not shown itself fully proof against its temptations. I myself belong to the middle class and wish only to belong-o it. If I understand the class, I wish to say that it will not thank its representatives in the Government for such favors in taxation if they are to be secured by putting the Government in peril for its life. Instead they would repel us with disgust as unfaithful public servants. They know that this is a world of duties as well as of rights, and that their first duty is to maintain even with their lives the great Government in which we are partners. They know that mere skyscraper taxation will not suffice to maintain that Government in peace or in war. A deinagogue may cry "Rightsl Rightsl", but they know that it is duties valiantly accepted which insures them the benefits of Government with the civilization it alone can protect and sustain. From the above table and the appendixes we learn that the British income tax here would have yielded us in 1930, $3,860,000,000, and the estate taxes $755,000,000, or a grand total of $4,615,000,000.

THB BBVENUE BIM OF 19 8 4

How much is the country worth to citizens who enjoy such income? Is it worth one half as much as Great Britain is to her subjects? A levy of one half of her income and inheritance taxes here would have produced more than enough. Are we willing to pay one half as much as the British to be citizens of the country of Washington? It is no answer to say that the British local taxes are light, excessive, as is our local taxation. The burdens of local taxation in Great Britain are equally great, though the average income of its people is much below ours. The data show that local taxation in Great Britain amounted to about $41 per capita, while our local taxes ran $59 per capita-per dollar of property assessed, the British local tax is much greater than in the United States.
LEAKS-DEPRECIATION

So far as it goes the bill reported by the committee possesses merit; it essays to stop a number of leaks and loopholes, by which it is-hoped to rescue some $200,000,000 now lost even out of the paltry income and estate taxes levied. But master leaks are left unattended to in the bill. One such leak is found in the excessive allowances for "depreciation ", a leak which is costing the Treasury about $270,000,000 a year. About two thirds of this vast sum relates to the depreciation claims of corporations and the remaining one third (by estimate) to individual returns. Neither corporate nor individual, perhaps not even Congress, can be charged with actual culpability for this leak. Its existence goes back to 1909 and its character indicates only a lack of "Treasury-mindedness" on the part of the Treasury officials who initiated the percentages for allowance for depreciation on physical property. These excessive percentages rise as high as 318 percent. In the case of a building I, myself, own, with an allotted useful life of 30 years, the percentage for depreciation allowed is excessive by 121 percent; that is, the percentage allowed, invested at 5 percent annually, would amount to $221 on the $100 invested in 30 years. What is the object of an annual depreciation allowance? Manifestly, to build up by such annual allowances a fund to replace the property at the end of its service life. Such annual allowances constitute a fund which increases from year to year not only by the amounts of the allowances themselves but also by the normal interest earnings of the fund. In computing the rate of the depreciation allowance account must first be taken of the normal life of the property, that is, the number of years it will serve. Next an annual paymnent is computed which with the annual accretions of interest on the fund together will accumulate a fund equal to the original cost of the property at the time when it must be replaced. There is no mystery, nothing dubious about it; it is only a commonplace fundig operation, a plain application of the principle of amortization. Not onl the annual contributions of principal to the fund is to be counted; but the cumulative interest on the fund from year to year as well. The difference between such a fund and a fund in which the interest accretions are ignored as the Treasury has been doing is made manifest by the following comparisons. In the first column is given the probable useful life of the kind of property in the second column; the necessary percentages of annual depreciation allowances when the natural interest accretions at 5 percent per annum are taken into account; in the third column the percentages now allowed (no interest

Table: [No Caption]

THE REVENUE BILL OF 19 3 4

considered); in the fourth column the percentages of the excessive allowances when no interest accretions are included. The fifth column shows the results under the present system of allowances when 5 percent annual interest accumulations are taken into account.
Probable useful life
tion neces- Depreclasary, 6 perD OW cent awor- anovIed tIation fund

Deprecia-

Excess allowan ce

Result of excessive allowance per $100

318 2.000 0. 478 60 years ,------, 268 2. 260 46 years -. -----628 202 2. 600 40 years-.. -828 2.860 35 years -1.107 158 300 140 10 3, 000 ^ -------------------~^~~ ~ ~~~~1.249 ~~~~~ 33 33yetirs-~~~~~~ years121 3.333 30 years - .---------------------------1. bo -104 1.712 3.500 28years ---------------------------------91 26 years -2.095 4. 000 73 4.500 2. 697 22 years-.-85 5.000 3.024 20 years
.

Percent

Percenft

Percent

-------

$418.70 369.33 302. 00 258.06 240.19 201 221.46 204.41 190.91 173.27 106.33

Percent of excess, simple average, 163 percent

receiving depreciation allowances during the intervening period have been fully amortized but are still receiving it the statistics do not enable me to say. What seems to be perfectly plain, is that the Treasury owes a substantial part of its "red" entries to its own neglect to apply fundamental principles in computing its depreciation allowances. Should not the depreciation accounts be immediately closed as to all depreciable assets where the records show them to have been fully amortized when the interest accretions are taken into account? Meanwhile, revised tables should be applied in the future administration of the law. The Treasury authority to revise these depreciation percentages seems ample,. The present law, the act of 1932, provides forA reasonable allowance for the exhaustion, wear, and tear of property used in the trade or busine-:q, including a reasonable allowance for obsolescence.

Lists are appended showing some of the kinds of properties which are included, according to their years of life, in the above table. (See appendix no. 5.) It was personal experience with my own property that has brought this subject to my notice. My rented. property is given a life of 33 years; and an annual depreciation allowance of 3.33 percent. In 30 years this allowance with 5-percent interest added to the fund each year the fund will rise to $221.46 per $100 on the value of the property; that is, to more than twice its cost. To replace the value of my property not 3.33 percent, but 1.505 percent should be allowed in my case, less than half the percentage now allowed. The same is true in the other cases of depreciation allowances referred to in the above table under the present practice. The allowances for depreciation began with the income tax; and so has been running for aboulit 20 years. As to how many of the properties

The power to make rules and regulations is found in section 62, as follows:
Smc. 62. Rules aud regulations.-The Conmmissioner, with the approval of the Secretary, shall prescribe and publish all needful rules and regulations for the enforcement of this title.

Table: Income prior to depreciation, depreciation, and net income after depreciation of al corporations, 1921 to 1930

Table: Total receipts, total deductions, of al corporations, 1921 to 1930

THE RAVENUE BILL CF 19 3 4

i have suggested that a substantial part of the "red" entries of the Treasury are due to this neglect to apply fundamental and accepted principles in determining its percentages of depreciation allowances. Compare the proportions of the "net taxable income" after the deduction of "depreciation" from the net income in the following table. The statistics available do not show the aggregates for individual returns, so that the table must be confinb(d to corporate returns. However it is the estimate of men most familiar with the subject that individual returns if computed would aggregate about 50 percent of the amount of the corporate returns.
Income prior to depreciation, depreciation, and net income after depreciation of all corporations, 1921 to 1930
Year

Income

orit deprecrat'ionto

Depreciation

Net taxable income

1930 -----

$2, 628,761,075 7,255,573,212 8,913,290,974 1924- . .. 8,046,161,916 1925 -----10,478,766,341 1926 ------------------------------------10,775,122,170 1927 -9,856, 524,183 1928 ------------------------------------------'- 11,823,533,455 1920 --12,610, 682,001
1021--

1922 2---1923 ----

'$2, li, 933, 290 12,485,538,425

5,5,537,420,739
-

$457, 828,679 4,770,034,787 6 ',2,605,316,27,307,974, 147 2, 683,425,617 5,362,726,290 2 857,710,739 7,621,035,602 3, 270, 429,583 7,504,692, 687 3,346,379, 298 6,510,144,885 3,596,916,546 8, 226, 616,90 3,870,924, 234 8, 739, 767, 767 3,986,208,883 1, 551, 217, 86

Estimated.

consideration.

It will be noted that the total depreciation has nearly doubled from 1921 to 1990-that the physical property so increased is incrediblewith an increase of $100,000,000 in the depreciation account from 1929 to 1930. Note the coincident drop of more than $7,000,000,000 in the taxable net income. I am adding a table giving the total receipts and the total deductions during the same years in order to present the whole picture for
Total receipts, total deductions, of all corporations, 1921 to 1930
Yhe,,r

Total receipts

Total deduc-

Year Total receipts

~tions
_

Year

Total receipts

Total deduo-

'otd(iedU
$ 142,629,445, 279 19261927-144, 899,177,214 1928 ..153, 374,972,611 1929 161,168, 206, 414 1930 138,848,319, 631
....

1922 1' 23 -,--1924 1925 ........

1921 -$91, 249, 273, 532 101, 314, 556, 563

119, 746, 703,353 130, 710,992,104

119,019,865,177

95,347,357,219 111, 385, 601, 734 112,951,551, 608 127, 394, 609, 328
_

$90, 791,444,853

. .

1.
_

$133, 119, 006, 282 136,230,130,860 142, 638, 226,880 149,288,699,319 134,189, 610,451

I have heard no defense or explanation of the failure to consider interest accretions in arriving at the percentages which should be allowed for depreciation. It all "just ha pened" in all probabilitythe taxpayer, of course, could not be looked to in the case of most individuals, at least, to compute the correct percentages. He is not tn actuary-his property had a 30-year life; 33% percent for 30 years would replace his investment. There is no defense for these often double depreciation allowances. However, it is suggested that the interest accretions to the arnortization funds should not be taxed as income1 since they are only capital replacements. This is true, however, since the corporate tax has

THE REVRNUE BILL OF 1934

been 12 percent on such interest accretions; that is about one eighth of the interest accretions. It may not be considered as a plea in bar, but rather as a partial set-off amounting to one eighth of the claim. It would be equivalent to saying that the rate of interest accretion to be imputed to the amortization fund should be reduced from 5 percent to 4.4 percent, if taxes be collected on such accretions as income. (See appendix no. 6.) It might be superficially urged that since both corporations and individuals alike enjoy the benefits of this leak, it presents no problem. This would be a mistaken view. The corporations do not enjoy it alike nor do the individuals. The excessive allowances are not uniform but depend upon the physical character of the property involved. In the case of a property having a useful life for 20 years, the excessive allowance is 65 percent; in the case of a property useful for 25 years, 91 percent; at 35 years, 158 percent; and at 50 years, the allowance is excessive by 318 percent. It cannot therefore be said that all taxpayers are equably benefited. Moreover this leak amounts to a positive discrimination in favor of property incone as against income through wages and salary. It is certainly not the policy of such income tax rate makers to grant such a discrimination. Rather it is the policy of the bill to discriminate in favor of earned income. Taking a simple average of the excessive percentages given in the table above, the depreciation allowances exceed by 153 percent the requirements of a sinking fund to amortize the property at the end of its useful life. The data available are not sufficient to permit the calculation of a weighted average. But it seems reasonable to infer from the above cases that the depreciation rates average 100 percent excessive. If this be true, and I think it is more than true, then the depreciation allowances covering $4,000,000,000 of corporate claims, and $2,000,000,000 of individual claims should be reduced by one half. The corporate income-tax rate in 1930 was 12 percent. That is $480,000,000 in round numbers. One half of this sum, that is $240,000,000 a year, represents the dimensions of the depreciation leak in the case of corporations. With reference to the $2,000,000,000 (estimated) of individual depreciation claims, the average individual income-tax rate received was about 3 percent, and this would mean $60 000,000 remitted on account of depreciation to individuals. One hall of this sum, or $30,000,000, would represent the leak in thae individual cases. Combining both together the depreciation leak reaches the dimensions of $270,000,000. As a Member of the House, I am com elled to make the mental inquiry, How should ] have voted on the bill to save about $270,000,000 by dismissing soldiers from the pension rolls because, whatever their needs, their disabilities were not service-connected, if I had known that the economy secured had been thus sacrificed year after year by a "non-Treasury-minded" Treasury to nonmeritorious depreciation allowances?
THE EIGHT

STATES' GRAB

A married Member of Congress from any 1 of 40 of the States whose total income consists of his salary, or $8,500, would deduct an exemption of $2,500, and under the present law pay an income tax of $345. But if he comes from any 1 of 8 States in the Union that have

THE RXVENVE BLI OF 19 3 4

inherited a peculiar Spanish or French law applicable to married persons, he can split his return and attribute one half of his salary to his wife and one half to himself, so that each will have an income of $4,250. When he deducts his exemption and she deducts her exemption, each of them will pay $120, that is a total of $240, or $105 less than his colleague from Viginia. The eight States in which this double exemption can be taken on a single salary are as follows: Washington, New Mexico, California, Arizona, Texas, Idaho, Louisiana, and Nevada. What the Congressman may do with his salary in those eight States, may be done, because of a loophole in the income-tax laws, by any salaried married man, and riot merely with reference to his )salary but with reference to all his income though it runs into the millions. Referring to this great abuse and resulting loss of revenue to the Treasury, estimated by it at $40,000,000, hut by the staff of the Joint Committee on Internal Revenue Taxation as more than $50,000,000, the Secretary of the Treasury advising the Committee on Ways and Xleans gave the following illustration:
T'hhus a husband earning a salary of $25,000 in New York vill pay approximately $2,520 in income taxes, whereas, a husband earning the samesalary in California may throw one half of it into his wife's return, the two paying a total of only $1,470 in income taxes.

Commenting generally on the abuse of splitting of income-tax returns by husband and wife, the Secretary also stated:
It is evident that this situation is the direct cause of numerous transfers, sales, assignments, and other arrangements between husbands and wives which have no real basis and are made because of a desire to avoid income taxes otherwise due. For example, property which has a)lpreciated in value is transferred to the spouse vho can sell it with the least tax liability. Again, property which has depreciated in value is transferred to the spouse with the larger income, in order that he may realize the greatest benefit from sale at a loss. Moreover, the present law encourages sales by one spouse directly to the other, and the courts are presented with the difficult and even impossible problem of determining whether such sales were bona fide or fraudulent. In the most notorious recent case, the jury ac.. quitted the husband from a criminal charge in such a situation. The income taxes which the husband sought to avoid in this manner, amounted to over $1,000,000. Eight of the forty-eight States have community property laws, which, under the present income tax law, have been held to permit each spouse to report one half of the community income, although it was all earned by, and was expended tinder the control of, the husband. This situation not only results in a large lose of revenue to the Unlied States, but also operates most inequitably as between spouses in community and those in noncommunity property States. Thus a husband earning a salary of $26,000 in New York will pay approximately $2,520 in income taxes, whereas, a husband earning the same salary in California may throw one half of it into his wife's return, the two paying a total of only $1,470 in income taxes.

The Secretary, in order to eliminate this master leak and loophole in the law then added:
The Treasury Department therefore recommends that the committee consider whether a husband and wife living together should not be required to file a single joint return, each to pay the tax attributable to his share of the income. Such

provision has long been in force in other countries. He then goes on to observe: Our (Treasury) estimates indicate that on the present returns the suggested change would directly account for an additional $40,000,000 of revenue, besides discourw'n g innumerable colorable transactions and eliminating present inequities. (See appendix no. 7.)
a

10

THE BRVENUE BEL O

1984

Another method of closing the loophole, known as the "Parker proposal," was recommended by the expert staff of the Joint Committee on Internal Revenue Taxation, as follows:
Income received by any marital community shall be included in the gross income of the spouse having the management and control of the community property.

The proposals of the Secretary of the Treasury and the staff of the Joint Committee on Internal Revenue Taxation were voted upon by the committee a number of times. The recommendation of tl;e Secretary of the Treasury was first adopted. Then the Parker proposal was adopted in its stead. Altogether the following roll calls were taken in committee on both propositions on the dates respec-

tively given:

January 25: Mr. Hill moved that the committee take no action in the pending bill relative to community property income. Oin a roll call, the motion was rejected, 10 ayes to 11 noes. Mr. Lewis then moved that the Treasury proposal providing for joint returns of husband and wife, be inserted in the bill. Mr. Lewis's motion carried, 15 ayes to 7 noes. January 26: Mr. Shallenberger moved to reconsider the vote by which the committee adopted the Treasury plan requiring husbands and wives to file joint returns. The motion carried, 18 aves to 5 noes. Mr. Lewis moved that the Parker proposal no. 1 be adopted. The motion carried, 14 ayes to 10 noes. January 31: Mr. McCormack moved that the committee reconsider the vote by which the committee adopted the Parker proposal no. 1, relating to community property income. The motion carried, 15 ayes to 9 noes. Mr. Sanders moved that the Parker proposal no. 1 be not included in the present revenue bill. The motion carried, 13 ayes to 12 noes.

That, is after having first adopted the Treasury proposal, the committee reconsidered its action and substituted the Parker proposal, either of which would have corrected the great injustice to the Treas.ury and taxpayers in the other States. Finally by a bare majority of one only, both treatments and any remedy were denied. No defense on ethical grounds was made of this discrimination in favor of the married man in those eight States. No ethical defense would seem to be conceivable. That it exists is due to forensic invention wholly. A brief history of the matter is given as appendix no. 8.
ESTATE AND INHERITANCE TAXES

The utter emptiness of the tax rates on estates under the present law entitles this subject to a place among the "leaks" which explain the present insolvency of the Treasury. With twice the wealth of Great Britain, the United States including both State and Federal systems derived but $180,000,000 from its taxes on the transfer of property of decedents, while the British rates would have yielded $755,000,000. I will not enter into a discussion of the social objectives which are commonly urged as justifying even higher rates on the. very large estates. But it is imperative that this subject be not longer ignored if the Treasury is to be rescued from persistent bankruptcy The subject was presented to the committee in the form of a bill, H.R. 7021, which in lieu of the present estate tax, proposed:
First. That an exemption of $25,000 should be allowed the widow and that she should pay a tax equal to one third )f the income-tax rates oIL any excess amount received by her over $25,000.

THE REVENUE BILL OF 1984

1 11

Second. That children or parents of the deceased should be entitled each to an exemption of $10,000, and pay a tax equal to two thirds of the income-tax rates on any excess amount received over such exemption. Charitable and eleemosynary gifts were subjected to the same rates. Third. Other persons not embraced in class 1 or 2 were allowed an exemption of $1,000 each, and required to pay a tax equal to the income-tax rates on any excess received by them above the exemption.

Provision was made in this bill for the continuance of the contributions being made to the States levying estate or inheritance taxes. Only a rough estimate is claimed for the revenue increase to follow the operation of such an inheritance bill and that estimate is from 100 to 150 millions of dollars annually. This inheritance bill did not receive the favorable action of the committee; instead it was referred to a subcommittee which is jeeringly referred to 4s a C"grave6. yard." The defects in the present estate taxation system are not confined to the unfertility of the rates imposed. The most indefensible discrimination results from the application of the present single rate of taxation to the estates which may involve one beneficiary, the widow alone, or 10 beneficiaries, including the children. Let us take the example of an estate of a million dollars going to one heir. He would pay a tax of 11.7 percent on the million dollars received. But if the same estate were to be divided among 10 children, each receiving $100,000, each would be paying as large a rate, namely, 11.7 percent, as if he had received a million. But the regular tax on an estate of $100,000 is 1.5 percent-a contrast of $11,700 to $1,500-a discrimination of 8 to 1. The principle of graduation now universally conceded to be just cannot be realized when applied to the estate as a single standard. The application must be made to the persons receiving the benefits if the burdens of the tax are to be graduated in proportion to the benefits received. Respectfully submitted. DAVID J. LEWI8, M.C.e Member of Committee on WaV8 anus Meane.

HI. Reptu., 73-2, vol 2-31

Table: Estimated receipts and expenditures fiscal year 1935

APPEN DIXES
APPENDIX No. 1 Estimated receipts and expenditures fiscal year 1956

Internal Revenue: $1,265,000,000 Income taxes Estate tax -117,000,000 Miscellaneous -1, 248, 862, 921 -548,000,000 Processing taxes $3, 178, 962, 921 --466,000,000 Customs --329, 702, 558 Miscellaneous Total 3, 974, 665, 479
EXPENDITUI
ES

RECEIPTS

General -

Emergency -723, 286, 500

Total Deficit -.

3,763,276,000

4,486,562,500

511,897,021

APPENDIX No. 2 CONGRESS OF THE UNITED STATES, JOINT COMMITTEE ON INTERNAL REVENUE TAXATION, Washington, May 20, 1983. Hon. DAVID J. LEWIS, House of Representatives, Washington, D.C. MT DEAR CONGRESSMAN: You request figures which will show the amount of revenue derived under the Federal estate tax, the proportion of this which in reality goes to the States, and the amount of revenue which accrues to the States from their inheritance taxes over and above what is secured by the way of a Federal tax credit. In 1930 the total Federal revenue from the estate tax was $64,000,770. The total State revenue from death taxes in 1930 was $180,794,000. According to my estimates, about $130,000,000 of this $180,000,000 of State revenue was due to the Federal 80 percent tax credit and about $50,000,000 was due to the State inheritance taxes, coming in the main from the taxation of the smaller estates which the Federal tax does not reach. I am attaching herewith exhibits Q and R from our report on Federal and State death taxes which show the Federal and State revenue from these taxes over a series of years and also compare such receipts with the receipts from similar taxes in the United Kingdom. It is interesting to note that the total death tax burden in the United States, both Federal and State, comprised about 5 percent of the total tax burden, whilein Great Britain the death tax burden comprised about 19.3 percent of the total burden in 1930 and tax 1931. It should also be noted that the Revenue Act of 1932 more than doubled the estate tax rates then in force. When the revenue from this added tax, which is applied without regard to a credit of State taxes, begins to come into the Treasury the picture presented by the above figures will be considerably

changed. 12

Table: Income-tax receipts, Federal, State, and British, 1931-32

THE REVENUE BILL 0?A 9 3 4

13

income taxes. Income-tax receipts, Federal, State, and British, 1981-3.e Federal income-tax receipts $1, 057, 000, 000 . State income-tax receipts -,.127, 000, 000 Total -

Trusting the above will meet your requirements, I am, Very respectfully, L. H. PARKER, Chief of Staff. P.S.-I am also giving the following figures as to Federal, State, and British

1,184, 000, 000

Great Britain -_.. 1, 833, 000, 000

APPENDIX No. 3 CONGRESS OF THE UNITED STATES, JOINT COMMITTED ON INTERNAL REVENuE TAXATION, Washington, May 16, 1933. Hon. DAVID J. LEwIs, House of Representatives, Washington, D.C. MY DEAR CONGRESSMAN: You have requested an estimate of the revenue which would have been returned if the British rates and exemptions had been applied to the values shown on our estate-tax returns filed in 1931 and to the values which would have probably been returned for the smaller estates which are reached by the British tax and not by our own. In reply to this request, an estimate of $755,000,000 is submitted. This figure is on the basis of 1931 returns, which, in the main, cover estates of decedents dying in 1930. The actual tax reported on these returns under the rates imposed by the 1926 act was $182,202,134. The estimate made on the basis of decedents dying in 1930 would, of course, be entirely too high under present conditions on account of the shrinkage in values of real estate, stocks, bonds, and other property. The British exemption is only 100 pounds (about $400) and the rates are gradu~ated from 1 percent to 50 percent. Under our 1926 revenue act, an exemption of $100,000 was allowed and the maximum rate was 20 percent. Under the Revenue Act of 1932, the exemption has been reduced to $50,000 and the maximum rate is 45 percent. Pursuant to your request, I have also caused an investigation to be made as to the probable income-tax revenue which might have been realized in this country in 1930 by the application of the present British rates and exemptions to the net incomes reported by individuals for that calendar year. Under the British law the normal tax is 12% percent on the first 175 (about $700) of net income, and 25 percent on the balance. The surtax is graduated froin 5% percent on net incomes in excess of 2,000 (about $8,000) to 41Y4 percent on net incomes in excess of 50,000 (about $200,000). Earned income is taxed at a lower rate than unearned income, the law permitting a deduction from the net income equal to one fifth the earned net income, limited, however, to 300, or about $1,200. The British exemptions and credit for dependents are 100 (about $400) for single persons, 150 (about $600) for married persons, 50 (about $200) for the first child, and 40 (about $160) for each additional child. Applying the above rates and exemptions to the net incomes reported by individuals in this country for the calendar year 1930, and making allowance for the probable number of new taxpayers who would be affected, it would figures, that collections would have amounted appi~ear, on the basis of preliminaryas t.o approximately $3,860,000,000, against receipts of $476,700,000 under the rates and exemptions actually in effect. If the British rates were to be applied to 1932 net incomes the receipts, of course, would be much less than the figure given al)ove. The estimate made contemplates the filing of some 18,700,000 taxable returns, nearly 7,000,000 of which would be made by persons with net incomes of less than $1,000. Persons with net incomes of less than $5,000 would file all but some 700,000 of the total number of returns and would contribute approximately one half of the total collections. Trusting that the above statement furnishes the information you desire, I am Very respectfully, H. PAmma, Chief of &4.
L

Table: Preliminary report on depreciation studies

14

THE REVENUE BILL OF 1934

APPENDIX No. 4: UNITED STATES DEPARTMENT OF AGRICULTURE, BUREAU OF AGRICULTURAL ECONOMICS, FARM REAL ESTATE TAXES IN THE UNITED STATES (By Bushrod W. Allin and Donald Jackson, Agricultural Economist, and Janet L. Weston, Assistant Agricultural Economigt, Division of Agricultural Finance) Net farm income figures for the United States as a whole are not available; but since 1924 the Bureau of Agricultural Economics has assembled income records of a widely scattered group of crop reporters. In 1929 reports from 11,805 farms showed that property taxes (real and personal) took 20 percent of the net cash income (before taxes). Records for 6,383 farms in 19122 showed that property taxes took 73 percent of the iet cash income. APPENDIX No. 6 The preliminary report of the Treasury on depreciation follows: Preliminary report on depreciation studies
BUILDINGS
Masonry, brick, concrete, rein- Masonry, slowforced concrete, burning, with brick and steel, or without steel frame, steel frame steel and stucco (fireproof)

Asset items

with frame Interior

Masonry,

Frame

Prob- Depre- Pro~b- Depre- Prb- Depre- Prob- -Depreeful elation able ciation able elation ulesul action usfl useful ret ae rt life life life life rae rae rae

usflrt

ueflrt

culture.) Apartments and flats, without eleva- Years PeTcnt Year8 Percent Years Percent Years Percent 4 30 3 25 40 35 tors - . 29i 2j 3St 2 28 3 33 40 Barns, car (and car shops) -60 2j Barns and sheds. (See Agriculture.) Dwellings: 2 2 60 2 33 3 50 50 1-family -... 2 40 33 30 46 2 3 2-, 3-, or 4-family 3j 294 36 3 4 30 25 40 -----------.-Factories2j 2 25 2 40 28 4 Foundries -6-------------60 3f Garages: 4 2 40 40 25 Private-so 2t 2% 6 30 20 2 35 29$ 50 Public -.3yj 2 33 4 3 2 40 25 Grain-elevator buildings -50 25 22 35 30 4 Hotels and elevator apartments 294 3YS 4i Housing. (Sec Row houses and dwellilgs.) 3 4 294 30 25 46 2 35 Loft buildings 20 3 35 294 30 5 2j Mill-type buildings -40 4 33 3 2 28 3 25 Machine shops -40 4 25 294 30 3 2 35 Offcee buildings -40 2 33 4 40 3 25 2 Power stations-60 2 33 3 2 40 28 3i Roundhouses -50 2 35 45 2 40 30 294 Row houses -.----.3li 40 35 2 294 28 60 2f ------------------------3i StoresStores, 1 or 2 stories, of rooms or 4 35 29 2 25 s30 3 apartments -40 5 4 22 4 3 20 25 Theaters -33 2 2 45 35 29 50 60 21 Warehouses Warehouses, skeleton pier, and special commodity warehouses, cold 20 5 3 28 40 2i 3j 33 storage and packing -----

Agricultural buildings. (See Agri-

Washington, January 6, 1934. Hon. DAVID J. LEWIS, House of Representatives, Washington, D.C. My DEAR CONGRESSMAN: In response to your request for the annual payments, as a percent of principal, required to accumulate to principal based on an interest rate of 5 percent compounded annually, and the number of years of probable

APPENDIX No. 6 TREASURY DEPARTMENT, OFFICE OF THE SECRETARY,

Table: [No Caption]

Table: [No Caption]

THE REVENUE BILL OF 1984

15

useful life of buildings as presented in the preliminary report on Depreciation the Studies offlic ire tii of Internal Revenue, tlhe following table is submitted: Probable useful life and annual paymnents, s percent of principal: 50 years -0.478 45 years -.. 626 828 40 years-35 years -1. 107 33 years-. ..-..-1.249 1.505 30 years-. 28 years-. .1.712 2. 095 25 years 22 years -2.597 20 years 3. 024 In the preparation of the data, it is assumed that payments to the sinking fund are made at the end of each year. Very truly yours, A. S. McLEoi), Government Actuary.
TREASURY

Hon. DAVID J. LEwIs, F-ouse of Representatives, Washington, D.C. MY DEAR CONGRESSMAN: In response to your request for sinking fund calculations based on the probable useful life and depreciation rates for buildings as )resented in the preliminary report on Depreciation Studies of the Bureau of Iiiternal Revenue, the following tal)le is submitted. of In the preparation of the data a principal investment $100, an interest rate of 5 percent compoun(led once a year, and depreciation payments to the fund at the did of each year are assulmfcd. In columni 3 are chown the number of years required to accumulate the corresponding annual depreciationn charges to the principal amount. In column 4 are shown the accumulation of the depreciation charges over the number of years indicated by the probable useful life.

OFFICE OP THE SECRETARY, W1ashington, December 29, 1933.

DEPARTMiENT,

DepreCla- mulate thi3 annutY o Amount annuity tion year principal rato basod on Probable useful life per ,poal l(Unuity) Years Months Days usaefu life
Years:

Time

required to accu-

PerceNr2 50 ------------2------------------------------45

22L 40 -._--------------------..---35 ------------------------------------------------29J 3 33 -_--------------------3 6 30 --------------------------------*-*-*-3 28 -....------.---4 2546 22 -_-------------------20 -_,_---,_------------

.. -2.

2.3

25

8
8

23

$4l8.70 3119.33
302.G0
253. 06

20

22

20 18 18 10 15
14

1 9 2 7

6 24 7 11 7 13 1
14

2-10.19
2101.41

221.46 190.91 1?3. 27 105.33

(lepreciation charge equal to an annuity certain which will accumulate during thle lifetime of the unit at a given rate of compound interest to the wearing value of tile unit. In tlhe above illustration (column 4), although the annual depreciation charges would accumulate to the amounts indicated, the differences between the cost and these amounts represent interest earned which is taxable income. Therefore, should the time be reduced (column 3) within which the given annual depreciation charge could be deducted from income, it would appear reasonable tlat the earned interest should also be deductible from income. Otherwise a concern would in effect be deducting from. income only a part of the lepreciatioln of the property. memorandum and table. I am returning Mr. Wright's Very truly yours, ... A A. S. MCLEOD, government Actuary.
.

The sinking-fund method of providing for depreciation makes the annual

..

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THE REVENUE BILL OF 1984

APPENDIX No. 7
REPORT OF THE HONORABLE HENRY MORGENTHAU, JR., HECIR START OF THE TREASURY, TO THE COMMITTEE ON WAYS AND MEANS ON THE REVENUE BILL FOR I1

siderably reduced. In other words, the present privilege of filing separate returns operates to that extent to defeat the progressive rate schedule, particularly in the case of the larger taxpayers. It is evident that this situation is the direct cause of numerous transfers, sales, assignments, and other arrangements between husbands and wives which have no real basis and are made because of a desire to avoid income taxes otherwise due. For example, property which has appreciated in value is transferred to the spouse who can sell it with the least tax liability. Again, property which has depreciated in value is transferred to the spouse with the larger income, in order that he may realize the greatest benefit from sale at a loss. Moreover, the present law encourages sales by one spouse directly to the other, and the courts are presented with the difficult and even impossible problem of determining whether such sales were bona fide or fraudulent. In the most notorious recent case, the jury acquitted the husband from a criminal charge in such a situation. The income taxes, which the husband sought to avoid in this manner, amounted to over $1,000,000. Eight of the 48 States have community property laws, which, under the present income tax law, have been held to permit each spouse to report one half of the community income, although it was all earned by, and was expended under, the control of the husband. This situation not only results in a large loss of revenue to the United States but also operates most inequitably as between spouses in community and those in noncommunity property States. Thus a husband earn-. ing a salary of $25,000 in New York will pay approximately $2,520 in income taxes, whereas a husband earning the same salary in California may throw one half of it into his wife's return, the two paying a total of only $1,470 in income taxes. The Treasury Department therefore recommends that the committee consider whether a husband and wife living together should not be required to file a single joint return, each to pay the tax attributable to his share of the income. Suce a provision has long been in force in other countries. Reference may be made in this connection to the Hoeper case (284 U.S. 206) in which the Supreme Court held that a somewhat similar provision in the Wisconsin income-tax statute was invalid. The case is not, however, conclusive for two reasons. In the first place, the Wisconsin law was evidently interpreted by the Court as requiring that the husband should pay the tax on his wife's income. This objection can be eliminated by proper draftsmanship specifying otherwise. In the second place, the Federal Government is not under the saine constitutional restrictions as the States in this respect. Our estimates indicate that, on the present rates, the suggested change would directly account for an additional $40,000,000 of revenue, besides discouraging innumerable colorable transactions and eliminating present inequalities.
APPENDIX No. 8
NEW INTEREST IN COMMUNITY PROPERTY LAW-OLD LAW OF EIGHT STATES CAUSE OF UNSETTLED QUESTION OF SEPARATE TAX RETURNS-GOTHIC IN ORIGINBROUGHT TO NEW WORLD BY SPANISH AND THE FRENCH

(10) (a) Taxation of the income of husband and wife.-Under the present law, a husband and wife living together may, at their own option, make separate returns or may make a single joint return. If each has an income of any considerable size, each will ordinarily make a separate return, in order to reduce the normal taxes and, more particularly, the surtaxes, which would otherwise be payable. The family income is in fact frequently expended and otherwise treated as a unit; nevertheless, ii the husband and wife can so arrange their affairs that the wife is in receipt of a portion of the family income, income taxes can be con-

The controversy in Congress during the last few days over the tentative provision in the new income-tax law for enforcing joint returns of husband and wife focuses attention again upon an interesting residue of Latin American la wand custom in a portion of now Anglo-America-the community property laws of Texas Louisiana, Arizona, New Mexico, California, Nevada, Idaho, and

Washngton,

THZ REVENUEMBIL OF 19 3 4

17

Although the communit -property system as adhered to In the laws of these States-and especially in Texas-has Its distinctiveness of practical consideration in many aspects, it was not until the raising of the question of separate returns under the Federal income tax that there was any great amount of public interest. Obviously, the division of the family income into two separate returns effects a saving to the taxpayer in the surtax brackets. The saving in Texas alone is estimated at more than $15,000,000. And the community property law, to date at least, has been accepted as justifying the division of income. The framing of a law that will tax the head of each family for the whole income is the aim of certain Members of Congress at present.
SUMMARY OF DEVELOPMENT

Following is a summary of an interesting article on the Federal Income tax and community property law, by Albert G. Moss, Dallas certified public accountant and tax expert, appearing in the November issue of the house journal of Lybrand, Ross Brothers & Montgomery, of which firm Mr. Moss is a resident partner: In 1919 a Dallas husband, upon the advice of a Dallas attorney, filed separate returns for wife and self upon the theory that the incomes were taxable separately under the law. This action was challenged, of course, by representatives of the Bureau of Internal Revenue, but the Commissioner of Internal Revenue, following a prior ruling of the United States Attorney General, held in substance that separate returns based upon community property law of Texas were legal.
CALIFORNIA TEST CASE

Shortly afterward, the Commissioner ruled similarly for the other communityproperty States, excepting California, where the wife during coverture has no vested interest in community property. A test case from California resulted in vindication of the Commissioner's ruling, and the Supreme Court went further by stating that, even if the wife did have an interest in community income "it does not follow that Congress could not tax the husband for the whole." This threw doubt upon the Commissioner's ruling with respect to the other seven community property States, as based upon the Attorney General's opinion, and the latter withdrew the opinion. The Bureau of Internal Revenue then took a position against separate returns in community-property States, but permitted filing of such subject to readjustment, if necessary, after decision of the Supreme Court. Five cases went up from community-property States, one of them from Texas, and all were decided favorably to taxpayers. However, the decisions were such that they could be construed as applying to the existing law and not a reversal of the former declaration of the Court that "it does not follow that Congress could not tax the husband for the whole." Here the question rests, states Mr. Moss in his article, the revenue act of 1932 not attempting to enforce joint returns. The community pr-oerty system became a part of Texas law in 1840 when Texas was a Republic. It was adopted, however, from the Spanish law that had prevailed earlier.
OF GOTHIC ORIGIN

Mr. Moss gives McKay, in his Community Property, as authority for the statement that, while the community systems of the eight community property States in their varying forms came from the Spanish and French, the origin was in the communal forms of Germanic law. The Goths brought the institution of marital community into southwestern France and Spain and in the latter country it became the law of the land under a Gothic conqueror. In France, however, it remained in the Southwest provinces until adopted in the Code Napoleon. Community property law was brought to the new world of Spanish dominion but in Louisiana an earlier Spanish law had later superimposed upon it the provisions of the Code Napoleon. The Texas law, though primarily from the Spanish, also shows traces of French influence. The States of California, Nevada, New Mexico, and Arizona came into their community property laws by direct influence during Colonial times, as did Texas and Louisiana. Washington and Idaho, however, adopted their laws from the older Stats