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Calendar No. 2380 Calendar No. 2380 81ST CONGRESS SENATE REPORT 2d Session j iNo. 2375 THE REVENUE ACT OF 1950 REPORT OF THE COMMITTEE ON FINANCE UNITED STATES SENATE TO ACCOMPANY H. R. 8920 A BILL TO REDUCE EXCISE TAXES, AND FOR, OTHER PURPOSES AUGUST 22 (legislative day, JULY 20), 1950.-Ordered to be printed UNITED STATES GOVERNMENT PRINTING OFFICE 71876 WASHINGTON : 1950 TABLE OF CONTENTS Page I. General statement ..............................-- 1 II. Revenue effect of the bill ------------------------------___ 2 III. The rates under the individual income tax-------------..---- 4 IV. The rates under the corporate income tax - - - 10 A. Existing law --..---------------..-- ..------------------- 11 B. The House bill .------------------ ..-- 11 C. The Finance Committee bill 12 D. Consolidating the tax computation on the return form ....14 V. Acceleration of tax payments of corporations ------------------- 18 VI. Returns and tax payments of trusts and nonresident aliens 21 VII. Excise tax changes .....................------------------------....................... 22 A. Auction sales ---------------------------------------- 23 B. Quick-freeze units ------------------------------------- 23 C. Coin-operated gaming devices------------------------- 24 D. Application of certain excise taxes with respect to Govern- ment agencies --------------.---.-- 24 E. Television sets and apparatus ----------------------- 24 F. Transportation of persons and property paid for outside the United States.. ------------------------------------ 25 VIII. Educational, charitable and certain other tax-exempt organizations, foundations, and trusts ------------------------------- - 26 A. Unrelated business income ----------------------..-- 27 1. Income from an unrelated trade or business other than the rental of property .. ................... 28 2. "Lease-back" income -----------.. 31 B. Publicizing instead of taxing accumulated investment in- come ------- ---------- ---------------..- 33 C. "Feeder" organizations------..-------------------.. ....35 D. Modification of House bill provisions relating to transactions prohibited in the case of exempt foundations and trusts-- 36 E. Elimination of House provision preventing the use of trusts and foundations to retain control of a family business--- 38 IX. Tax on life insurance companies -------------- ----39 X. Other revenue-increasing changes in the income taxes-----.---- 40 A. Measures included in the Finance Committee bill --------- 40 1. Premiums on tax-exempt bonds held by dealers---- 40 .2. Dividends-received credit for distributions in kind 42 3. Stock redemption by subsidiary corporations------- 42 4. Capital gains treatment of income from books and other artistic works--------------------------- 43 5. Short sales of capital assets ----..-------..-- 44 6. -Collapsible corporations ------------------------- 45 7. Capital gains of nonresident aliens --------------. 46 8. Amortization of premium on convertible bonds----- 47 9. United States employees in the possessions and the Canal Zone --------------------------------- 48 10. Tax treatment of Puerto Rican residents --------- 48 B. Measures included in the House bill which are not contained in the Finance Committee bill -----------------..- 50 1. The interest element in installment payments of life insurance------------------------------------ 50 2. Dividends paid out of pre-1913 earnings------------ 51 3. Tax-free liquidation of foreign subsidiaries---------- 51 4. Loss from sale of business property --------------- 51 5. Withholding on dividends----------------------- 52 6. Interest on refunds and deficiencies -------------- 53 IV TABLE OF CONTENTS Page XI. Other adjustments in the tax law --------------------------.-- 53 A. Measures contained in the House bill ------------------- 53 1. Percentage depletion ------------------------- 53 2. Distributions in aid of decedents' estates---------- 54 3. Holding period for capital assets----------------- 55 4. Carry-over of business losses -----------------.-- 56 5. Contemplation of death------------------------- 57 6. Estate tax deduction for the support of dependents- 57 B. Measures added by the Finance Committee ------------- 58 1. Exclusion for members of the Armed Forces------ 58 2. Amortization of emergency facilities ------------- 58 3. Employee stock options------------------------- 59 4. Family partnerships---------------------------- 60 5. Recognition of gains in the liquidation of domestic corporations ------------------------------- 63 6. Circulation expenditures of newspapers, magazines, and other periodicals ---------------------- 63 7. Corporate reorganizations taking the form of "spin offs" --------- 64 8. Personal--------------------holding company income--------64 9. Regulated investment companies----------------- 65 10. Extension of time in the case of discharge of certain indebtedness -------.---------------------- 66 11. Capital gain and loss treatment for assignments of certain oil, gas, and mineral rights------------- 66 12. Reversionary interests in the case of life insurance-- 66 I)DETAILED DISCUSSION OF THE TECHNICAL PROVISIONS OF THE BILL Title I. Increase in income tax rates ------- --------- 68 II. Miscellaneous income tax amendments------------------------ 76 III. Treatment of income of, and gifts and bequests to, certain tax- exempt organizations ------------------------------- 104 IV. Income taxes of life-insurance companies---------------------- 126 V. Estate tax-.--------------------.-------------------------- 129 VI. Excise taxes ---------------_--___--------- 132 Calendar No. 2380 81ST CONGRESS SENATE 4 REPORT £d Session 3 No. 2375 REVENUE ACT OF 1950 AUGUST 22 (legislative day, JULY 20), 1950.-Ordered to be printed Mr. GEORGE, from the Committee on Finance, submitted the following REPORT [To accompany H. R. 89201 The Committee on Finance, to which was referred the bill (H. R. 8920) to reduce excise taxes, and for other purposes, having considered the same, reports favorably thereon with amendments and recommends that the bill, as amended, do pass. I. GENERAL STATEMENT Military action in, Korea coupled with substantial increases in defense and related expenditures has made it necessary to convert the excise tax reduction bill passed by the House in June of this year into a bill to raise revenues. The bill as amended by your committee will increase tax liabilities by 4.5 billion dollars a year when fully effective, and will increase collections in the fiscal year 1951 by about 3 billion dollars. It is not anticipated that these increases will be of sufficient size to offset the new defense and related expenditures. However, this bill accomplishes all that can be done quickly. Your committee deemed it unwise to delay the bill by attempting to include other methods of raising revenue, such as an excess profits tax, which would require several weeks of hearings and detailed study and analysis by the committee and its staff. To make the change in withholding rates on individuals effective on October 1 it is necessary that the bill become law as soon as possible in order that the with- holding forms may be revised and printed in time. It is also advisable that the tax on corporations be adopted as promptly as possible since it affects the year 1950. The committee has instructed the staff to study the excess profits tax and other revenue-raising measures, so that they may be considered by your committee early next year, and has announced that any excess profits tax enacted at that time will be applicable to the income of the entire calendar year 1951. :1 2 THE REVENUE ACT OF 1950 Yourcommittee's bill includes many of the loophole-closingmeasures, the minor excise increases contained in the House bill, and extends the 10-percent tax on radio receivers to television sets. The House plan to accelerate corporate income-tax payments is retained. How- ever, the bulk of the additional revenue provided under the bill will come from the imposition of higher corporate and individual income- tax rates. The top corporate income-tax rate is raised from 38 to 45 percent. The percentage reductions in the wartime individual income taxes, made by the Revenue Acts of 1945 and 1948, are eliminated, increasing the effective starting rate from 16.6 to 20 per- cent, and the top rate from about 82 to 91 percent. The full increase in both corporate and individual rates will be effective in 1951 and subsequent years. The corporate income tax increase applies to approximately one-half, and the individual income-tax increase to about one-quarter of the income for the calendar year 1950. These changes in the corporate and individual income-tax rates involve few technical problems and there is general agreement that these rates must be raised in view of the new expenditures required by the crisis in international affairs. II. REVENUE EFFECT OF THE BILL Table 1 compares the effect of the Finance Committee bill and the House bill on collections in the fiscal year 1951 and on tax liabilities in a full year of operation. It is estimated that your committee's bill will increase tax liabilities in a full year of operation by $4.5 billion, while the House bill would have virtually no effect on over-all tax liabilities. In terms of collections it is estimated that in the fiscal year 1951 your committee's bill will increase revenues by slightly less than $3 billion as compared to slightly more than $600 million under the House bill. Estimated collections for the fiscal year 1951 in the case of both the House bill and your committee's
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