THE REVENUE ACT OF 1951

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CIA-RDP57-00384R001200010014-4
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January 1, 1951
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REPORT
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Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384ROO1200010014-4 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 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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. Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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. Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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. Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 6 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 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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. Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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. Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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. Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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. Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 ? ??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 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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- Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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. Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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. Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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. Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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, Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R0J1200010014-4 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 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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. Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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- Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010.014-4 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4 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 Approved For Release 2007/01/16: CIA-RDP57-00384R001200010014-4