REVENUE ACT OF 1951

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• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP57-00384R001200010015-3
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• Document Creation Date: December 20, 2016
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• Content Type: REGULATION

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REVENUE ACT OF 1951 27
retained as undivided profits. At the end of 1949, the general re=
serves and undivided profits of all savings and loan associations in the
United States amounted to $1.1 billion. This was over 7.5 percent
of the $14.7 billion of private savings invested in these institutions.
Most of the assets of savings and loan associations take the form of
mortgage loans, usually on residential properties. Thirty years ago,
this type of loan accounted for over 90 percent of the assets of these
institutions; today, the percentage is somewhat lower, although
mortgage loans represented 80 percent of all assets held at the end of
1950. Table 10 shows for 1950 the types of assets held by savings
and loan associations at the end of the year 1950, and in the case of
federally insured associations, the types of mortgage loans held at the
end of the year and the net income, dividends, and additions to un-
divided profits during the year. The table indicates that these asso-
ciations have a much larger portion of their assets invested in real-
estate mortgages than is true in the case of commercial banks. How-
ever, this can be attributed to the fact that since the deposits of savings
and loan associations are almost exclusively time deposits, it is possible
for them to invest most of their funds in nonliquid assets. The
majority of the deposits of commercial banks, on the other hand, are
demand deposits requiring greater liquidity in their investments. It
should also be noted that, as in the case of the mutual savings banks,
nearly one-third of the mortgage loans of the building and loan asso-
ciations, in terms of value, are insured or guaranteed by the Veterans'
Administration or the Federal Housing Administration.
In the early days of these institutions, the transactions of the
associations wore confined to members, and no one could participate
in the benefits they afforded without becoming a shareholder. Indi-
viduals became investing members of these organizations in the
expectation of ultimately becoming borrowing members as well.
Membership implied not only regular payments to the association for
a considerable period of time, but also risk of losses. Members
could not cancel their memberships or withdraw their shares before
maturity without incurring heavy penalties. The fact that the
members were both the borrowers and the lenders was the essence of
the "mutuality" of these organizations.
Although many of the old forms have been preserved to the present
day, few of the associations have retained the substance of their
earlier mutuality. The steady decline in the proportion of share-
accumulation loans is evidence that the character of those organiza-
tions has changed. More and more, investing members are becoming
simply depositors, while borrowing members find dealing with a
savings and loan association only technically different from dealing
with other mortgage lending institutions in which the lending group
is distinct from the borrowing group. In fact, borrowers ordinarily
have very little voice in the affairs of most savings and loan associa-
tions.
One characteristic of the earlier mutuality which remains is the
absence of capital stock. However, the character of the organization
has been modified by the practice of paying more or less fixed rates of
return on shares, and of building up substantial surplus accounts to
protect shareholders against the risk of losses.
Savings and loan associations at present are exempt from income
tax under section 101 (4) of the code. In addition, Federal savings and
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28 REVENUE ACT OF 1951
loan associations which are chartered by the Federal Government are
exempt from income tax under the Home Owners' Loan Act of 1933
and are covered by subsection (15) of section 101 of the code providing
for the exemption of United States instrumentalities.
Section 313 of your committee's bill removes the exemption of
savings and loan associations, including Massachusetts cooperative
banks, and those chartered by the Federal Government and taxes
them as ordinary, corporations. However, it, specifically allows the
deduction for dividends paid to depositors and the amounts placed
in bad-debt reserves on basis similar to that provided for mutual
savings banks. This provision is effective with respect to taxable
years beginning after December 31, 1951.
The grounds on which your committee's bill taxes savings and loan
associations on their retained earni:ngs,after making a reasonable
allowance for additions to reserves for bad debts, are the same as those
on which mutual'savi:ngs banks are taxed under the bill. Moreover,
since savings and loan associations are no longer self-contained cooper-
ative institutions as they were when originally organized there is rela-
tively little difference between their operations and those of other
financial institutions which accept deposits and make real-estate loans.
The principal argument that a savings and loan association does
not really have income which could be taxed is based on the theory
that both the borrowers and the investors are members of the asso-
ciation and that the interest paid by the borrowers on their loans is
really only paid to themselves as members of the association. In
other words, it is argued that the mutuality of the borrowing and
the investing members is such that no income exists.
The mutuality argument assumes that in the long run, the invest-
ments of each member are equal to the debts he has owed the organi-
zfttion. It also assumes that the membership in each organization
is fixed and that eventually each member will receive a proportionate
share of the accumulated earnings of the organization. These assump-
tions might have been valid for the original savings and loan associa-
tions which terminated after they had fulfilled their purposes for the
original membership groups. They are not generally valid, however,
for the present-day associations, where investing members may never
contemplate becoming borrowers and where the organizations are
permanent and a member has no right to a share in the undistributed
earnings upon withdrawal.
Another basis on which it is argued that the savings and loan asso-
ciations do not have income is that all their receipts are either paid
out as expenses or as dividends to members or accumulated for the
mutual benefit of the members. However, an individual member
or depositor has no claim to a share of the accumulated earnings
unless he remains in the organization until its dissolution. The idea
that income of a savings and loan association be]ongs to a member
even though it is not paid to him or allocated to his account is a more
extreme concept of cooperative ownership than that used by coop-
eratives.
The income which is added to reserves and undivided profits by
the savings and loan associations cannot be treated as income to a
member or depositor for income-tax purposes under the doctrine of
constructive receipt because the member cannot obtain it unless he
remains a member of the association until it is dissolved. It is
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REVENUE ACT OF 1951 29
income of the associations. The fact that it is retained for the benefit
of the members makes it analogous to the income retained by an
ordinary taxable corporation for the benefit of its stockholders.
C. UNRELATED BUSINESS INCOME OF GOVERNMENT COLLEGES AND
UNIVERSITIES
The Revenue Act of 1950 imposed the regular corporate income tax
on certain tax-exempt organizations which are in the nature of cor-
porations with respect to so much of their income as arises from
active business enterprises which are unrelated to the exempt pur-
poses of the organization (including certain "lease-back" income).
However, the present provision does not apply to such income of
State universities and other schools of governmental units. It has
been called to the attention of your committee that some State
schools are engaging in unrelated activities and "lease-backs" which
would be taxable if they were not a State or its instrumentality.
It is clear that the same opportunities for unfair competitive advan-
tage exist in connection with these activities of State universities
as with respect to similar activities of other educational institutions.
Therefore, section 338 of your committee's bill extends the present tax
to the unrelated business income of universities and colleges of States
and of other governmental units. As a result governmental univer-
sities and colleges will be taxable on income derived from any unrelated
business activities carried on by the schools themselves (including the
income derived from leases for over 5 years of property purchased
with borrowed funds), and also their "feeder" corporations carrying
on a trade or business will be fully taxable.
This amendment is effective with respect to taxable years beginning
after December 31, 1951.
The House bill contained no similar provision.
The revenue gain from this provision is expected to be small.
D. EDUCATIONAL "FEEDER" CORPORATIONS
The Revenue Act of 1950 included 'a series of provisions which,
under specified conditions, resulted in the imposition of taxes on
educational, charitable, and certain other tax-exempt organizations,
foundations, and trusts. Among these provisions was one which for
1951 and subsequent years specifically denied exemption to "feeder"
corporations, that is, corporations carrying on a trade or business for
profit whose profits inure exclusively to organizations exempt under
section 101 of the code. With respect to prior years the tax status of
such corporations was then in litigation. With respect to these years
the Revenue Act of 1950 provided that no tax would be asserted for
years prior to 1947 unless a deficiency had already been asserted, or
taxes had already been assessed or paid. Your committee believes
undue hardship would arise if any of these educational feeder corpora-
tions were required to pay taxes on income which had already been
spent to carry on educational programs.
Therefore, both section 601 of your committee's bill and section 501
of the House bill amend section 302 of the Revenue Act of 1950 to
provide that for years prior to 1951 exemption is not to be denied
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feeder corporations if their profits inure to a regularly established
school, college, or university.
This provision is expected to have no permanent effect on revenues.
VI. STRUCTURAL CHANGES IN THE INCOME TAXES
A. PROVISIONS IN THE HOUSE BILL ALSO IN YOUR COMMITTEE'S
BILL
1. Life-insurance companies
In section 401 of the Revenue Act of 1950 the formula used for
computing the net. income of life-insurance companies was amended,
the action being effective only for 1949 and 1950. This action was
necessitated by the fact that the formula set up in the Revenue Act
of 1942 resulted in no tax being due from any company on its life-
insurance-investment income for the years 1947 and 1948. The
substitute formula provided for 1949 and 1950 was intended to be a
:stopgap which would terminate the tax-exempt status of this type of
income and permit the completion of the study needed for the develop-
ment of a permanent solution to the problem of the taxation of life-
insurance companies.
Section 311 of the House bill applies the stopgap formula to life-
insurance-investment income for 1951. This was deemed necessary
because, although considerable progress has been made in the study
of the problems of the proper taxation of life-insurance companies, a
reasonable and acceptable solution to man.y.of,the problems has not
yet been developed, and it is generally recognized that the formula
set up in the Revenue Act of 1942 is defective. Although that
formula would no longer have resulted in a tax-free status for life-
insurance companies in 1.951, because the yield on life-insurance
investments has somewhat increased and the average rate of interest
required to maintain the life-insurance reserves has decreased, the
revenue which would have been obtained under that formula is,
because of its defective nature, only about half that which would be
obtained :for 1951 by a continuation of the use of the stopgap formula.
During the hearings conducted by your committee, representatives
of almost all the life-insurance companies presented a proposal which
in their view is a reasonable and adequate method of taxing the
income of those companies. In your committee's bill that plan is
substituted for the stopgap formula as provided in the House bill,
as the method for determining the income-tax liability of life-insurance
companies for 1951.
Under the stopgap formula, as used for 1949 and 1950 and. as pro-
vided for 1951 in the House bill, the taxable income of each life-
insurance company relating to its life-insurance business is determined
by deducting from its net investment income a percentage of that
income. To that amount is added an amount-3% percent of the
unearned premiums and unpaid losses-reflecting the taxable income
of its accident and health business, if any. Appropriate adjustments
are made with respect to exempt interest and the credit for dividends
received. The normal tax is obtained by applying the ordinary cor-
poration normal tax rate to that entire amount, and the surtax is
obtained by applying the ordinary surtax rate to that portion in
excess of $25,000. The percentage to be deducted in arriving at the
taxable income is the same for all life-insurance companies, and is
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REVENUE ACT OF 1951 31
determined and proclaimed for each year by the Secretary of the
Treasury, by comparing the aggregate amount needed in the previous
year by all life-insurance companies to meet their life insurance policy
obligations and any other interest on indebtedness with the aggregate
net investment income of all life-insurance companies less 3% percent
of the unearned premiums and unpaid losses of those companies which
had health and accident insurance. For 1950 this percentage, based
on 1949 data, was slightly more than 90 percent; for 1951, based on
1950 data, it would probably be between 87 and 88 percent.
Section 335 of your committee's bill substitutes a different formula
for the taxation of life insurance companies in 1951. Under it the
income tax is in general, to be 3% percent of so much of the net invest-
ment income of each company as is not in excess of $200,000, and
6% percent of the amount over $200;000. It will be noted that 3%
percent of $200,000 is approximately the same as 27 percent of
$25,000; and that 6% percent of not investment income is approxi-
mately the same as 52 percent of 12 to 13 percent (100 percent less 88
or 87 percent) of the entire net income. For those companies with
accident and health insurance an appropriate adjustment is made so
Nme that the tax computed at the 3i%- and 6%-percent rates is approxi-
mately the same as a tax at the ordinary 27- and 52-percent rates on
the income (determined as before) from that part of their business.
As under the present stopgap formula, appropriate adjustments are
made for exempt interest and the credit for dividends received.
Since the new formula, under the circumstances of 1951, is sub-
stantially equivalent to the stopgap formula, it is clear that, for most
life-insurance companies, the income-tax liability under your com-
mittee's bill will be substantially the same for 1951 as it would be
underrthe provisions of the House bill.
It is expected that a number of companies, mostly small, will not
in 1951 earn their interest requirements, or will earn an amount
only slightly in excess of their requirements. Under the stopgap
formula these companies would have paid ordinary corporation
normal taxes and surtaxes on the same percentage of their net invest-
ment incomes as the other companies whose net investment income
materially exceeded their policy requirements. Under your com-
mittee's bill a measure of relief is accorded such companies: those
with not investment income less than their policy requirements will,
in general, pay a tax at 3% or 6% percent on only 50 percent of their
net investment incomes, while those with net investment incomes of
from 100 to 105 percent- of their- policy requirements will pay a tax
at the rate of 3i% or 6% percent on amounts varying from 50 to 100
percent of their net investment incomes. With respect to companies
which also do an accident and health insurance business, in determining
whether or not their net investment income is less than that.required
to meet their life-insurance-policy requirements, or not more than
105 percent of that amount, the total net investment income is reduced
by one-half of 3% percent of their unearned premiums and unpaid
losses on the accident and health policies. The limitation of this
reduction to one-half of the adjustment for such business appears to
be reasonable since, as was stated in the report on the 1942 provisions
by the Committee on Finance,13 "there is very little investment
income derived from the investment of premiums on such (accident
and health) contracts."
18 77th Cong., 2d sess., S. Ropt. No. 1631, p. 148.
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REVENUE ACT OF 1951
It is believed that the method of taxation provided by your com-
mittee's bill is not only more equitable with respect to certain of the
smaller companies which do not earn a margin of investment income
,over their requirements but also that it is simpler in structure and
involves fewer compliance, and administrative difficulties than the
stopgap formula provided in the House bill.
It has been suggested that this new method of taxing life-insurance
companies should be used permanently, or for an indefinite period in
the future. It is the opinion of your committee, however, that the
question whether this new method is the best practicable method
should only be answered after the results of the present continuing
study are available, and after this method is carefully compared with
other possible methods of taxing life-insurance companies which may
be suggested as the results of that study. Therefore, in your commit-
tee's bill, the application of this method is limited to taxable years
beginning in 1951.
It is estimated that for 1951 the revenue under your committee's
bill will be about $111 million, an amount about $58 million more than
would be obtained under the 1942 formula.
2. Offset of short- and long-term capital gains and losses
Section 322 of this bill amends the treatment of the gains and losses
of individuals so as to eliminate a defect in existing law. '.This
section is identical to section 305 of the House bill. Present law
excludes 50 percent of a long-term capital gain or loss from the com-
putation of net capital gain, net capital loss and net income, but
includes 100 percent of a short-term capital loss in such computations.
As a result a $1 short-term loss can wipe out a $2 long-term gain.
Under the bill long-term gains are included in gross income at
100 percent and a deduction from gross income is allowed equal
to 50 percent of the amount by which the taxpayer's net long-term
gain exceeds his net short-term loss. Thus, if a taxpayer has a
net long-term gain of $1,000 and a net short-term loss of like amount,
no deduction is to be allowable. If the net long-term gain is $2,000
and the net short-term loss is $1,000, the deduction against gross in-
come will be 50 percent of the excess of $2,000 over $1,000, or $500.
Hence the amount actually taxed as a long-term capital gain will be
$500. Under existing law the $1,000 of short-term loss offsets the
portion of the long-term gain included in the calculation of net
income, and no tax liability exists.
k- Long-term losses, like long-term gains, are to be taken into account
in full. Long-term losses will therefore offset short-term gains on a
dollar-for-dollar basis, just as short-term losses will offset long-term
gains. If long-term losses exceed short-term gains, the unreduced
excess will be offset against other income up to $1,000. The net loss
which is not absorbed in this manner will be carried forward as a short-
term capital loss, whether arising out of short- or long-term operations.
Under both your committee's bill and the House bill, the amendment
applies only to taxable years beginning on or after the date of enact-
ment of this act.
It is estimated that when fully effective this amendment will increase
the revenues by $28 million annually.
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RCT OF
amendment made in this bill is not specifically retroactive and without
inferences drawn from the limitations contained in section 117 (m)
as amended by section 326 of this bill.
It is estimated that in a full year's operations this provision will
increase the revenues by $5 million.
4. Dealers in securities
Under existing law, dealers in securities are permitted to hold some
securities as a personal investment. Gains or losses on those securities
which are held by the taxpayer in his capacity as a dealer are treated
as ordinary income. Capital gain or loss treatment is accorded the
results of the transfer of securities which the taxpayer holds as an
investor. Existing law also permits the transfer of securities from
such a taxpayer's investment account to his inventory account and
vice versa with corresponding changes in tax liabilities. These trans-
fers increase the difficulty of determining in which portfolio specific
securities are actually held, and facilitate the manipulation of the
taxpayer's accounts so as to obtain ordinary loss treatment on secu-
rities sold at a loss and capital-gains treatment on those sold at a gain.
To forestall this practice, section 327 of this bill, which is sub-
stantially the same as section 309 of the House bill, provides that in the ?~
case of a, dealer in securities capital-gains treatment be available only
under certain specific conditions. The security in question must have
been clearly identified in, the dealer's records as "a security held for
investment" within a period of 30 days after the date of its acquisition
or after the date of enactment of the Revenue Act of 1951, whichever
is later, and must not at any time thereafter have been held by the
taxpayer "primarily for sale to customers in the ordinary course of his
trade or business." Unless these terms are complied with, the gain
on the sale of the security is to be taxed as ordinary income.
Ordinary loss treatment is not to apply where the security sold was,
at any time after this section becomes applicable, clearly identified in
the dealer's records as "a security held for investment."
Your committee has changed the House provision to insure that
this amendment will not affect the application of section 117 (i) of
the Code which provides, in the case of banks, that, if losses from the
sale of all securities during a year exceed the gains, then the net loss.
shall be treated as an ordinary loss.
The amendment applies to sales or exchanges made more than 30-
days after the date of enactment of this act. `..
The revenue loss resulting from this amendment is expected to be. negligible.
5. Gain from sale or exchange of the taxpayer's residence
Section 318 of your committee's bill and section 305 of the House,
bill are the same except in one respect. Both sections amend the pres-
ent provisions relating to a gain on the sale of a taxpayer's principal'
residence so as to eliminate a hardship under existing law which pro-
vides that when a personal residence is sold at a gain the difference
between its adjusted basis and the sale price is taxed as a capital gain.
The hardship is accentuated when the transactions are necessitated by
such facts as an increase in the size of the family or a change in the
place of the taxpayer's employment. In these situations the trans-
action partakes of the nature of an involuntary conversion. Cases
of this type are particularly numerous in periods of rapid change such
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REVENUE ACT OF 1951 35
,as mobilization or reconversion. For this reason the need for remedial
action at the present time is urgent.
Both bills provide that when the sale of the taxpayer's principal
residence is followed within a period of 1 year by the purchase of a
-substitute, or when the substitute is purchased within a year prior to
the sale of the taxpayer's principal residence, gain is to be recognized
,only to the extent that the selling price of the old residence exceeds the
cost of the new one. Thus, if a dwelling purchased in-1940 for $10,000
is sold in 1951 for $15,000, there would ordinarily be a taxable gain of
$5,000 under existing law. Under both bills no portion of the gain
is to be taxpable provided a substitute "principal residence" is pur-
?chased by the taxpayer within the stated period of time for a price of
$15,000 or more. If the replacement cost is less than $15,000, say
`$14,000, the amount taxable as gain is to be $1,000.
The provision of both your committee's bill and the House bill
,applies to cases where one residence is exchanged for another, where
a replacement residence is constructed by the taxpayer rather than
purchased, and where the replacement is a residence which had to be
,/ reconstructed in order to permit its occupancy by the taxpayer.
However, under the House bill, where a replacement residence is
,constructed by the taxpayer, he must occupy the new residence within
1 year after sale of his old residence. This is the same rule which both
your committee's bill and the House bill apply in the case of the
-purchase of a new residence. However, in the case of new con-
-struction the requirement of occupancy within 1 year appears to your
committee not to be realistic, particularly during the present period
of material and labor shortages. Therefore, your committee's bill
provides that in the case of the construction of a new house, if the
,construction of the house begins within o year before or after the sale
-of the first house, and the new house is used as the taxpayer's principal
-residence within 18 months after the sale of the first house, then all
,expenditures on the new residence within this 18-month period are
to be considered as a reinvestment of the selling price of the first
-residence.
In cases where the replacement is built or reconstructed, only so
much of the cost is to be counted as an offset. against the selling price
?of the old residence as is properly chargeable against capital account
within a period beginning 1 year prior to the date of the sale of the old
1./ residence and ending 18 months (1 year under the House bill) after
such date in the case of construction of a new house, and 12 months
,after such date in the ease of reconstruction of an existing house.
This special treatment is not limited to the "involuntary con-
version" type of case, where the taxpayer is forced to sell his home
because the place of his employment is changed. While the need
for relief is especially clear in such cases, an attempt to confine the
provision to them would increase the task of administration very
-much.
The adjusted basis of the new residence is to be reduced by the
amount of gain not recognized upon the sale of the old residence.
Thus, if the replacement is purchased for $19,000, the old residence
cost $10,000 and was sold for $15,000, the adjusted basis of the new
residence is to be $19,000 minus $5,000, or $14,000. This is equal to
the cost of the old residence plus the additional funds invested at the
time the new residence is purchased. If the second residence had
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36 REVENUE ACT OF 1951
been purchased for $14,000, so that $1,000 of gain on the sale of the
old residence would be recognized, its basis would be $14,000 minus
$4,000, or $10,000.
For the purpose of qualifying a gain as a long-term capital gain the
holding period of the residence acquired as a replacement in a set of
transactions which qualify under the terms of the amendment is to
be the combined period of ownership of the successive principal
residences of the taxpayer.
The new provision extends to cases in which similar treatment is
available under existing law under the involuntary-conversion provi-
sions of section 112 (f). Such cases arise when a home is destroyed
by fire or is lost by seizure or by the exercise of the powers of requisi-
tion or condemnation and the proceeds are invested in a replacement.
In such cases the new provision, and not section 112 (f), is to apply.
Generally this will result in more favorable treatment for the taxpayer
than that available under the involuntary-conversion provisions. The
latter require the tracing of the expenditure of the funds obtained as
a result of the loss of the previous residence, and substantial tax conse-
quences result from such technicalities as a decision to use the money
so received to repay a mortgage on the previous residence and to use
other funds for the purchase of a replacement. Moreover, no relief is
available under the involuntary-conversion sections in cases where the
replacement is acquired before the actual condemnation or requisition
of the previous residence.
The taxpayer is not required to have actually been occupying his
old residence on the date of its sale. Relief is to be available even
though the taxpayer moved into his new residence and rented the old
one temporarily before its sale. Similarly, he may obtain relief even
though he rents out his new residence temporarily before occupying it.
The special treatment is to be available only with respect to one
sale or exchange per year, except when the taxpayer's new residence
is involuntarily converted, in which case he is to be treated as though
a year had elapsed since the time of the previous sale of an old residence.
The ownership of stock in a cooperative apartment corporation is to
be treated as the equivalent of ownership of a residence, provided the
purchaser or seller of such stock uses the apartment which it entitles
him to occupy as his principal residence.
Regulations are to be issued under which the taxpayer and his spouse
acting singly or jointly may obtain the benefits of the bill even
though the spouse who sold the old residence was not the same as the
one who purchased the new one, or the rights of the spouses in the new
residence are not distributed in the same manner as their rights in the
old residence. These regulations are to apply only if the spouses
consent to their application and both old and new residence are used
by the taxpayer and his spouse as their principal residence.
Where the taxpayer's residence is part of a property also used for
business purposes, as in the case of an apartment over a store building
or a home on a farm, and the entire property is sold, the provisions
of both bills apply only to that part of the property used as a resi-
dence, including the environs and outbuildings relating to the
dwelling but not to those relating to the business operations.
These provisions apply to a trailer or houseboat if it is actually used
as the taxpayer's principal residence.
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REVENUE ACT OF 1951 37
In order to protect the Government in cases where there is an
unreported taxable gain on the sale of the taxpayer's residence, either
because he did not carry out his intention to buy a new residence or
because some of the technical requirements were not met, the period
for the assessment of a deficiency is extended to 3 years after the tax-
payer has notified the Commissioner either that he has purchased
a new residence, or that lie has not acquired or does not intend to
acquire a new residence within the prescribed period of time.
The benefits of both your committee's bill and the House bill will
apply to the sale of a taxpayer's principal residence 'made after
December 31, 1950.
The revenue loss will be about $112 million annually.
6. Percentage depletion
Under existing law depletion based on cost is available to all mining
industries and in addition percentage depletion is available to oil, gas,
sulfur, metal mines, and certain nonmetallic minerals. The allowable
rate of percentage depletion is 5 percent in the case of coal, and 15
percent in the case of the other nonmetallic minerals except sulfur
which is allowed 23 percent.
The testimony received by this committee both in connection with'
this bill and the bill which became the Revenue Act of 1950 revealed
that in a number of cases nonmetallic minerals which are not in the
enumerated group under existing law are competitive with those re-
ceiving percentage depletion, or have just as good a claim for such
treatment as the enumerated minerals. The testimony also indicated
that the 5-percent rate. allowed coal. is of little practical value, and
that the coal mining industry is peculiarly in need of more favorable
tax treatment because of the inroads which alternative sources of
energy, particularly.oil and gas, have made on the potential markets
of coal.
Both section 319 of your committee's bill and section 304 of the
House bill set up a new group of minerals to which percentage deple-
tion is available at the rate.of 5 percent. Both bills extend this rate
to sand, gravel, slate, stone (including pumice and scoria), brick and
tile clay, shale, oyster shell, clam shell, granite, and marble. In
addition, your committee has added to this category entitled to the
5-percent rate sodium chloride, and, if from brine wells, calcium
chloride, magnesium chloride, potassium chloride, and bromine. In
the allowance of percentage depletion for these items, your commit-'
tee does not intend to reduce allowances now granted. For example,
potash is allowed percentage depletion at 15 percent under present
law, and your committee does not intend to reduce this allowance
with respect. to potash or any of its salt derivatives which are presently
receiving percentage depletion at 15 percent. The bill also makes a
technical change in this portion of the House provision by including
slate as a separate item rather than including it as a type of stone as
in the House bill.
-The House bill also included asbestos at the new 5-percent rate.
Because of the importance of this product and the smallness of its
supply in this country, your committee has allowed asbestos a 10-
percent rate. Both bills increase coal from its present 5-percent rate
to 10 percent.
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38 REVENUE ACT OF 1951
The House bill added to the list of nonmetallic minerals, to which
percentage depletion is, available at a 15-percent rate, borax, fuller's
earth, tripolt, refractory and fire clay, quartzite, perlite, diatomaceous
earth, and metallurgical and chemical grade limestones. Your com-
mittee's bill., on the other hand, provides that these items added by
the House are to receive percentage depletion at the same 10-percent
rate accorded coal and asbestos. In addition to these items, your
committee has added a 10-percent rate for wollastonite, which is
`important as an insulating and fireproofing material and thus com-
petitive with other items presently accorded similar treatment, and
the magnesium compounds magnesitc, dolomite, and brucite.
Your committee's bill adds to the nonmetallic minerals presently
receiving 15-percent depletion, aplite. This material, which is found
in only small quantities in this country, is closely. related to feldspar,
which already receives 15-percent depletion.
Your committee has also made two technical revisions in the 15
percent depletion section of the House bill. The latter includes at
the 15-percent rate "thenardite (including thenardite from brines or
eliminated the parentheti-
h
itt
"
as
ee
Your comm
mixtures of brine).cal limitation as unnecessary and because it might give rise to doubt
as to certain other of the enumerated products. For example potash,
trona, and borax are also frequently recovered from brines or mixtures
of brine. The phrase "mines and other natural deposits" is clearly
broad enough to include brines as well as all other natural sources.
The particular type of source is immaterial.
The names of all the various enumerated minerals are of course in-
tended to have their commonly understood commercial moaning. For
example, the term "thenardite" applies to sodium sulphate, also
known as salt cake; the term "trona" to sodium carbonate and sodium
bicarbonate, also known as soda ash; and the term "borax" to boron
minerals generally.
Your committee has also amended the House provision which reads
"ball and sagger clay" to read "ball clay, sagger clay" in order to
remove the implication of the House bill that these are not separate
types of clay.
Many of the above changes were provided in the House version of
the bill which became the Revenue Act of 1.950 but they were elim-
inated by your committee and from the final legislation largely be-
cause of the revenue loss involved. It is apparent, however, that the
need for equalization is substantially greater now because of the
additional taxes imposed under the legislation. of 1950 and under this
committee believes that the proposed extension
th
f
e
bill. There
ore, of the percentage depletion system is necessary in spite of the revenue
loss involved. The latter 'is estimated to be about $76 million in a full
year's operation.
The amendments made by this section of the bill apply to taxable
years beginning after December 31, 1950.
7. Family partnerships
Section 339 of your committee's bill is intended. to harmonize the
rules governing interests. in the so-called family partnership with
those generally applicable to other forms of property or business. Two
principles governing attribution of income have long been accepted as
basic: (1) income from property is attributable to the owner of the
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REVENUE ACT OF 1951
property; (2) income from personal services is attributable to the per-
son rendering the services. There is no reason for applying different
principles to partnership income. If an individual makes a bona fide
gift of real estate, or of a share of corporate stock, the rent or dividend
income is taxable to the donee. Your committee's amendment
makes it clear that, . however the owner of a partnership interest may
have acquired such interest, the income is taxable to the owner, if
he is the, real owner. If the ownership is real, it does not matter what
motivated the transfer to him or whether the business benefited from
the entrance of the now partner.
Although there is no basis under existing statutes for any different
treatment of partnership interests, some decisions in this field have
ignored the principle that income from property is to be taxed to the
owner of the property. Many court decisions since the decision of
the Supreme Court in Commissioner v. Culbertson (337 U. S. 733)
have held invalid for tax purposes family partnerships which arose
by virtue of a gift of a partnership interest from one member of a
family to another, where then donee performed no vital services for
the partnership. Some of these cases apparently proceed upon the
theory that a partnership cannot be valid.for tax purposes unless
the intrafamily gift of capital is .motivatd by a desire to benefit the
partnership business. Others seem to assume that a gift of a partner-
ship interest is not complete because the donor contemplates the.
continued participation, in the business of the donated capital. How-
ever, the frequency with which the Tax Court, since the Culbertson
decision, has held invalid family partnerships based upon .donations,
of capital, would seem to indicate that, although the opinions often
refer to