COMMITTEE PRINT ^Ist SeTsfoT } SUMMARY OF H.R. 13270, THE TAX REFORM ACT OF 1969 (AS PASSED BY THE HOUSE OF REPRESENTATIVES) PREPARED BY THE STAFFS OF THE JOINT COMMITTEE ON INTERNAL REVENUE TAXATION AND THE COMMITTEE ON FINANCE (Note.—This document has not been reviewed by the committee.) AUGUST 18, 1969 Printed for the use of the Committee on Finance COMMITTEE PBINT 'iM SeTsfoT } SUMMARY OF H.R. 13270, THE TAX REFORM ACT OF 1969 (AS PASSED BY THE HOUSE OF REPRESENTATIVES) PREPARED BY THE STAFFS OF THE JOINT COMMITTEE ON INTERNAL REVENUE TAXATION AND THE COMMITTEE ON FINANCE (Note.—This document has not been reviewed by the committee.) AUGUST 18, 1969 Printed for the use of the Committee on Finance U.S. GOVERNMENT PRINTING OFFICE ^-^58 WASHINGTON : 1969 JCS-61-69 For sale by the Superintendent of Documents, U.S. Government Printing Office Washington, B.C. 20402 - Price 55 cents COMMITTEE ON FINANCE KUSSELL B. LONG, Louisiana, Chairman CLINTON P. ANDERSON, New Mexico JOHN J. WILLIAMS, Delaware ALBERT GORE, Tennessee WALLACE F. BENNETT, Utali HERMAN E. TALMADGE, Georgia CARL T. CURTIS, Nebraska EUGENE J. MCCARTHY, Minnesota EVERETT Mckinley DIRKSEN, Illinois VANCE HARTKE, Indiana JACK MILLER, Iowa J. W. FULBRIGHT, Arljansas LEN B. JORDAN, Idaho ABRAHAM RIBICOFP, Connecticut PAUL J. FANNIN, Arizona FRED R. HARRIS, Olslalioma HARRY F. BYRD, Jr., Virginia Tom Vail, Chief Counsel Evelyn R. Thompson, Assistant Chief Clerk (II) — CONTENTS PART I Outline Summary of Provisions Page I. Tax reform provisions 3 II. Extension of surcharge and excises, termination of investment credit, and certain amortization provisions (contained in H.R. 12290 but which have not yet passed the Senate, and which are in H.R. 13270) 7 III. Adjustments of tax burden for individuals 7 PART 2 Analysis of Provisions and Arguments For and Against A. Private foundations 11 1. Tax on investment income 11 2. Prohibitions on self-dealing 12 3. Distributions of income 13 4. Stock ownership limitation 15 5. Limitations on use of assets 16 6. Other limitations 17 7. Disclosure and publicity requirements 18 8. Change of status 19 9. Changes in definitions 21 10. Private operating foundation definition 22 11. Hospitals 23 12. Effective dates 24 B. Other tax-exempt organizations 25 1. The "Clay-Brown" provision or debt-financed property 25 2. Extension of unrelated business income tax to all exempt or- ^^ ganizations .--T-- 3. Taxation of investment income of social, fraternal, and similar organizations 28 4. Interest, rent, and royalties from controlled corporations. _ 29 5. Limitation on deductions of nonexempt membership organiza- tions 29 6. Income from advertising 30 C. Charitable organizations 31 1. 50-percent charitable limitation deduction 31 2. Repeal of the unlimited deduction 32 3. Charitable contributions of appreciated property 33 4. Two-year charitable trust 35 5. Charitable contributions by estates and trusts 36 6. Gifts of the use of property 37 7. Charitable remainder trusts 37 8. Charitable income trust with noncharitable remainders 38 D. Farm losses 39 1. Gains from disposition of property used in farming where farm losses offset nonfarm income 39 2. Depreciation recapture 41 3. Holding period for livestock 42 4. Hobby losses 42 (in) . IV Page E. Limitation on deduction of interest 43 F. Moving expenses 45 G. Limit on tax preferences 47 H. Allocation of deductions. 48 I. Income averaging 50 J. Restricted stock plans 51 K. Other deferred compensation 52 L. Accumulation trusts, multiple trusts, etc 54 M. Multiple corporations 55 N. Corporate mergers 57 1. Disallowance of interest deduction in certain cases 57 2. Limitation on installment sales provision 59 3. Original issue discount 60 4. Convertible indebtedness repurchase premiums 61 O. Stock dividends 62 P. Foreign tax credit 64 Q. Financial institutions 66 1 Commercial banks—Reserves for losses on loans 66 2. Mutual savings banks, savings and loan associations, etc 67 3. Treatment of bonds held by financial institutions 70 4. Foreign deposits in U.S. banks 71 R. Depreciation allowed regulated industries 72 1. Accelerated depreciation 72 2. Earnings and profits 73 S. Alternative capital gain rate for corporations 75 T. Natural resources 75 1. Percentage depletion 75 2. Mineral production payments 78 3. Mining exploration expenditures 80 4. Treatment processes in the case of oil shale 81 U. Capital gains and losses 81 1. Alternative tax 81 2. Capital losses of individuals 82 3. Collections of letters, memorandums, etc 83 4. Holding period of capital assets 8^ 5. Total distributions from qualified pension, etc., plans 85 6. Sales of life estates, etc 87 7. Certain casualty losses under section 1231 88 8. Transfers of franchises 89 V. Real estate depreciation 90 W. Cooperatives 92 X. Subchapter S corporations 94 Y. Tax treatment of State and municipal bonds _ 95 Z. Extension of tax surcharge and excise taxes; termination of investment credit 96 1. Extension of tax surcharge at 5-percent annual rate for first half of 1970 96 2. Continuation of excise taxes on communication services and automobiles 96 3. Repeal of the investment credit -_ 97 4 Amortization of pollution control facilities 98 5. Amortization of certain railroad rolling stock 99 A A. Adjustment of tax burden for individuals 100 1. Increase in standard deduction 100 2. Low income allowance 101 3. Maximum tax on earned income 102 4. Intermediate tax rates; surviving spouse treatment 103 5. Individual income tax rates 104 6. Collection of income tax at source on wages 105 . " 4o PART 3 Statistical Material—Tables ^' °^ :tax reform with tax relief under H.R. '^^^.^'^Jf'i^'"!modified 13270 with Page rate reduction-Calendar year tax liability " " inq 2. Balancing of tax reform and tax relief-Calendar year ta"x liabifity 1 OQ 3. Individual income tax liability-Tax under present law and arnount'and ^"^' ''"''"' ''^°'°' ^"^ ''^''^ provisions S?ve5! ^ when fuUy ^^ 4. Tax relief provisions affectYng [ndiViduals and total" foV alf reYorm an"d ^ individuals, when fully wL^'^'^'''-^^' ^^^"i^^^S effective bj^y ad--^^ _ justed gross income class, 1969 levels > o. rax reform provisions aflfecting individuals, full year'effect—Bv'ad-j'«'^ justed gross income class ----___ 6. Revenue estimates, tax reform, calendar yVaVfiabUity jl T^'L^^blo r^^^^^V'^d^': P'-'^sent law, number made nontaVabYe'byVeii'ef provisions and number benefiting from rate reduction 113 «. lax burdens under present law, under H.R. 13270, and change-Married ' YercenYtax^ ^ couple with 2 dependents. 1 1 -^ J. lax burdens under present law, under H.R. 13270, ' 'and YerYenYpercent tax change—Single person under 35... 10. la.x burdens under present law, under H.R. Y327b, ' YndYercenYtax change-Single ^ ^'''' person, 35 and over. 1 11. Effect of H.R. 13270 on 1 fiscal year receipts, igYo'and ignYYYYYY::: 114 PART 1 OUTLINE SUMMARY OF PROVISIONS (1) PART 1 OUTLINE SUMMARY OF PROVISIONS The provisions included in H.E. 13270 can be briefly summarized as follows: I. Tax Reform Provisions 1. Private Foundations.—The permissible activities of private foun- dations desiring to preserve the benefits of tax exemption, as well as the tax benefits to their contributors, are substantially tightened to prevent self-dealing between the foundations and their substantial contributors, to require the distribution of income for charitable purposes, to limit their holdings of private businesses, to give assur- ance that their activities are restricted as provided by the exemption provisions of the tax laws, and to be sure that investments of these organizations are not jeopardized by financial speculation. In addition, these private foundations are called upon to make a small contribu- tion, 7% percent of their investment income, toward the cost of government. 2. Tax Exempt Organizations^ Generally.—The activities of exempt organizations generally are limited so that they cannot participate in debt-financed leaseback operations, wherein they, in effect, share their exemption with private businesses. Second, the unrelated business income tax is extended to virtually all tax-exempt organizations not previously covered by this tax, including churches. Third, the bill extends the regular corporate tax to the investment income of tax- exempt organizations set up primarily for the benefit of their members, such as social clubs, fraternal beneficiary societies, etc. 3. Charitable Contributions.—Charitable contribution deductions are substantially restructured. The general charitable deduction limi- tation is increased to 50 percent but the so-called unlimited charitable deduction is phased out over a 5-year period. The extra tax benefits derived from charitable contributions of appreciated property, are restricted in the case of gifts to private foundations, gifts of ordinary income property, gifts of tangible personal property, gifts of future interests, and in the case of so-called bargain sales. Also, the 2-year charitable trust rule is repealed and a number of changes are made limiting charitable contribution deductions where there are gifts of the use of property and in the case of charitable remainder and charitable income trusts. 4. Farm Losses.—The deduction of farm losses is restricted in the case of those with farm losses of $25,000 or more and with incomes of over $50,000 from nonfarm sources. Other provisions of the bill, primarily relating to farm operations, provide for the recapture of depreciation upon the sale of livestock, the extension of the holding period for livestock, and a revision of the treatment in the case of hobby losses. (3) 5. Interefit Deductions.—The deduction of interest on funds bor- rowed to carry investments is generally limited to investment income plus $25,000. 6. Moving Expenses.—Moving expense deductions are allowed when changing jobs for househunting trips, for temporary living expenses prior to locating a new home, and for the expenses of selling an old home or buying a new one. 7. Limit on Tax Preferences.—In those cases where tax preferences are not fully subject to tax, provision is made for a minimum tax on individuals having tax preferences in excess of their taxable in- come.