THE REVENUE ACT OF 1951

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• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP57-00384R001200010014-4
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• Document Page Count: 30
• Document Creation Date: December 20, 2016
• Sequence Number: 14
• Publication Date: January 1, 1951
• Content Type: REPORT

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Calendar No. 737
82D CONGRESS)
1st Session f
{REPORT
No. 781
THE REVENUE ACT OF 1951
REPORT
OF THE
COMMITTEE ON FINANCE
UNITED STATES SENATE
TO ACCOMPANY
H. R. 4473
A BILL TO PROVIDE REVENUE,
AND FOR OTHER PURPOSES
SEPTEMBER 18 (legislative day, SEPTEMBER 13), 1951.-Ordered
to be printed
UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON : 1951
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TABLE OF CONTENTS
Page
1. General statement------------------------------------------- 1
11. Revenue estimates------------------------------------------- 2
III. Changes in the individual income tax --------------------------- 3
A. Rate changes----------------------------------------- 3
1. Description------------------------------------ - 3
2. Reasons for the rate changes--------------------- 6
B. Head-of-household provision --------------------------- 8
1. Description-------------- -- ----- 8
2. Reasons for adopting the head-of-household pro-
vision--------------------------------------- 10
C. Distribution of tax burden_____________________________ 11
IV. General corporate tax changes_________________________________ 12
A. Normal tax and surtax rate changes--------------------- 13
B. Ceiling rate or maximum rate limitation----------------- 15
C. Capital-gains tax rate--------------------------------- 17
D. Percentage of the average base period net income taken into
account in computing the excess-profits credit---------- 18
E. Effective date---------------------------------------- 18
F. Distribution of the burden_____________________________ 19
V. Tax-exempt organizations------------------------------------- 20
A. Cooperatives----------------------------------------- 20
B. Mutual financial institutions___________________________ 22
1. Mutual savings banks___________________________ 22
2. Savings and loan associations____________________ 26
C. Unrelated business income of government colleges and
universities----------------------------------------- 29
D. Educational "feeder" corporations---------------------- 29
VI. Structural changes in the income taxes -------------------------- 30
A. Provisions in the House bill also in your committee's bill- 30
I. Life-insurance companies_______________________ 30
2. OiI et of short- and long-term capital gains and
losses -------------------------------------- 32
3. Collapsible corporations________________________ 33
4. Dealers in securities ---------------------------- 34
5. Gain from sale or exchange of the taxpayer's resi-
. deuce 34
6. Percentage depletion___________________________ 37
7. Family partnerships___________________________ 38
8. Gains from sales of livestock____________________ 41
9 C 1 1t' 42
a
a es
_______________
roy
o
10. Expenditures in the development of mines-------_ 43
11. Venture capital companies______________________ 45
12. Additional withholding upon agreement by em-
plover and employee________________________ 46
B. Provisions added by your committee____________________ 47
1. Additional allowance for certain members of the
Armed Forces------------------------------ 47
2. Sales of land with unharvested crops------------- 47
3. Elections to file joint or separate returns and to use
the standard reduction_______________________ 48
4. Pensions------------------------------------- 48
5. Stock distributions of profit-sharing plans-------- 49
6. Death benefits to employees -------------------- 50
7. Termination payments to employees------------- 50
8. Restricted stock options________________________ 50
9. Medical expenses------------------------------ 51
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IV CONTENTS
VI. Structural changes in the income taxes--Continued
B. Provisions added by your committee-Continued
rage
10. Redemption of stock to pay death taxes ----------
51
11. Basis of joint and survivor annuities included in the
gross estate------------ ------------ --
52
12. Abatement of income taxes for certain members of
the Armed Forces dying in combat zones or as a
result of injuries received in such zones --------
52
13. Individuals earning income abroad_______________
52
14. War losses------------------------------------
63
15. Foreign tax credit for taxes paid by a foreign sub-
sidiary ------------------------------------- -
54
16. Postponement of due date for returns of China
Trade Act corporations______________________ -
55
17. Application of the intercorporate dividends-re-
ceived credit in the case of resident foreign
corporations --------------------------------
56
18. Net operating loss deductions --------------------
56
19. Corporate reorganizations (spin-offs) -------------
57
20. Back mail pay of railroads______________________
58
21. Income from discharge of indebtedness-----------
59
22. Liquic'ation of corporations_____________________
60
lating surplus (see. 102) ---------------------- -
61
24, LIFO method of accounting---_--_ --------------------
61
25. Exchanges and distributions under SEC orders---
62
26. Preferred stock of public utilities-----------------
62
27. Earnings of dependents ------------------------
62
28. Mine exploration expenditures - - - - - - - - - - - - - - - - - -
63
2d. Corporate liquidations accompanied by reorgani-
zations-------------------------------------
63
C. Provisions of the House bill not accepted by your committee-
65
1. Withholding on dividends, interest, and royalties-_
65
2. Surtax exemptions and minimum excess profits tax
credits of related corporations ------ _------------
67
3. Sale of property to controlled corporations--___-
69
VII. Structural changes in the excess profits tax______________________
70
1. Extension of growth alternative to new corporations---____
.70
2. Special ceiling rate for new corporations ------------------
- 72
3. Special relief provision for companies engaged in television
broadca.,ting during the base period-------------------
74
4. Taxable mchanges--____________________________________
75
5.
Base period abnormalities --------------------------------
76
6.
Change in products committed to prior to close of base period_
77
7.
Lessor railroad corporations--------------------- -----
78
8.
Exempt c'cess output of sulfur, potash, metallurgical grade
li
l
i
l
78
mestone_________________
limestone and c
em
ca
grade
9. Reductions in inadmissible assets subsequent to the base
period-.._.-------------------------------------------
79
10.
Inadmissible assets of banks----------------------------
80
11.
Dealers in municipal bonds ------------------------------ -
s0
12.
Regulated public utility credit for intrastate pipelines-------
81
13.
Management and technical service fees___________________
81
14.
Technical amendment relating to new corporations--_______
82
15.
Technical amendment of growth alternative--------------
82
1f.
Base period of fiscal-year corporations___________________
83
17. Consolidated returns------------------------------------
83
18. Capita] reduction for loans made by parent corporations to
subsidiaries------------------------------------------ -
84
19. Transitions from World War II production and increases in
peacetime capacity-----------------------------------
84
20. Special relief provision for corporations suffering catastrophes-
85
21. Consolidal,ion of newspapers -----------------------------
85
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CONTENTS V
Page
VIII. Structural changes in estate and gift taxes______________________ 86
A. Provision in the House bill also in your committee's bill--- 86
1. United States bonds hold by nonresident aliens- - - _ 86
B. Provisions added by your committee____________________ 87
1. Estate taxes of servicemen killed in Korea-------- 87
2. Pre-1916 transfers with reversionary interests
retained------------------------------------ 87
3. Reversionary interest of decedents dying prior to
February 10, 1939 ---------------------------- 88
4. Decedents dying in 1950 with pre-1931 life estates
retained------------------------------------ 88
5. Reversionary interests in life insurance-Decedents
dying after October 21, 1942 ------------------ 88
6. Foreign estate tax credit________________________ 89
7. Works of art loaned by nonresident aliens --------- 90
IX. Excise tax changes------------------------------------------- 90
A. Alcoholic beverages___________________________________ 91
1. Distilled spirits________________________________ 91
2. Beer------------------------------------------ 92
3. Wines----------------------------------------- 93
4. Occupational taxes on dealers in liquor------------ 94
B. Tobacco products_____________________________________ 95
1. Small cigarettes-------------------------------- 95
2. Snuff and fine-cut, scrap, plug, and twist chewing
tobacco------------------------------------ 95
C. Manufacturers' excises___ --------------------------------- 96
1. Gasoline and Diesel fuel________________________ 96
2. Passenger cars and motorcycles ----------------- 97
3. Automobile trucks, busses, and truck trailers----- 98
4. Automotive parts and accessories---------------- g5
5. Tires on toys, etc------------------------------ 100?
6. Electric, gas, and oil appliances -------- ______---- 10Q,
7. Navigation receivers sold to the United States Gov-
ernment------------------------------------ 102:
8. Refrigeration equipment ----------------------- 102'
9. Sporting goods-------------------------------- 103
10. Photographic apparatus and film________________ 103
11. Electrical energy------------------------------ 105
12. Fountain pens, ball-point pens, and mechanical
pencils ------------------------------------- 105
13. Cigarettes, cigars, and pipe lighters-------------- 106
D. Retail excises______________ 106
1. Cigarettes, cigars, and pipe lighters______________ 106
2. Toilet preparations_____________________ 106
E. Transportation and communication excises --------------- 107
1. Domestic telegraph, cable, and radio messages-____ 107
2. Long-distance telephone calls to or from members of
the Armed Forces in combat areas______________ 108
3. Transportation of persons -----------------___ 108
4. Transportation of property---------------------- 109
F. Excises on. amusements or recreation_____________________ 110
1. General admissions ------------------------------ 110
2. Cabarets -------------------------------------- 112
3. Bowling alleys and billard and pool tables --------- 112
G. Excises on gambling----------------------------------- 112
1. Tax on wagers--------------------------------- 113
2. Occupationaltax ------------------------------- 118
3. Coin-operated gaming device,s____________________ 118
H. Floor stock taxes and refunds__________________________ 119
X. Tax treatment of illegal activities______________________________ 120
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Calendar No. 737
82D CONGRESS SENATE J REPORT
1st Session No. 781
SEPTEMBER IS (legislative day, SPPTEMRER 13), 1951.-Ordered to be printed
Mr. GEORGE, from the Committee on Finance, submitted the following
REPORT
1. GENERAL STATEMENT
This is the third time your committee has been called upon to
consider revenue increases since the outbreak of hostilities in Korea
a little over a year ago. The Revenue Act of 1950, which became
law on September 23, 1950, increased revenues by $6.1 billion; the
Excess Profits Tax Act of 1950, which became law on January 3, 1951,
raised revenues by $3.9 billion; and it is estimated your committee's
bill will increase revenues by $5.5 billion. In the fiscal year -1952
the bill is expected to increase revenues by $2.7 billions, raising
collections this year to $64.7 billion.
The revenue raised by these two acts, plus that provided by your
committee's bill, will add to Federal revenue $15'la billion at calendar
year 1951 levels of income and in a full year of operation. These
three revenue-raising measures on the average will increase the taxes
of individuals by 29.0 percent of the amount which would have been
due under the prior law, and will raise corporate taxes by 52.9 percent.
Never before has so much additional revenue been raised in so
short a period of time. Moreover, these three revenue measures have
brought the income tax burdens of most corporate and individual
taxpayers near the World War II peak and for many such taxpayers
the rates imposed under your committee's bill are above the maximum
rates imposed during World War II. As a result your committee
has serious doubts as to the feasibility of raising any substantial addi-
tional amounts of revenue from income tax sources. This is said
although it is recognized that present expenditure estimates made by
the executive departments indicate very substantial additions to
Federal expenditures next year. In view of this, your committee
believes that every effort must be made to reduce expenditures.
Your committee's bill provides tax increases in all of the major
tax areas. Individual income taxes for most taxpayers are raised
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2 ? REVENUE ACT OF 1951
by 11 percent effective November 1, 1,951. The top income tax rate
of corporations is raised to 52 percent. The ceiling rate on excess
profits taxes is raised to provide a maximum effective income and
excess profits tax rate of about 69 percent. Excise taxes also are
raised, primarily those on alcoholic beverages, tobacco, gasoline,
automobiles, and electric, gas, and oil appliances, and a new tax is
imposed on wagering. The bill also provides taxes for certain types
of presently exempt income of cooperatives, mutual savings banks,
and building and loan associations.
H. REVENUE ESTIMATES
Table I shows the estimated increase in tax liabilities under your
committee's bill and under the House bill in a full year of operation,
and also the effect of, these bills on collections in the fiscal year 1952.
Both the increases in liabilities in a full year and the increases in
collections in the fiscal year 1952 are shown by major revenue sources.
It is estimated that your committee's bill will increase tax liabilities
in a full year of operation by approximately $5,500 million, and that
it will increase collections in the fiscal year 1952 by about $2,700
million. The increases in collections in the fiscal year 1952 are con-
siderably smaller than the increase in tax liabilities provided by your
committee's bill in a full year of operation, both because the changes
are not fully effective in the fiscal year 1952, and because collections
tend to lag behind the incurring of liabilities. The House bill would
increase tax liabilities in a full year of operation by approximately
$7,200 million and would increase collections in the fiscal year 1952
by about $4,900 million.' The major differences from the standpoint
of revenue between the House bill and your committee's bill can be
accounted for by the fact that your committee did not impose as
large increases in individual and corporate taxes as the House, and
did not subject corporate dividends to withholding.
The increase in excise tax collections in the fiscal year 1952 assumes
that the changes in these. taxes become effective as of November 1,
1951, the same date as is provided in your committee's bill for the
increases in the individual income tax.
TA13L) 1.-Estimated effect of the House bill and committee bill on tax liabilities in a
Individual income tax_______________________________
General corporate tax changes__________________________
Tax-exempt organizations______________________________
Structural changes in the income taxes-----------------
Structural changes in the excess profits tax_____________
Structural changes in the estate and gift taxes----------
____________________________________
Excise tax changes-------------------------------------
Total --------------------------------------------
Total--------------------------------------------
Full year
Full
effect
Fiscal year
1952 effect
Full year
effect
Fiscal year
1952 effect
$2,847
1$1,652
$2, 367
$1,370
2 2, 855
2 1, 740
2 2, 060
0
0
150
0
245
705
-224
-219
0
0
-120
-120
(*)
(')
-2
0
1,252
8 811
1,276
4 823
*Negligible.
1 Estimate based on the assumption House provision is effective Nov. 1, 1951, instead of Sept. I as pro-
vided by the ]louse bill.
8 Net increase after allowing for reduction in individual income taxes duo to lower dividends.
8 This larger amount is due primarily to the acceleration of collections on withholding.
..A ss,,mes excise tax changes effective Nov. 1, 1951,
I This assumes excise and individual income tax increases provided by the House bill are effective
November 1, 1961.
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REVENUE ACT OTC' 1951 a.
III. CHANGES IN THE INDIVIDUAL INCOME TAX
Your committee's bill, in a new rate schedule, provides the lower
of the following two increases: An 11-percent increase in present tax
rates, or an 8-percent additional tax based on the surtax net income 2
remaining after the deduction of present taxes. The House bill pro-
vided an additional tax equal to 12l percent of the existing tax for
all income brackets except the very highest.
The increase provided by your committee applies only to the tax on
ordinary income. The increase under the House bill also applies to
the alternative tax on capital gains.
The rate increases under your committee's bill, in effect, are made
as of November 1, 1951, the date when increased withholding becomes
effective, and are to terminate as of December 31, 1953. Under the
House bill the rate increases, in effect, are made as of September 1,
1951, the date when increased withholding was to become effective
under that bill, but no termination date was set.
Both your committee's bill and the House bill grant to heads of
households some of the benefits of income splitting now enjoyed by
married persons. Under your committee's bill they obtain one-
quarter of the benefits of income splitting, and under the House bill,
one-half. For calendar year taxpayers this head-of-household provi-
sion under both bills is to be effective beginning in 1952.
It is estimated that in a full year of operation the individual income
tax rate changes provided by. your committee's bill will increase
liabilities by $2,394 million and that on the some basis the head-of-
household provision provided by your committee's bill will decrease
revenues by $27 million. Thus, it is estimated that the combined
effect of those provisions will be to increase liabilities in a full year of
operation by $2,367 million.
Since, in effect, the rate changes made by your committee's bill do
not become operative until November 1, and the head-of-household
provision for practically all taxpayers will not be effective until Janu-
ary 1, 1952, collections in the fiscal year 1952, ending June 30, 1952, will
not fully reflect the increases provided. Therefore, fiscal year 1952
collections under your committee's bill are expected to be increased
by only about, 58 percent of the $2,367 million, or by $1,379 million.
Since the rate changes made by the House bill were to be effective
as of September 1, 1951, the report by the Committee on Ways and
Means of the House estimated collections in fiscal year 1952 would be
increased by $1,947 million. However, had the effective date been
November 1, as under your committee's bill, fiscal year 1952 collections
under the House bill would have been increased. by $1,652 million.
A. RATE CHANGES
1. Description
For taxable years beginning after October 31, 1951, your com-
mittee's bill increases the present individual income taxes by the
lower of either about 11 percent of the present combined normal tax
and surtax, or approximately 8 percent of the surtax net income 3 after
present taxes. These increases are to terminate as of December 31,
1953. The House bill increases the present normal tax and surtax
a Surtax net income is income after deductions and exemptions.
8 Surtax not income is income after deductions and exemptions.
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4 REVENUE ACT OF 1951
in most cases by 123 percent for taxable years beginning after August
31, 1951. No termination date for this increase is provided. The 11-
or 8-percent increase provided by your committee's bill is incorporated
in the surtax rate schedule. Under the House bill the 1232-percent
increase is to be a separate tax computation, although it is incorpo-
rated in the tax table used by those with adjusted gross incomes of
$5,000 or less.
The new surtax table in your committee's bill provides surtax
bracket rates ranging from 19.2 percent on the first $2,000 of surtax net
income to 88.7 percent on surtax net income in excess of $200,000.
This, when combined with the flat 3-percent normal tax, gives total
rates which range from 22.2 percent on the first $2,000 of taxable in-
come to 91.7 percent on taxable income in excess of $200,000. The
combined normal tax and surtax rates (including the 1232 percent in-
crease) under the House bill range from 22.5 percent on the first $2,000
of surtax net income to 94.5 percent on surtax net incomes in excess of
$80,000. Under present law these combined rates range from 20
percent on the first $2,000 of taxable income to 91 percent on incomes
in excess of $200,000.
Your committee's bill raises the effective rate limitation, or maxi-
mum combined normal tax and surtax on total net income, from the
87 percent provided by present law to 88 percent. This effective
rate limitation prevents an individual's total net income from being
taxed at a rate higher than 88 percent, although the bracket rate on
income in excess of $200,000 permits a portion of an individual's
income to be taxed at as high a rate as 91.7 percent. Under the
House bill the effective rate limitation is raised to 90 percent.
Your committee's bill also provides a new surtax rate schedule for
the calendar year 1951, adding to the present tax burden about one-
sixth of the increase provided for 1952 and 1953. Thus, for 1951 the
present tax is increased by the lower of either nearly 2 percent of the
existing law tax, or by slightly over 1 percent of surtax net income after
deducting the present tax. this is roughly the equivalent of making
the full 11-percent or 8-percent increase effective November 1, 1951.
The House bill which would have been effective as of September 1,
1951, provided a 4- percent increase in the present law tax for calendar
year 1951 taxpayers. This would have been roughly the equivalent, of
making the tax increase effective for the last third of the year. The
combined normal tax and surtax bracket rates under your committee's
bill for the calendar year 1951 range from 20.4 percent on the first
$2,000 of taxable income to 91.1 percent on taxable. income over
$200,000. Under the House bill these rates range from 20.8 percent
on the first $2,000 of taxable income, to 92.56 percent on taxable
incomes in excess of $200,000. Under your committee's bill the effec-
tive rate limitation for calendar year 1951 taxpayers is 87.2 percent,
and under the House bill, 88 percent.
Your committee's bill also adds a provision which makes inap-
plicable, for 195 1., the penalties and additions to tax for willful failure
to make declarations or pay estimated tax with respect to the addi-
tional tax imposed on individuals by this bill.
For 1952 and subsequent years and for the last third of 1951 the
House bill provides an increase in the alternative tax on capital
gains of individuals. For 1952 and subsequent years this increase
Aft
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REVENUE ACT OF 1951 J
is 12% percent, the same increase as provided for the normal tax
and surtax. Applying this to the present 25-percent capital gains
tax gives a new rate of 28.125 percent. For the calendar year 1951
the House bill provides a 4-percent increase in the alternative tax
on capital gains resulting in a total capital gains tax rate of 26 percent.
Under your committee's bill -no change is made in the alternative tax
on capital gains. Thus, the rate remains at 25 percent both for 1951
and 1952 and subsequent years.
Under both your committee's bill and the House bill new withhold-
ing tables are provided to reflect the increased taxes. The withhold-
ing in both of these tables is at approximately 20 percent as contrasted
to 18 percent in the table in present law. Similar adjustments are
made in the percentage method of withholding. A withholding tax
rate of approximately 20 percent collects the full amount ordinarily
due on the beginning rates provided by your committee's bill and the
House bill after allowance for the standard deduction.
't'able 2 shows the amount of tax paid at selected net income levels
under present law, under the House bill for the calendar year 1952 and
subsequent years, and under your committee's bill for the calendar
years 1952 and 1953. The tax burden is shown separately for single
persons with no dependents, for married couples with no dependents,
and for married couples with two dependents. The tax of single
persons, of married couples with no dependents and of married couples
with two dependents shown in this table differ because the amount
of tax paid is shown by net income 4 classes. Net income for these
classes of taxpayers differs from the income on which the tax is based
because a single person receives one $600 exemption, a married couple
two $600 exemptions and a married couple with two dependents four
$600 exemptions. In addition, married couples receive the benefits
of income-splitting.
4 Not income is income after deductions but before exemptions.
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TABLE 2.-Comparison of individual income-tax burdens under present law
those under the House bill and Finance Committee bill for 1962 and 1963
Net income (after deductions but before exemptions)
Finance
Committee
bill
$800------------
000
$1
--
-----
----------
--
------------------------
-
$40
$45
$44
,
--
-
-
-
--
---------
0 -------------------
------------
$2,00
80
90
89
-------------
--------- --------------------------- --
$4
00
0
280
315
311
,
----------------------------- -?------- -----------------
'4
000
488
549
542
,
--?---------------------- ---------
$5
000
708
797
786
,
-----?---------
-----------------------------------
944
1
002
$8,000---
--
10
000
--
----------------------
1,780
,
2
003
1,048,
1
974
.
,
------------- -----
20,000
----?---- --------
2;438
,
2, 741
,
2,704
$2
000
4;448
5
004
4
940
,
---?-----------?-
$265,000
?------------- ---------------
6,942
,
7, 810
,
7, 718
00 ----------------
50
9,796
26
388
11, 021
10,872
0,
$100,000-------------------------------
300
000
,
66798
'
29, 687
74
831
28, 234
69
344
,
-------------------------------------------------------
$1
0
000
24i,
274
,
263
831
,
251
522
,
--------------- --------- ------------------
000
000
$1
429, 274
,
2 450
000
,
434
922
,
,
,
------------ . . a
1870 000
,
2900,000
,
8 880, 000.
MARRIED COUPLE, NO DEPENDENTS
$1,506--------------------------------
$3
000
$60
$68
$67
,
----------------------------- ------------------------
$4,000----------
- 160
3
180
178
$4,000-----------
$8 -?-------------------------
000
60
560
405
630
400
622
,
------------
------ -----------
$8
000
760
855
844
,
-------------
$10
000
--------------------------------------------
1
416
1
693
1
571
,
------------
5
000
------- ------- ------------- -------------------
,
1,888
,
2,124
,
2
006
,
,
?----------------------------- ------ ----------------
$225,000------
3, 260
3,668
,
3,618
. 25,000----------?-----------------` --------------------------
$50,000--------------------------------
____________________
4,872
6, 724
19
6,481
7, 565
5,408
7, 460
--
'tftt1
060
----------------
_.-
,592
52, 776
22,041
59
37:1
21 744
5)) 468
,
-------------------------------
------------
22`2, 57'2
,
244, 1111,
228 664
41 ooo,o(0 - ---------------------
$I,U0Q0
----------- -
------------------
403, 548
858,548
433, 1(il
900, 000
411, 3,54
809, 8' 4
MARRn1) COUPLE, 2. DEPENDENTS
$3,000-..------------------------------- ._
$4
000
------------------
$120
$135
8133
.
_..---------------------------- ----
$5,000----------------------------------
- ---------------
1320
520
360
355
-----------------
8,000--------- -------------------------------------
$10
000
1, ['52
581
1. 296
577
1
2118
.
- ---------------------------.
$1
000
_--------------
1, 592
1, 791
,
1
766
,
-----------------
(100 ---------------
$26
-- ----
2, 900
3,263
,
3, 222
,
------------------------------ -
0
$2
----------------
--
4, 404
5. 022
4
952
G,0
0 ----------------------------------
0(10 - - -
$60
- -
----------------
6, 269
7052
,
6
956
,
-------------------------------
$100
006
-
-- ---------
18,884
21, 245
,
20,961
,
------------------------------- -
---------- --
-
------------------
51,012
58
401
555
592
---------------------------------
-
$500
0
221,.501
.
243,1)27
,
227
581
,
00----------------------------------- - ----------------
15
000
$1
402,466
432, 027
,
410
24 (
,
,
0)--------------------------------- ------------------
857,450
2 900, 000
,
868,743
14aximum offcctive rate limitation of ;r,' (u'rcont.
Maximum effective rate limitation of f'() (u rcent.
a i laximum effective rate limitation of s(, l e cont.
2. Reasons for the rate cha:n.,7,s
Your committee believe that in view of revenue requirements
resulting from the present f),,)tional defense emergency it is necessary
to make substantial increases in the individual income taxes. Only
by such increases will it [)v possible to come close to balancing the
budget and alleviating the iutpact of increased inflationary pressures
arising from additional defel[.se expenditures. It is believed, however,
that the 12Y-percent increas(' in present taxes provided by the House
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REVENUE ACT OF 1961 .7
bill is too severe in view of the fact that an average increase of 17 per-
cent in individual income taxes has been made quite recently by the
Revenue Act of 1950. For that reason your committee has reduced
this percentage increase for the bulk of the taxpayers to 11 percent of
their present taxes. Even with this increase many taxpayers will
find themselves with tax rates in excess of the peak rates imposed
during World War H.
Your committee modified this 11-percent increase by providing that
in no case is the increase to be more than about 8 percent on the income
remaining after taxes. Your committee believes that a provision of
this type is fairer to all income groups than the type of provision
adopted by the House. For most taxpayers their present tax is much
smaller than their income remaining after the payment of taxes.
However, because of the present highly progressive income tax rates.
for some taxpayers, their income remaining after the payment of all
taxes is smaller than their present tax burden. In the case of both of
these groups of taxpayers, LO ur committee's bill imposes an increaser
on the smaller amount; in case of the former group, on the present,
tax burden, and in the case of the latter group, on the income re=
maining after payment of the present tax burden. The percentage
increase in income after taxes is effective with respect to taxable
incomes of about $27,000 and over. It was believed necessary
to provide a limitation of this type, in view of the fact that in the
upper income brackets the marginal rates, or the rates applying to the
next dollar of income, are already very high. The present law mar-
ginal tax rate at $28,000 of surtax net income, for example, is 62
percent; at $44,000 is 72 percent; at $70,000 is 81 percent; and at
$200,000 is 91 percent. Your committee's bill raises these marginal
rates very substantially, although not as much as the 12;2-percent
increase provided by the House. In the view of your committee,
the marginal rate of about 70 percent provided on surtax net income of
$28,000 under the House bill will seriously impair the incentives of the
ti
i
d
S
il
ras
s
c
l more
t
taxpayers in this bracket to work and to invest.
the marginal rate of nearly 85 percent provided by the House bill on
incomes of $50,000, and the rate of 94.5 percent provided for income$
of $80,000. The rates provided by your committee's bill in these
brackets also are drastic but less so than those of the House bill.
Under your committee's bill the marginal rate at $28,000 is 67 percent;
at $44,000 is 73 percent; at $70,000 is 82 percent; and at $200,000 is
91.7 percent.
A similar limitation on the tax increase was previously provided
in the Victory tax imposed by the Revenue Act of 1942. That tax
was limited to the excess of 90 percent of net income after the regular
income tax liability. The 1940 defense tax also used this type of
formula. Your committee believes that in bracket areas where the
progression is already quite steep the formula used in imposing addi-~
tional taxes should measure ability to pay by taking into. considera-
tion taxes already paid. It is only the . funds remaining after the
payment of the present tax burden which. such individuals will have
available to meet additional tax burdens.
Although the House bill increases the alternative tax on capital
gains to a little over 28 percent, your committee's bill retains the
ceiling rate in this tax at 25 percent. Your committee recognizes that
capital gains are different from ordinary income in that the time of
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8 REVENUE ACT OF 1951
realizing a capital gain, to a substantial degree, is subject to the
control of the taxpayer. Therefore, in this case, particularly, high
rates tend to discourage the realization of gains. Congress has
recognized this as far back as the Revenue Act of 1942 by placing an
effective coiling rate of 25 percent on capital gains income. Since
that time, although individual income tax rates have been both sub-
stantially increased and decreased, this ceiling rate has remained
the same. In view of this your committee does not believe that it
is appropriate to consider a change in this ceiling rate at this time.
A termination date, namely, December 31, 1953, has been provided
by your committee for the individual income tax rate increases because
it is recognized that those rates are exceedingly high, and your com-
mittee hopes that it will be unnecessary to continue rates at this high
level after December 31, 1953. In any case, it appears desirable to
review the levels of the individual income tax rates at that time.
November 1, 1951 was selected as the effective date for the individ-
ual income tax increases because so much of the individual income
tax is collected through the withholding system that it is not feasible !
to make changes in this tax applicable prior to the time the withholding
rate increases can be made. Because some time will be required for
the preparation of the new withholding tax tables and their distribu-
tion to employers, November 1 appears to be the earliest possible
date at which withholding can be made effective. The September 1
date contained in the House bill was selected before it was known
how much time would be required for the proper consideration for
this tax measure.
Your committee has included the increase provided by its bill in
the regular surtax rate schedule because it is believed that this will
be easier for both the taxpayers and the administrators. The report of
the Committee on Ways and Means of the House indicates that the
rate increase provided by the House bill was not included in the rate
schedule because it was believed that a separate schedule would be
more generally recognized as representing a temporary tax increase.
Your committee agrees with this objective, but believes that it is
better accomplished by the termination date for the individual in-
come tax increases as provided in its bill.. Therefore, it was believed
unnecessary to retain the increase made by your committee as a
B. HEAD-OF-HOUSE HOLD PROVISION
1. Description
For persons qualifying as a "head of a household" your committee's
bill provides a new surtax table applicable for taxable years beginning
after'October 31, 1951 and the House bill, for taxable years beginning
after August 31, 1.951. Thus, in both cases, for a calendar year tax-
payer, the provision will not become effective until 1952. In your
committee's bill the new surtax table is constructed to give heads of
households approximately one-quarter of the benefits of income-split-
ting, while the surtax table in the House bill provides them approxi-
mately one-half of these benefits.
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REVENUE ACT OF 1951 9
Your committee's bill defines a head of a household, for'purposes of
obtaining the benefits of this special provision, as an individual who
is not married and who maintains a household in which lives-
(1) One of his children (including an adopted child), one of
their descendants or a stepchild (but the child, descendant, or
stepchild if married must still be a dependent of the taxpayer
and not file a joint return); or
(2) Any person (not filing a joint return with a spouse), who
has a gross income of less than $600,5 more than half of whose
support is supplied by the taxpayer and who boars one of the
following relationships to the taxpayer:
(a) A brother or sister or stepbrother or stepsister,
(b) A parent or one of their ancestors,
(c) A stepparent,
(d) A nephew or niece,
(e) An uncle or aunt, or
(f) A son-in-law, daughter-in-law, mother-in-law, father-in-
law, sister-in-law, or brother-in-law.
The House bill differs only in one minor respect in the tests outlined
above. In the House bill the descendants of stepchildren are included
among the relatives who if living in the household of a taxpayer may
make him eligible for the head-of-household status.
Under both bills, a taxpayer is considered as maintaining a household
only if during the year he furnishes more than half the maintenance
costs of such household. Moreover, the individual. who makes it
possible for the taxpayer to gain the benefits of the head-of-household
status must actually live in the taxpayer's household during the entire
taxable year unless he is temporarily absent, for example, attending
school or for reasons of health. Under this definition it is immaterial
how much gross income an unmarried child or grandchild living with
the taxpayer may have.
Table 3 shows for both the House bill and your committee's bill
the amount of tax paid at selected net income levels for heads of house-
holds with one dependent, for single individuals with one dependent,
and for married couples withno dependents. It also shows how much
less the tax of the head of household and the tax of the married
couple are than that of the single person at the same income level.
This represents the benefits of income .splitting which present law
grants in full to married couples and which both the House and your
committee's bill grant in part to heads of households. The last
column of the table expresses the income-splitting benefits granted
heads of households as percentages of the income-splitting benefits
available to married couples. This shows that your committee's bill
grants about 25 percent, and the House bill about 50 percent, of the
benefits of income splitting to heads of households.
6 Under present law the taxpayer is allowed a dependency credit provided the dependent has a gross
h, Como of less than $500. Sec. 310 of your committee's bill, discussed elsewhere in this report, raises the
allowable gross income of a dependent to $000.
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10
REVENUE ACT OF 1951
TABLE 3.-Comparison of individual income tax burdens for heads of households
under the House bill. and your committee's bill with those for single persons with
1 dependent and for married couples under both bills, for 1952
A. HOUSE BILL
Selected net
income levels I
Head of
household
with 1
dependent
Single indi.
vidual with
1 exemption
Married
couple filing
a joint
return
Amount of tax difference
between single person
with 1 dependent and-
Head of
household
Married
couple
Percent tax
difference
of head of
household
is of that
of married
couple
$1,500-------------
$2
000
$68
$68
$68 ------
-------------
------------
,
----------- --
000
$3
180
180
180
-------------
--
--------------
,
------------
000
$5
405
405
405 --------------
---------
,
-------------
875
806
855 $21
$41
----
51
2
$8,000-------------
1,697
1, 800
1, 593 103
207
.
49
8
$10,000-___________
2, 318
2,511
2, 124 193
387
.
49
9
$15,000____________
4, 172
4, 696
3,668 524
1
028
.
51
0
$20,000____________
6,462
7,452
5,481 990
,
1
971
.
50
2
$25,000____________
9,092
10,622
7,565 1,530
,
3
057
.
50
0
$50,000____________
25, 605
29, 201
22,041 3,596
,
7
160
.
60
2
$100,000___________
66,830
74, 264
59, 373 7, 434
,
14
891
.
49
9
$500,000___________
442, 724
2 450, 000
433,161 7, 276
,
16
839
.
43
2
$1,000,000_________
2 900, 000
2 900, 000
2900,000 ----------
,
--------------
.
--------------
B. COMMITTEE BILL
$1,500------------
$67
$67
$67
2,000 -------------
178
178
178
3,000_____________
400
400
400
--------------
--------------
--------------
$3,000 ,_____________
1,728 728
776 883
1
844
1
571
-------------
$48
--------------
----------
----
$10,001 ------------
000
$15
2,388
4
372
,
2,476
,
2,096
88
205
380
23.4
23.2
,
------------
1101000 ------------
1
,
6,872
4,636
7,364
3,618
5,408
264
492
1,018
1
956
25.9
25
2
25,000 ------------
0,000____________
9,722
26,288
10,482
27, 796
7,460
21,744
760
1,508
,
3,022
6
052
.
25.1
24
9
103,000_________ _
65,732
68,816
56,468
3,084
,
12
348
.
25
0
$500,000 -----------
$1,000,000---------
428,890
2 880, 000
434,372
3 880
000
411,344
869
844
5,482
,
23,028
.
23.8
,
,
-------------
10,156
--------------
I Income after deductions but before exemptions.
I Maximum effective rate limitation of 90 percent.
8 Maximum effective rate limitation of 88 percent.
2. Reasons for adopting the head-of-household provision
Your committee agrees with the House that taxpayers, not having
spouses but nevertheless required to maintain a household for the
benefit of other individuals, are in a somewhat similar position to mar-
ried couples who, because they may share their income, are treated
under present law substantially as if they were two single individuals
each with half of the total income of the couple. The income of a
head of household who must maintain a home for a child, for example,
is likely to be shared with the child to the extent necessary to main-
tain the home and raise and educate the child. This, it is believed,
justifies the extension of some of the benefits of income splitting. The
hardship appears particularly severe in the case of the individual with
children to raise who, upon the death of his spouse, finds himself in
the position not only of being denied the spouse's aid in raising the
children, but under present law also may find; his tax load much
heavier.
As indicated by the report of the Committee on Ways and Means
of the House it does not appear appropriate to give a head of household
the full benefits of income splitting because it is unlikely that there is
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REVENUE ACT OF 1951 11
as much sharing of income in these cases as between spouses. More-
over, it is your committee's opinion that in view of the fact that under
the head-of-household provision taxpayers are not required to include
the income of the dependent (spouses must file a joint return in order
to enjoy the benefits of income splitting) an allowance of 25 percent
of the benefits of income, splitting for such taxpayers should be
adequate.
In defining the relationship to the taxpayer of an individual who
enables the taxpayer to claim the head-of-household status, the
relationships provided in section 25 (b) (3) of the code for claiming
a dependency credit have been followed. In all cases except those
in which unmarried children, their descendants or stepchildren
live in the home of the taxpayer he must supply over half of the support
of the relative and the relative must have gross income of less than
$600 s These limitations are believed to be unnecessary in the case
of children, grandchildren, or stepchildren because such relatives are
ordinarily a part of the close family unit and the relationship is more
nearly similar to that existing between spouses than is true in the
other cases. However, even such individuals must live in the same
household as the taxpayer, except for the temporary absences pre-
viously described, and the taxpayer must supply over half the cost
of maintaining the household. However, the limitations described
in section 25 (b) (3) are applied where the children or grandchildren
are married. This will prevent extending the benefits of a head of
household to a parent while the child is himself obtaining the benefits
of income splitting with his spouse.
C. DISTRIBUTION OF TAX BURDEN
Table 4 shows the distribution of the individual income tax burden
under present law, the House bill and your committee's bill by ad-
justed gross income classes.' It also distributes by the same classes
the number of taxable returns, the adjusted gross income, the value
of the exemptions and the normal tax and surtax net income.a
The table indicates that of $25,823 million in total individual
income tax liability under your committee's bill, $9,637 million will
come from those with adjusted gross incomes of $5,000 or less
and $16,186 million from those with adjusted gross incomes of over
N"001 , $5,000.
_U See footnote 4 above.
7 Income after business but before personal deductions and exemptions.
I Income after business and personal deductions and exemptions.
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 Adjusted gross income classes
Total
number
of returns
Adjusted
income
Value of
exomp
tions
Surtax
net
income
Total
tax,
present
law 1
Total tax Taal tax
under under
House Iinanco
bill Commit-
tee bill I
Under $1,000________
$1,000 to $2,000_______________
1,868,095
6
991
074
$1,556
10,875
$1,121
?i
436
$272
$54
6 60
9
1
$2
,000 to $3,000_______________
to $4,000_________
,
,
10,908,014
9
830
797
27,275
33
402
,
12,918
4,209
11,226
842
2,245
4
934
2,626 2
492
______
$4,000
,000 to $5,000 _______________
,
,
6,262,777
,
27,905
15,496
11,259
14,315
13
247
2,871
2
672
,
3,229 3,186
3
,
,
,002 2,964
Total under $5,000______
35,860, 757
101, 073
46, 230
43,268
8,684
9, 765 9,637
$5,000 to $10,000______________
$10,000 to $25,000 ------------ _
6,645,679
1, 342, 865
42?850
. 19
470
1.2,524
2
637
24,916
14
742
5,080
5,707
5
8
4
0$25,000 to $50,000____________
$5
,000
t0$100
000
247,141
70
11
,
8,200
,
495
,
6,070
3, 488
2,289
3
,908 3,
6
2.560 2
529
,
------------
100
000
$, to $250,000___________
-
,
5
18,276
4,075
2,559
138
35
3,966
1
966
1,862
1
27
,
2,080 2,020
$250,000 to $500,000___________
$500,000 to $1,000
000
1,967
479
647
3
,
438
,
6
378
1,429 1,341
1
418 388
,
__________
$1,000,000 and over___________
189
316
310
1
(2)
185
178
192
206
209 195
2
Total over $5,000_______
8,320,711
79;027
15,833
53,363
14,771
19 208
16,537 16,186
Total________________
44,187,408
1
180,100
62,063
96,631
23,455
2G, 302 26,823
1 Includes normal tax, surtax, and alternative tax on net long-term capital gains.
2 Less than $500,000.
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? ??12 REVENUE ACT. OF 1951
:.CABLE 4.-Estimated distribution of individual income-tax returns, income, exemp-
tions, and tax liability under present law, Rouse bill, and Finance Committee bill
when fully effective
[Money amounts in millions of dollars]
IV. GENERAL CORPORATE TAX CHANGES
Both your committee's bill and the House bill provide a top corpor-
ate rate of 52 percent as contrasted to 47 percent under existing law.
Your committee's bill provides a corporate income tax rate of 27
percent on the first $25,000 of each corporation's income, and a 52-
percent rate on all income in excess of $25,000. This can be com-
pared with House bill rates of 30 percent on the first $25,000 of in-
come, and 52 percent on all income in excess of $25,000. Under
existing law the first $25,000 of each corporation's income is taxed at
25 percent and all income in excess of this amount is taxed at 47 per-
cent. Under both your committee's bill and the House bill the top
corporate income tax rate, taken together with the 30 percent excess
profits tax rate, gives a combined rate of 82 percent applying to
adjusted excess profits net income, as compared with a combined rate
of 77 percent tinder existing law. Your committee's bill provides a
coiling rate of 17 percent for excess profits tax and consolidated return
purposes, which when taken together .with the maximum effective
rate of about 52 percent under the corporate income tax, means that
in no case will more than about 69 percent of a corporation's income
be taken in income, consolidated return and excess profits taxes. The
House bill provides a ceiling rate on income taxes and excess profits
taxes, taken together, of 70 percent, and present law provides a. 62
percent ceiling of this type. The normal tax and surtax rate changes
provided by your committee's bill are effective- as of April 1, 1951,
and are to terminate as of December 31, 1953. The House bill sets
January 1, 1951, as the effective date but has no termination provision.
It is estimated that in a full year of operation these changes in
corporate rates will increase liabilities by $2,220 million before
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REVENUE ACT OF 1951 13
.consideration is give( to the effect on individual income taxes of the
smaller amounts which will be available for corporation dividend
payments. Of this amount, $2,100 million is attributable to the
increases in the regular corporate income taxes. The additional
$120 million is attributable to increases in excess profits tax liabilities.
It is estimated that after the decrease in in.dividuai income tax col-
lections resulting from smaller dividend payments is. taken into
account, the net increase provided by the actions of your committee
with respect to corporate rates will be $2,060 million. The House bill
provided a gross increase in corporate tax liabilities of $3,078 million
and a net increase of $2,855 million.
In the fiscal year 1952, .ending June 30, 1952, it is estimated that the
increases in corporate rates provided by your committee's bill will
increase revenues in this year by $870 million as compared with
$1,740 million under the House bill.
A. NORMAL TAX AND SURTAX RATE CHANGES
Your committee's bill provides a corporate normal tax rate of 27
V percent as compared. to 25 percent under existing law, and 30 percent
under the House bill. The corporate surtax rate under your com-
mittee's bill is 25 percent as compared to 22 percent under both
existing law and the House bill. Changes are also provided in both
your committee's and the House bills in the credits allowed Western
Hemisphere trade corporations and the credits for dividends paid
and received on preferred stock of public utilities, in order to retain
the tax differential provided in these cases under existing law.
Since corporations with incomes of $25,000 or less are subject only
to the normal tax, their rate of tax is increased from 25 percent to 27
percent under your committee's bill, or by 3 percentage points less
than is provided by the House bill. The combined normal tax and
surtax on. incomes in excess of $25,000 is increased from 47 percent to
52 percent by your committee's action, the same increase as is pro-
vided by the House bill. Table 5 compares for corporations with
selected net incomes the combined corporate normal. tax and surtax
effective rates under your committee's bill with those under the
House bill, under existing law and under the law in effect prior to the
enactment of the Revenue Act of 1950. The table indicates that
under your committee's provisions the effective rate, or average rate
on the entire taxable income, for corporations with incomes of $25,000
or less, is always 2 percentage points above existing law and 3 per-
centage points below the House bill. For corporations with incomes
above $25,000 the percentage point increase provided by your com-
mittee as the income grows larger gradually approaches, but never
quite reaches, a 5-percentage-point increase over existing law. Or,
expressing it another way, the increase provided by your committee's
bill never quite reaches the increase provided by the House bill.
This is attributable to the fact that your committee did not place the
full 5-percentage-point increase on the normal tax with respect to
which corporations are fully taxable, but rather added 3 of the addi-
tional 5 percentage points to the surtax with respect to which corpora-
tions have a $25,000 exemption.
Table 6 shows for corporations with selected net incomes the com-
bined corporate normal tax and surtax liabilities under your com-
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14 REVENUE ACT OF 1951 11 mittee's bill, under' the House bill, under existing law, and' under the
law in effect prior to the enactment of the Revenue Act of 1950.
The increase in tax liabilities of your committee's bill over existing
law ranges in the cases shown from 8 percent on incomes under
$25,000, to 10.64 percent on incomes of $100,000,000. Under the
House bill the increase in tax liabilities ranges in the cases shown. from.
20 percent of the tax due under present law on incomes under $25,000,
to 10.64 percent on incomes of $100,000,000. Thus under your com-
mittee's bill the percentage increase in tax grows larger as the income
increases, while under the House bill exactly the reverse is true.
The rate increases provided by your committee's bill are much
larger than it would" ordinarily be desirable to provide, and it is
li
d
h
i
rea
ze
t
at
f corporate rates are continued at this high level in'
definitely the expansion of productive facilities may be seriously
impaired. For this reason your. committee has set .December 31.,
1953, as the termination date for these increases. In the interval
before 1953, your committee believes that corporations. will be able
to stand these high rates in view of the high corporate profits stem-
ming in a large part from the national defense program and the high
level of demand generally for product's and services. In the first
quarter of 1951 corporate profits before taxes were running at the
annual rate of nearly $52 billion, and in. the second quarter of 1951
it is estimated that corporate profits were running at the annual rate
of $48;2 billion. Thus, corporate profits in the first half of '1951
are above the very high rates reached in the last half of 1950 and
one-half again as large as the profits in the calendar year 1948, which
were the largest prior to 1950. It is expected that corporate profits
after all taxes, even including the taxes imposed by your committee's
bill, will be within about $2.5 billion of the level of corporate profits
after taxes in 1950 and above the profits after taxes in any prior year
except 1948. During World War IT, for example, corporate profits
after taxes ranged from $8.5 billion to $10.8 billion as compared to
anticipated corporate profits of about $20 billion after the taxes
imposed under your committee's bill.
TABLE 5.-Comparison of corporate combined normal tax and surtax effective rates
under present law, House bill and Senate Finance Committee bill
Not income subject to normal
Effective rates of combined normal tax and
surtax (percent)
Percentage point
increase over present law
tax and surtax
Present
law
House
bill
Finance
Committee
bill
House
bill
Finance
Committee
bill ,
$1,000-------------------------
000
$5
21, 00
25:00
30.00
27.00
5
00
2
00
,
-------------------------
$10
000
21.00
25.00
30.00
27.00
.
5
00
.
2
00
,
---------- ------
$25
000
-
22.00
25.00
30.00
27. 00
.
5
00
,
2
00
,
-
----------------------
$30
000
23.00
25. 00
30.00
27.00
.
6
00
.
2
00
,
------------------------
$40
000
28.00
28. 67
33.67
31.17
.
5
00
.
2
50
,
------------------------
50
000
34.25
33.25
38. 25
36.38
.
5
00
.
3
13
$
,
------------------------
000
$00
38.00
36.00
41.00
39.50
.
5
00
.
3
50
,
------------------------
$76
000
38,00
37.83
42.83
41.58
.
5
00
.
3
75
,
------------------------
$100
000
38.00
39.67
44.67
43.67
.
5
00
.
4
00
,
-----------------------
200
0
38.00
41.50
46.50
45.75
.
5
00
.
4
25
4
,0
0-----------------------
$500
000
38.00
44.25
49.25
48.88
.
5
00
.
4
63
,
-----------------------
$1
000
000
38.00
45. 90
50. 90
50.75
.
5
00
.
4
85
,
,
---------------------
$10
00
38.00
46.45
51.45
51.38
.
5
00
.
4
93
,
0,000--------------------
100
0
38.00
46.95
61.95
51.94
.
5
00
.
4
99
$
,
00,000-----------------__
3,8, 00
46.99
51.99
51.99
.
5.00
.
5.00
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REVENUE ACT OF 1951. 15
TABLE 6.-Comp, wpro ent law, house bill, Finance Committee billnder pre-1960
lap ,
Increase in tax liability over present law
Combined normal tax and surtax
Amount
Percent
Net income sub-
Joet tonermal tax
and surtax
Finance
Finance
Finance
m-
C
Pre-1950
Present
law
House
bill
Coin-
mitten
House
bill
Com-
mittee
House
bill
o
mitteo
bill
bill
bill
$1;1300 00 ____________
$210
050
$250
250
1
$300
500
1
$270
350
1
$50
250
$20
100
20.00
20.00
8.00
8,00
$10,000___________
1,
2,200
,
2, 600
0
,
3,000
0
,
2,700
750
6
500
250
1
200
500
20.00
20.00
8.00
8.00
$25,000___________
$30
000
5,750
8,400
0,25
8,600
7,60
10,100
,
0,350
,
1,600
750
17.44
8.72
40
9
___________
,
$40,000__________
50
000
13,700
000
19
13,300
000
18
15,300
500
20
14,550
19,750
2,000
2,500
1,250
1,750
15.04
13.89
.
9.72
________.__
$
,
$60,000___________
,
22,800
,
22,700
,
25,700
24,950
750
3
3,000
750
3
2,250
000
3
13.22
12.61
9.91
10.08
$75,000___________
____
$000
000
28, 500
38,000
29, 750
41,500
33, 500
46,500
2,
45,750
,
5,000
,
4,250
12.05
10.24
45
10
,
_____
$200,000_ _ __ _ _ _ _ _ _
76, 000
000
1
0
88, 500
500
229
98,500
500
254
97 , 760
750
253
10, 000
25,000
9, 250
24,250
11.30
10.89
.
10.57
$500,000__________
$1
_
000
000
9
,
000
380
,
464,500
.
,
514,500
,
513,750
60,000
49,250
10.76
10.00
10
63
,
______
_
,
$10,000,000 _ _ _ _ _ _ _
$1OQ003,000------
,
3, 800, 000
38, 000, 000
4, 694, 500
46, 994, 500
5,500
51:199404: 500
5 193, 750
51, , 093, 750
500, 000
5,000,000
499, 250
4,999,250
10. 65
10. 04
.
10.64
Moreover, these larger tax collections during the immediate period
ahead will occur during a period of large defense orders and a high
level of consumer income. The assurance of these large and predict-
able markets for producers during the immediate period ahead must
be offset against the adverse effect on incentives of the high corporate
taxes provided by. this bill.
Your committee dooms it desirable to add only two out of the five
percentage points by which corporate taxes are increased to the
normal tax because this is the only rate under which some small
corporations are taxed and the rate under which most of the income
of other relatively small corporations is taxed. Your committee be-
lieves that the continuance of a free competitive market demands the
creation of new, and the growth of existing, small businesses and that
this necessitates preferential tax treatment with today's corporate tax
burden.
B. CEILING RATE on MAXIMUM RATE LIMITATION
Under existing law the normal tax, surtax, 2-percent tax on con-
solidated returns, and excess profits tax together may not exceed 62
percent of a corporation's excess profits not income (income before
the excess profits credit and unused excess profits credit
ductin
d
g
e
carry-over.' Thus, for corporations with effective income tax rates
of about 47 percent, this moans that the excess profits tax may not
exceed about 15 percent of their excess profits net income.
Under the House bill this ceiling rate, or maximum rate limita-
tion, is raised to 70 percent, or by 8 percentage points. Five of
these percentage points merely offset the 5-percentage-point increase
in the income tax rates in the case of the corporation with most of
9 For this purpose the excess profits net income is substituted for the normal tax net income and surtax
net income in computing the various taxes involved.. Excess profits not income is income before the deduc-
tion of the excess profits tax credit and the excess profits credit carry-ovor. The 30 percent excess profits
tax rate is excess applied to credit and the unused profits excess profits credit is, carry-over. net income after deduction
of the ex
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16 REVENUE ACT OF 1551
its income taxed at the 52-percent rate. The additional 3-percent
age-point increase in the ceiling rate provided by the House bill,
however, has the effect of increasing the excess profits tax liabilities
of many corporations. ']'he 70-percent coiling rate for a corpora-
tion with an effective income tax rate of about 52 percent means that
its excess profits tax may not exceed about 18 percent of its excess.
profits net income under the House bill as contrasted to 15 percent
under existing law.
Your committee's bill adopts a new type of ceiling rate.. The coil-
ing rate in this bill is 17 percent of excess profits net income but applies
only with respect to excess profits tax liability and the tax liability on
consolidated returns. For corporations with income tax effective rates
of about 52 percent this is the equivalent of about a 69-percent coiling
rate on liabilities under the income taxes, consolidated return tax and
excess profits tax, taken together, and this is the rate which is com-
parable in these cases to the 70-percent ceiling rate under the House
bill and the 62-percent ceiling rate under existing law. However,
because of the $25,000 surtax exemption, the effective income tax
rates of corporations with taxable incomes of less than $300,000 is less
than 50 percent. As a result a ceiling rate of 69 percent on their
combined income and excess profits liabilities is.quite different from
a 17-percent ceiling on their excess profits tax liabilities. Table 7
shows for selected income levels, the effective income tax rates under
your committee's bill, and the maximum effective rates with the 69-
percent ceiling formula and the 17-percent ceiling formula. The table
indicates that for corporations with incomes over $58,00010 the 17-
percent formula is the more generous, resulting in a maximum tax
saving of nearly 6 percent of total income for corporations with
incomes of about $106,000.
10 For corporations with incomes under $57;692.31 the $25,000 minimum excess profits tax credit prevents
a higher effective rate than 17 percent under both formulas.
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REVENUE ACT OF 1951 17
TABLIO 7.-Corporation normal tax and surtax effective. rates under the Finance
Committee bill, and a comparison of the maximum effective rates of income and
excess-profits taxes under a 69-percent ceiling rate on income and excess-profits taxes
with the ceiling rate under the Senate Finance Committee bill (a 17-percent ceiling
rate on excess-profits taxes alone)
Effective rate
of normal tax
and surtax
under Fi-
nance Com-
mittee bill
$10,000-----------------------------------------
$25,000---------------------- -----------------
$30,000..-----------------------------------------
$40,000.----------------------------------------
$60,000.---------------------------------------
$57,692-----------------------------------------
$60,000------------------------------------------
$70,000-----------------------------------------
$80,000-----------------------------------------
$90,000------------------------------------------
$100,000-----------------------------------------
$105,769----------------------------------------
$150,000-----------------------------------------
$200,000-----------------------------------------
$250,000----------------------------------------
$300,000---------------------------------------
$400,000----------------------------------------
$500,000--------------------------------------- --
$1,000,000--------------------------------------
$I.0,000,000-------------------------------------
$100,000,000-------------------------------------
Percent
27. 00
27.00
31.17
36.38
39.50
41.17
41. 58
43.07
44.19
45.06
45.75
46.09
47. 83
48. 88
49.50
49.92
50.44
50,75
51.38
51.94
51.99
Maximum effective rate of income and
excess-profits taxes
69 percent
17 percent
excess-profits
Percentage
income and:
tax ceiling
point
excess-profits
ceiling
(provided
by bill)
difference
Percent
Percent
Percent
1 27.00
2 27.00
--------------
1 27.00
2 27.00
--------------
1 36.17
2 36. 17
------------
147.63
247.63
1 54.50
264.50
1 58.17
258.17
1 59.08
58. 58
1 62. 36
60.07
2.29
1 64. 81
61.19
3.62
1 66.72
62.06
4.66
168.25
62.75
5.50
69.00
63.00
5.91
69.00
64.83
4.17
69.00
65.88
3.12
69.00
66. 50
2.50
69.00
66.92
2.08
69.00
67. 44
1.56
69.00
67.75
1.25
69.00
68.38
.62
69.00
68.94
06
69.00
08.99
.01
I As a result of the $25,000 surtax exemption and the $25,000 minimum credit, the maximum effective rate
on income and excess-profits tax liabilities is always less than 69 percentfor corporations with incomes below
$105,769.23.
2 As a result of the with ii coininimum nes below $57,69231 1 isalways less than 17 percent. excess-profits tax
rate for corporations wYour committee prefers this ceiling on excess-profits-tax liabilities
over the type of ceiling rate in present law and the House bill because
this type of ceiling rate is more advantageous to sina,ll corporations.
Moreover, even for large corporations this 17-percent ceiling rate pro-
vides a maximum effective rate on total liabilities _which is never quite
69 percent as compared to the flat 70-percent ceiling provided under
the II_ouse bill. Although the, large corporations subject to this maxi-
mum rate necessarily have substantially larger earnings than their
excess-profits-tax credit would suggest is "normal," this lower maxi-
mum rate is deemed desirable because imperfections in the present
allowable methods of computing the, excess-profits credit may sub-
stantially understate "normal" earnings.
C. CAPITAL-GAINS TAX RATE
The House bill increased the capital-gains tax rate for corporations
from 25 to 28.125 percent. This is an increase of 12% percent, which
corresponds with the 122-percent increase made by the House bill in
the capital-gains tax rate of individuals. Since your committee's bill
provides no increase in the maximum capital-gains tax rate of individ-
uals, no increase is made in the capital-gains tax rate, of corporations.
Under the House bill it was estimated. that the rate increase in capital
gains would increase corporate tax liabilities by $38 million before
taking into account the reduction in corporate dividend payments.
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18. REVENUE ACT OF 1951
D. PERCENTAGE OF THE AVERAGE BASE PERIOD NET INCOME TAKEN
INTO ACCOUNT IN COMPUTING THE EXCESS-PROFITS CREDIT
Under present law a corporation in computing its excess-profits
credit on the basis of average earnings may take into account only
85 percent of its average earnings in 'its three best years in the period
1946-49, The House bill reduces this percentage to 75 percent, but
your committee'-,; bill keeps it at 85 percent.
,After studying this point last year in its consideration of excess
profits tax legislation, your committee concluded that a 15-percent
discount was an adequate adjustment in order to place 1946-49 earn-
ings on a normal basis and your committee believes a greater discount
cannot be sustained. To further reduce this 85 percent in the case of
the average-earnings base is to penalize those using this type of credit
instead of the invested capital credit. It should not be forgotten
that in the World War TI excess-profits tax the average earnings in
th
b
i
d
e
ase per
o
was only reduced by 5 percent.
E. EFFECTIVE DATE
Under your committee's bill the corporate rate increases are effec-
tive as of April 1, 1951. Under the House bill they are effective as of
January 1, 1951. Your committee generally is opposed to making
retroactive rate increases and for this reason did not accept the House
effective date of January 1. However, the need for revenue in the
fiscal year 1952 made it necessary for your committee to apply these
rate increases as far back as April 1 of this year. By making these
corporate rate increases effective at that time it is anticipated that
collections 'in the fiscal year 1952 (before taking into account the
effect of smaller dividends on individual income tax collections) will
be increased by $975 million as contrasted to only $615 million if, for
example, the corporate rate changes were not made effective until
July 1, or $295 million if the rate changes were made effective as of
October 1. Moreover, by making the rate increase effective as of
January 1, the House bill increases the tax of most corporations even
before they have paid any of the additional taxes resulting from the
increases made by the Revenue Act of 1950. Thus, for a calendar year
o
c
rporation, for example, the top corporate rate would jump from 42
percent in 1950 to 52 percent in 1951. This is an increase of about
24 percent, and your committee considers it too steep an increase to
be made with respect to a single year. By making the increase effec-
tive as of April 1, your committee's bill spreads the full 24 percent
increase over 2 years instead. of 1. It should also be noted that for
the bulk of the corporations, which are on a calendar-year basis, the
Government will not begin collecting this additional 1951 tax liability
until March 1952 and will not complete its collection until December
1952. Thus, corporations will have adequate time in which to prepare
for these additional tax payments.
The corporate income tax and ceiling rate changes provided b
our
y y
committee's bill are to be effective with respect to taxable years begin-
ning after March 31, 1951. For corporations with taxable years be-
ginning prior to July 1, 1950, and ending after March 31, 1951, your
committee's bill provides a formula for prorating the taxes due under
the law in effect prior to the Revenue Act of 1950, under existing law
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REVENUE ACT OF 1951 19
and under your committee's bill. For corporations with taxable years
beginning after June 30, 1950, and ending after March 31, 1951, your
committee's bill prorates the taxes due under existing law and under
your committee's bill. In general these proration formulas provide
that the tax on the entire income is to be computed at the two or
three different rates applicable. Then these taxes are multiplied by
a fraction of which the numerator is the number of days in the corpo-
ration's taxable year in which the rate in question is effective, and the
-denominator is the total number of days in its taxable year. The sum
of these fractional taxes is the corporation's final obligation.
F. DISTRIBUTION OF THE BURDEN
Table 8 shows the combined corporate income and excess profits
tax liabilities of corporations' in various income classes under existing
law, under the House bill and under your committee's bill.. The table
indicates that of the 415,182 corporations with taxable net 1 income, 4-1
crease provided by your committee's bill.
TABLE law, the House bill and the Finance Committee bill, calendar year 1951
292,491, or about 70 percent of the total, have incomes o ess Ian
$25,000. These corporations which have 4.8 percent of the total tax-
able income, bear 3.55 percent of the increase in tax liabilities provided
by the House bill, but only 1.94 percent of the increase in tax liabilities
under your committee's bill. The 45,022 corporations with incomes
of $100,000 and over, which constitute about 11 percent of the total
number of corporations with taxable net income, have 87.25 percent
of the total taxable income, and would bear 89.34 percent of the
increase provided by the House bill, or 92.37 percent of the in-
Income and excess profits tax
liabilities
Increase over present
law
Number
of taxable
returns
Taxable
net in-
coine
Present
rates
Finance
Commit-
tee bill
Finance
Commit-
tee bill
Up to $25,000______________
000-_______-_
000 to $50
$25
292, 491
47,192
Millions
$2,161
1,666
Millions
$540
620
Millions
$648
608
Millions
$583
563
982
Millions
$108
88
128
Millions
$43
43
83
,
,
$50,000 to $100,000_________
$100,000 and over----------
30,477
45,022
2,018
39, 311
809
21,426
1,027
24,142
23,473
2,716
2,047
Up to $25,000______________
$25,000 to $50,000-_________
70.45
11.37
34
7
4.80
3.47
4
48
2.31
2.22
3.85
2.45
2.30
3.89
2.28
2. 20
3.84
3.55
2.90
4.21
1.94
1.94
3.75
$50,000 to $100,000_________
$100,000 and over_________
.
10.84
.
87. 25
91.62
01.36
91.68
89.34
92.37
I Based upon a level of profits before tax (Commerce basis) of $48 billion.
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20 REVENUE ACT OF 1951
V. TAX-EXEMPT ORGANIZATIONS
Your committee's bill imposes the regular corporate income tax on
certain undistributed profits of the following organizations'
rganizations fully
exempt from income tax under section 101 of the present law: farmers'
purchasing and marketing cooperatives, mutual savings banks, and
State chartered savings and loan associations, as well as Federal savings
and loan associations. A minor amendment is also provided in the
.ease of educational bodies with respect to their "feeder" organizations.
This provision is in the House bill. With respect to mutual casualty
and fire insurance companies, presently subject to limited taxation, the
staffs of the Treasury Department and the Joint Committee on
Internal Revenue Taxation have been requested to prepare a report
on their tax treatment, and your committee will give consideration to
this matter as soon as is feasible after the completion of that report.
The House bill does not go into the subject of tax treatment of
cooperatives or mutual financial institutions. As a result the $150
milli
hi
h i
on w
c
t is anticipated will be derived from the tax treatment
provided in your committee's bill for these organizations represents
an increase not only in the amount collected under present law but
in the amount which would be collected under the House bill.
A. COOPERATIVES
Section 101 (12) of the code exempts from income tax all farm
cooperatives which meet certain specified requirements. This exemp-
tion includes not only cooperatives marketing the products of farmers
but also cooperatives purchasing products and reselling them to
farmers. The chief requirements which must be met by cooperatives
in order to be exempt from income tax under section 101 (12) are as
follows:
1. They must be farmers', fruit growers', or like associations
organized and operated on a cooperative basis for the purpose
of marketing products or purchasing supplies for their members.
2. Substantially all of their stock. (other than preferred non-
voting stock) must be owned by producers marketing products or
h
i
i
purc
as
ng suppl
es through the cooperatives.
3. The marketing of products of nonmembers may not exceed
50 percent in val
f +1:.. . , ..
ue o
4. The purchasing for nonmembers may not exceed 50 percent
of the cooperative's total purchasing, and the purchasing for per-
sons who are neither members nor producers may not exceed 15
percent of the cooperative's total purchasing.
5. Nonmembers must not be discrirated against in the
allocation of patronage dividends or refunds to the accounts of
patrons.
At the present time, the advantages which are derived from exemp-
tion can be summarized as follows: First, the earnings of a cooperative
which are paid out to shareholders in the form of dividends on. capital
stock are not taxable to an exempt cooperative but are taxable to other
cooperatives. Second, any part of the net margins or profits which are
retained as reserves and not allocated to the accounts of patrons are not
taxable to an exempt cooperative but are taxable in the case of other
cooperatives. Third, nonoperating income such as interest, dividends,
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REVENUE ACT OF 19551 21
rents, and capital gains and also the income from certain business done
with the United States Government or its agencies, is taxable to the
ordinary cooperative even when allocated to the accounts of patrons,
but are tax-free to the exempt cooperative whether or not allocated.
Section 314 of your committee's bill continues the exemption
provided by section 101 (12) of the code but removes from its applica-
tion earnings which are placed in reserves or surplus and not allocated
or credited to the accounts of patrons. In addition to being tax-free
with respect to patronage dividends paid or allocated to patrons, as is
generally also true in the case of other cooperatives, the cooperatives
coming under section 101 (12) are also to remain exempt with respect
to amounts paid as dividends on capital stock, and with respect to
amounts allocated to patrons where the income involved was not
derived from patronage, as for example in the case of interest or rental
income, and income derived from business done with the Federal
Government. Moreover, they will not be taxed in any way with
respect to reserves set aside for any necessary purpose, or reserves
required by State law, if such reserves are allocated to patrons.
As a result of this action, all earnings or net margins of cooperatives
will be taxable either to the cooperative, its patrons or its stockholders
with the exception of amounts which are paid or allocated to patrons
on the basis of purchases of personal, rather that, business, expense
items. With this exception, funds which are allocated to the accounts
of patrons, or paid in cash or merchandise, are taxable to them. This
is true in the case of either taxable or tax-exempt cooperatives. In
the ease of either. a tax-exempt or a taxable cooperative funds which
are paid or allocated to patrons on the basis of personal expense items
have no income-tax consequences to the patrons, since they represent
a return with respect to expenditures by the patron of a personal
nature, for which no income tax deduction has been taken by him.
Funds which are not paidor allocated to patrons but are retained as
reserves by the cooperativeswill be taxable to the cooperative. This
also will be true of both types of cooperatives. Funds paid out as
dividends on ordinary capital stock in the case of the exempt cooper-
ative will be taxable to the stockholder, while in the case of the tax-
able cooperative a tax is imposed at both the stockholder and the
cooperative levels.
While the tax treatment provided by your committee for coopera-
tives does not impose the double taxes payable in the case of ordinary
corporate income, your committee believes that the securing of a
single tax with respect to substantially all of the income of coopera-
tives should be sufficient in view of the unique characteristics of a
cooperative.
Your committee disapproves of withholding on dividends. How-
ever, should withholding on corporate dividends be provided your
committee believes it should also be provided for patronage dividends
paid by cooperatives. For that reason your committee has added a
provision to the bill which subjects patronage dividends of coopera-
tives to a withholding tax if at any time one should be imposed
upon corporate dividends.
It has been contended that, although patronage dividends are
generally taxable to the patron, the patronage dividends paid in
scrip or some other noncash. form have not been included in the
patron's income. It has been suggested that this is true because
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22 REVENUE ACT OF 1951
the patron who reports his other income on a cash basis is not accus-
tomed to considering noncash payments as income. Also, it has
been . suggested that the patron is reluctant to include noncash
patronage dividends in his income in many cases because he does
not have sufficient other cash income available to pay the tax involved.
To ascertain the degree to which both cash and noncash patronage
dividends are included in returns at the present time your com-
mittee's bill provides that the Commissioner of Internal Revenue is
to require reporting by all cooperatives of patronage dividends
which are paid to or allocated to the accounts of patrons in amounts
of $100 or more, and is to have the discretion to require reporting
on smaller amounts. Also, the committee has instructed the staffs
of the Treasury Department and Joint Committee on Internal
Revenue Taxation to study and report by April 1, 1952, the possi-
bility of withholding against reserves allocated, and on the various
methods used in allocating reserves and the form and character of
th
i
e cert
ficates issued.
It is estimated that the action provided by your committee with
respect to exempt cooperatives will increase collections from this
source in a full year of operation by $10 million.
B. MUTUAL FINANCIAL INSTITUTIONS
1. Mutual savings banks
Mutual savings banks were established to encourage thrift and to
provide safe and convenient facilities to care for savings. They also
have the responsibility of investing the funds left with them so as to
be able to give their depositors a return on their savings. Mutual
savings banks were originally organized for the principal purpose
of serving factory workers and other wage earners of moderate means
who, at the time these banks were started, had no other place where
they could deposit their savings.
Most mutual savings banks were started. by groups of individuals
who put up guaranty funds which were repaid out of subsequent
earnings. The organizers appointed boards of trustees to manage the
affairs of the banks. The boards of trustees, which are generally self-
perpetuating, direct the policies of the banks, subject to the limitations
imposed upon them by the laws of the several States in whi
h th
c
ey
operate. The depositors themselves have no voice either in the choice
of trustees or in the management of the bank's affairs. However,
since a mutual savings bank has no capital stock, everything that the
bank earns is, in theory, held for the benefit of the depositors.
With respect to outlets for their funds, mutual savings banks are
subject to limitations similar to those which apply to other banking
institutions. They are not required to make loans only to depositors
or members. Table 9 shows the types of assets held by mutual
savings banks as of December 30, 1950, and in the case of federally
insured mutual savings banks, the types of real. estate loans as of
June 30, 1950, and their earnings, expenses, and dividends for the
year ending- December 30, 1950. The table indicates that United
States Government obligations represent nearly 51 percent, and loans
38 percent of the total loans and investments of these banks. In the
case of commercial banks nearly 49 percent of their total loans and
investments represent United States Government obligations, and
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REVENUE ACT OF 1951 23
41 percent represent loans.ll This indicates that if there is any im-
portant difference between the use of funds by mutual savings banks
and commercial banks, it is that the investments of the former are
somewhat safer. Mutual savings banks, of course, have a larger por-
tion of their loans in real estate than do commercial banks, but this
can be attributed to the fact that since the deposits of mutual savings
banks are almost exclusively time deposits, it is possible for them to
invest a substantial portion of their funds in nonliquid assets. On the
other hand, the majority of the deposits of commercial banks are
demand deposits requiring greater liquidity in' their investments.
In any case, the investment of funds in real estate today is not a sign
of insecurity in view of the fact that an important segment of such
loans are backed by the Federal Government. Table 9 indicates
in the case of federally insured mutual savings banks, for which
statistics are available, that, as of June 30, 1950, about 33 percent
of the real-estate loans held by these banks were either insured by
the Federal Mousing Administration, or guaranteed by the Veterans'
.Administration. Moreover, even the other real-estate loans are more
secure than formerly was the case because of the present general use
of declining-balance" loans in lieu of the older "fixed-amount" loans.
The total deposits of mutual savings banks as of June 27, 1951, were
$20,400 million and their capital accounts, $2,290,12 indicating that
they have about $1 of capital for every $9 of deposits. As of the
same date the total deposits of all commercial banks were $150,280
million, and their capital accounts $11,860 million, indicating that
they only have about $1 of capital for every $13 of deposits. Thus,
despite the absence of capital stock the mutual savings banks today
on this ground also appear to have considerably more protection than
commercial banks.
1 1 As of December 30, 1950. Computed from data available in the Federal Reserve Bulletin.
18 These statistics are published regularly in the Federal Reserve Bulletin.
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24 REV1;iNt7E ACT OF 1951
TABLE 9.-Types of assets held by mutual savings banks as of Dec. 30, 1950, and
for federally insured mutual savings banks, types of real es"ate loans held as of
June 30, 1950, and earnings, expenses, and dividends in the calendar year 1.950
1. ASSETS OF ALL MUT UAL SAVINGS BANKS IN THE UNITED
STATES, AS OF DEC. 30, 1050
Rem Dollar amounts
in millions
Total.assets ------------------------------$22,385
Cash and fund' due from banks__ ___________________________ 797
United States Government obligations_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ .10, 868
Obligations of States and subdivisions ------------------------- th.ersecurities-------------------------------------------- 2,253
Real estate and other loans_____________________ 8, 137
Miscellaneous assets ----------------------------------------- 242
Number of banks, 529.
11. FEDERALLY INSURED AND CONVENTIONAL REAL ESTATE
LOANS HELD BY INSURED MUTUAL SAVINGS BANKS, JUNE
30 1950
, Total real estate loans
Federally insured:
Insured FHA and guaranteed VA mortgage loans on
1- to 4-family properties _-_---___-_--_____-- $1,364
Insured FIIA and guaranteed VA loans on 5 or more
family properties------------------------------- 415
Total
------- 1,779
Conventional loans_________________________________________ 3,668
Number of insured mutual savings banks, 192.
III. EARNINGS, EXPENSES AND DIVIDENDS OF INSURED 14UTUAL SAVINGS BANKS
FOR TIIE YEAR ENDING DECEMBER 30, 1950
Dollar amounts
in thousands
Current operating earnings, total ----------------------------------- $478, 695
Interest, discount and ' o ther income on real estate loans--------- 231, 730,
Interest on U. S. Government obligations, direct and guaranteed-- 182, 457
Other current earnings__________________ 64, 508.
Current operatinexpenses_________________________________ 115,470,
Net current operating earnings_______________________ 363, 225
Dividends (interest) paid on deposits_______________________ 257, 770,
Net profits after interest and dividends ------------------------ 91, 175
Number of insured mutual savings banks, Dec. 30, 1950, 194.
Source: Annual Report of the Federal Deposit Insurance Corporatioq for the year ended Doe. 31, 1950,,
pp. 55 and 272, and Operating Insured Commercial and Mutual Savings Banks, Assets and Liabilities,
June 30, 1950, Rept. No. 33, Federal Deposit Insurance Corporation.
Section 102 (2) of the code exempts mutual savings banks from the
payment of any income tax. The effect of the exemption has been
to relieve mutual savings banks of income tax on the amounts retained
as undivided profits and additions to surplus. Since they have in-
creased their surplus and undivided profits by over $800 million since
1940, and by more than $500 million since 1945, it would appear that
they have enjoyed substantial tax savings as a result of the exemption.,
Section 313 of your committee's bill removes the exemption of
mutual savings banks and permits them to deduct amounts paid,,
credited or allocated to the accounts of depositors and, as in the
case of other banks, permits them to deduct amounts credited to a
reasonable reserve for bad debts. The addition to the reserve for
losses on loans is to be determined with due regard to the taxpayer's.
surplus or loss reserves at the close of December 31, 1951. In addi-
tion, mutual savings banks are to be allowed as a deduction from-
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REVENUE ACT 0' 1051 25
gross income any amount currently paid to the United States, or to
any Federal Government instrumentality exempt from Federal in-
come taxes, in repayment of indebtedness incurred prior to September
1, 1951. On the remaining income, mutual savings banks are to be
taxed in the same manner as ordinary corporations. This provision
is effective with respect to taxable years beginning after December
31, 1951.
The size of the bad-debt allowance provided in the case of com-
mercial banks is determined under administrative rulings by the
Commissioner of Internal Revenue. At present it is provided in the
case of commercial banks that the, amount which can be deducted
from taxable income in.any one year shall be determined by applying
the ratio of losses to outstanding loans during the past 20 years, to the
loans outstanding in the current year. These reserves are limited to
three times the current 20-year loss ratio. ' In the case of mutual
savings banks also, the formula permitted may be quite different from
that now provided for commercial banks if the Commissioner after
investigation finds that the historical loss experience of these institu-
tions differs substantially from that of commercial banks. In fact,
your committee believes that the loss experience of these banks
should be based upon a period of at least 25 years if this, in the
aggregate, would result in greater loss deductions for these banks
than the 20-year period now provided in the case of commercial
banks. Basing loss reserve deductions on the loss experience. of the
past 20 or 25 years will include a period in which the losses of the
mutual savings banks were quite large, with the result that the loss
reserve deductions per. mitten in the next several years will be relatively
large.
At the present time, mutual savings banks are in active competition
with commercial banks and life insurance companies for the public
savings, and they compete with many types of taxable institutions in
the security and real estate markets. As a result your committee
believes that the continuance of the tax-free treatment now accorded
mutual savings banks would be discriminatory. So long as they are
exempt from income tax, mutual savings banks enjoy the advantage
of being able to finance their growth. out of earnings without incurring
the tax liabilities paid by ordinary corporations when they undertake
to expand through the use of their own reserves. The tax treatment
provided by your committee would place mutual savings.banks on a
parity with their competitors.
Moreover, earnings of a mutual savings .bank which are allocated
to the accounts of depositors are subject to individual income tax.
Since 'it is contended that the income which is retained by the mutual
savings banks is the income of depositors, there seems to be no reason
why this also should not be subject to tax. However, it is impossible
to tax the depositors on these unallocated funds, since they have no
legal right to the funds unless they are depositors at the time of
liquidation of the bank. Therefore, if these earnings are to be
recognized as income, there is no alternative but to tax them in the
hands of the mutual savings banks which have the power over their
management and disposition.
It has been suggested that mutual savings banks might be taxed
only on their net income in excess of some specified reserve. 110w-
ever, if the funds going into this reserve represent income there would
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26 REVENUE ACT OF 1,951
appear to be no reason for not taxing them. If they are funds which
are necessary to offset future losses, allowance will already have been
made for them through a loss-reserve deduction which will afford
these institutions at least as generous treatment as is accorded their
chief competitors, namely, commercial banks.
2. Savings and loan associations
Savings and loan associations were established to encourage thrift
and to promote home ownership. These organizations, which also
go under the name of building and loan associations, are typically
nonstock corporations which in reality secure their funds through
deposits, which are known, as "shares." Savings and loan associ-
ations may be chartered by the States or by the Home Loan Bank
Board. Of the 5,980 associations which were doing business at the
end of 1949, 1,505 were Federal associations and the remainder were
State-chartered institutions. The former group accounted for $7.1
billion, or nearly 50 percent, of the $14.7 billion of total assets of all
the associations.
TABLE 10.-Types of assets held by savings and loan associations as of Dec. 30,
1950, and for federally insured associations, types of real-estate loans held as of
Dec. 30, 1950, and income dividends and undivided reserves and profits in 1950
1. ASSETS OF ALL SAVINGS AND LOAN ASSOCIATIONS AND INSURED SAVINGS AND
LOAN ASSOCIATIONS AS OF DEC. 30, 1950
[Dollar amounts in millions]
All savings
and loan
associations
Insured sav-
ings and loan
associations
Total assets
First-mortgage loans
Cash
----------
U S. Government obligations _________________
Number of associations
----------------------------------------------------
1 1$16,925
$13, 810
$913
$1, 491
5, 980
$13, 644
$11, 153
$800
$1, 202
2, 860
II. FEDERALLY INSURED AND CONVENTIONAL FIRST-MORTGAGE LOANS FIELD
BY INSURED SAVINGS AND LOAN ASSOCIATIONS, DEC. 30, 1950
[Dollar amounts in millions]
Total first-mortgage loans-------------------------------------------------------------------2$11,188
VA-guaranteed loans-------------------------------------------------------------------- $733
FIIA-insured loans-------------------------------------------------------------------- 2,507
-----------------
Total---------------- 241
------------------------------------ 3,
Conventional loans -------------------- ------------------------- 7,947
III. INCOME, DIVIDENDS, AND UNDIVIDED PROFITS OF INSURED SAVINGS AND
LOAN ASSOCIATIONS, FOR THE YEAR ENDED DEC. 30, 1950
[Dollar amounts in thousands]
Net income---------------------------------- --------------- $411,347
Undivided divae--rand reserves ------------------------------------------------------------------ 262,781
profits and res___________________________________________________ 148,566
1 Preliminary.
2 The difference between this figure and the comparable category shown in pt. Isis due to differences in
accounting methodology.
Sources: Statistical Summary, 1951, Home Loan Bank Board, pp. 8 and 14; Operational Analysis Section,
Home Loan Bank Board.
Not all of the earnings of savings and loan associations are dis-
tributed in the form of cash or credited to the shareholders' accounts.
Some earnings are set aside in various reserve accounts, and some are
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